Bouncing cheques to suppliers of Tuskys Supermarkets have rekindled bitter memories of billions of shillings lost in similar fashion from other collapsed giant retailers in the not too distant past.
And while there is talk of a rescue plan by strategic investors, there is something eerily similar with Tuskys’ saga to that of Nakumatt, Uchumi and Ukwala before it that has left suppliers sceptical.
“We’ve seen this movie three times. This one is just by a different name... everybody here has lost money previously,” said a supplier during a recent meeting with the Tuskys management.
“There’s no firm commitment from you in terms of payment. Getting any of you people on phone or email is a hell of a problem... we’re being frustrated and neglected,” added another agitated supplier.
If at least Sh2 billion is not pumped into Tuskys soon, the country might witness the death of yet another promising retailer.
- 1 How investors were left holding Sh100b bonds they can't cash
- 2 Uchumi begins to vet creditors
- 3 Tuskys appoints new Chief Financial Officer
- 4 Uchumi opens debt servicing portal
And if Kenya’s second-largest supermarket secures an investor, it will mark the end of homegrown top-tier retailers.
Naivas and Quickmatt have all since been partly acquired by Private Equity funds.
Tuskys is following a familiar script that points to what ails the Kenyan retail sector - debt-fuelled expansion, claims of fraud, internal wrangles and cannibalisation.
And now, the family-owned firm is facing the moment of reckoning like other retailers that failed at several attempts to turn around their fortunes.
The retailer, that employs over 6,000 says it’s closing in on a strategic investor, riding on the fact that its debts are not as big as the other fallen retailers.
Tuskys had told the Competition Authority of Kenya (CAK) that it would by last Friday have secured the confidence of a strategic investor to help it recapitalise.
It finds itself where Nakumatt was a few years ago in a twist of fate, having at one point promised to bail out the latter and stock some Ukwala Supermarkets stores.
In shareholders meeting held last month, the owners of the retailer were told that Tuskys' current financial position is “very weak” and may not “support the business for much longer.”
The seven sibling shareholders agreed to sell off a majority stake to save the business – a process that could take up to six months.
Around 2016, Nakumatt, which collapsed with a Sh38 billion debt, also announced it was closing in on a strategic investor in a deal that would see it sell a significant stake to clear its staggering debts.
At the time, Nakumatt was Kenya’s largest supermarket chain.
As is the case with Tuskys, the supermarket declined to name the investors until the transaction was completed. The deal, however, fell through, and the retailer went under.
Tuskys, Nakumatt and Naivas share a close history having helped each other rise from small stores in Nakuru County’s Rongai area.
Nakumatt had also harboured intentions to raise capital through listing at the Nairobi Securities Exchange.
Tuskys is also part of the Ibuka programme, a listing incubation programme at the bourse.
Limping Uchumi, which has survived multiple liquidation attempts, has also unsuccessfully failed to find a strategic investor. Two strategic investors had promised to pump in substantial cash, only to pull out at the last minute, scuttling the turnaround efforts.
Uchumi has also been bailed out by the government multiple times. Over the last few weeks, Tuskys management has been in intense talks with different stakeholders, including banks, suppliers, landlords and staff to back recovery efforts.
Diamond Trust Bank (DTB) also agreed to extend Tuskys debt, pending negotiations for a capital injection.
Tier one suppliers, landlords and staff also agreed to support the supermarket until it completes the deal with the strategic investor.
Suppliers, who furnish supermarket shelves, are the hardest hit when supermarkets collapse.
A majority of them have grown weary of Tuskys’ empty promises and have pulled their products off the shelves.
“If suppliers withdraw support, this deal could collapse, and they lose all outstanding debt,” said Chief Executive Dan Githua in a previous meeting with tier-one suppliers.
To win back suppliers, Tuskys has launched an escrow account linked to the supermarket’s tills that will solely handle suppliers’ cash. This approach is not new.
Years earlier, Uchumi had launched a digital payment system that automatically credits a supplier’s account once a purchase is made.
The retailer had also sought to engage suppliers through an escrow account where they were to be paid at the end of the month.
During the Tuskys shareholders’ meeting, the siblings agreed to set aside their differences so as not to scare the investor.
“Any matter that may have gone wrong or any financial mismanagement or misuse would be discussed in detail and whoever is responsible for such misdeeds will be dealt with appropriately, including in a court of law,” said a document obtained from the meeting.
Being a low-margin business, retailers aggressively seek to expand to achieve volume sales and end up using suppliers’ money.
Tuskys chief Githua told suppliers they are considering a new business model since the current one used by local supermarkets isn’t working.
He said for every Sh100 sold, Tuskys’ margin is only Sh19 or Sh20, with the rest going to suppliers.
“Traditionally, retailers have behaved as though suppliers’ money is their money... to pay rent, staff or open a new branch. We don’t want that going forward,” he said.
This, Githua said, had informed the decision to open the escrow account.
According to him, traditionally the Kenyan market has seen retailers put up shop with little capital, with suppliers and employees coming on board when they start getting paid monthly.
“By the time the store is opening, the retailer has put in very little money and then waits end month and collects the money and pays everyone. If everything goes right, then it becomes a very good business and it can now open multiple stores,” he said.
But Githua observed that the dynamics had changed. “That’s not possible anymore. The retailer must now come with some skin in the game at the point of opening the store, some element of the capital for all those things I’ve spoken about must come from the retailer themselves and that’s what we’re addressing in terms of getting new capital into the business,” he added.
Tuskys is also set to close more stores as it restructures its business. Githua also attributed part of the retailer’s woes to supporting non-performing stores.
“There’s not going to be any carrying of any unsustainable units just to look big,” he said.
In an aggressive expansion drive after backing by a private equity fund, Tuskys’ rival Naivas has fast become Kenya’s largest supermarket chain.
The retailer is now valued at a staggering Sh20 billion. But can it learn from the mistakes of its peers as it charts its ambitious path?
“We have a good management system at Naivas. In spite of what is happening in the market, we are expanding. We have 61 branches countrywide, and we are opening two more from next week,” said Managing Director David Mukuha in a past interview.
Broadways Bakery Managing Director Bimal Shah, a key supplier who spoke to the Financial Standard in a recent interview, said he hopes Tuskys’ cash flow would improve in next two months.
“While they are negotiating with strategic investors, who will inject capital, we need Tuskys to continue operations. We cannot afford to see them go down,” said Shah.
He, however, said the retail chain would have to do a lot of restructuring to survive.
“Some unprofitable stores will need to close. Also, proper stock controls are very important,” added Shah.
Of all the country’s supermarkets, Uchumi was the only one that had assets that could at least cushion it when trouble struck.
A strategy in the early 2000s to revive the retailer included raising money through a rights issue and sale of its properties.
Uchumi now hopes to earn Sh2.8 billion from the sale of a piece of land in Kasarani in new turnaround efforts.
This has, however, run into headwinds, with the Kenya Defence Forces laying claim to the land.
Most of the supermarkets’ trolleys, shelves and other property are usually leased.
Nakumatt collapsed without any assets, which could have been sold to pay off creditors.
Tuskys also trades on the brand name and has not been keen to acquire assets.
Of all the country’s supermarkets, Uchumi has probably had the most turnaround efforts spanning at least two decades.
This includes hiring of countless chief executives. The exit of billionaire Naushad Merali was also a big blow to reviving Uchumi in the early 2000s.
It was hoped that shrewd investor’s vast resources and wealth in turning around undervalued companies would pay off, but this did not happen.