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Uchumi to close loss-making outlets, sell assets in recovery plan

BUSINESS
By Moses Michira | July 8th 2015

Uchumi Supermarkets has announced radical changes to its operations, which include closing down several outlets and selling a Sh2 billion plot in Kasarani in its newest plan to steer clear of financial troubles.

This development comes as it became clearer that unpaid dues owed to suppliers may have been understated by up to Sh1.8 billion. Uchumi directors yesterday announced a 20-acre parcel of land along Thika Road had been placed on the market and its disposal would place the giant retailer in an ‘extremely good position’.

Uchumi Supermarket, Garden City Branch. Uchumi  has announced radical changes to its operations, which include closing down several outlets and selling a Sh2 billion plot in Kasarani in its newest plan to steer clear of financial troubles. (PHOTO: COURTESY)

Audit firm KPMG has been recruited to carry out a forensic investigation to look into irregularities by the past management, which rival firm Ernst & Young failed to capture in its audit reports – according to the directors.

Newly recruited finance director Sam Oduor told an investor briefing yesterday of an impending branch closure that could see the retailer exit South Sudan, Rwanda, Uganda or Tanzania markets.

“We may have to shrink to grow,” Mr Oduor said early yesterday, ahead of the release of a Sh500 million-bailout loan from KCB.

He acknowledges that the selling price of the key asset could be lower, given the urgency with which the funds were required.

Closure of unproductive branches, however, seems the more immediate measure. Exiting of the foreign markets could be a real possibility with the management now reviewing the performance of individual branches and even whole markets, James Murigu, another company director said, telling of the resolve among the board members.

Implications of total exits would be wide considering that the firm is listed in the four stock markets including Nairobi, Dar es Salaam, Kampala and Kigali.

The retailer had sought the loan as a stop-gap measure hoped to pacify its disgruntled suppliers upset by unpaid dues. Hundreds of suppliers have cut deliveries to the retailer’s branches, leading to stock outages that put the firm in a ‘catch 22’ situation. “No supplies mean no customers, and no revenues to pay the same suppliers,” the CFO adds.

Uchumi, like other retailers, get most supplies on credit and only pay either after the commodities have been sold or at the expiry of a specified period. Typically, supermarkets have negotiated credit terms of between 30 and 90 days. Such a business model means the capital requirement in establishing a supermarket chain is minimal but heavily reliant on the relations with suppliers.

Former managers have also been accused of abusing the procurement guidelines by becoming major suppliers, often fast tracking payments due to the companies associated with them at the expense of other firms. Oduor concedes that his firm and former management got it wrong by using the free cash flows to set up new branches rather than settle supplier dues.

We got it wrong, he said, but it is time to chart a new path to recovery. Uchumi-owned Lang’ata Hyper and Ngong Road Hyper premises could also be disposed, to allow the company to concentrate on the core business of retail. Both assets are however bound because they have charged as collateral against bank loans.

“Though we think the restructuring is a positive move, we believe Uchumi will take a while to fully turnaround,” said Standard Investment Bank in a note to investors.

This marks the second time that Uchumi has come under distress for the comparable reasons. When the company slid to receivership in 2006, uncoordinated expansion was cited as the reason for the collapse. Several branches had to be closed down immediately after the company was put under receivership, with no new branches opened till the receivership was lifted in 2011.

Radical step

One director who talked to The Standard accused Mr Ciano of overstating the company’s profitability and moving further to understate the dues owed to suppliers.

“External auditors should have picked up this anomaly,” said the director who spoke in confidence, citing that the statement could upset the ongoing forensic probe by KPMG.

At the time of Ciano’s exit, debts due to suppliers were estimated at Sh500 million. But that was the official position. A much bigger hole of Sh2.3 billion was discovered, indicating that Ciano and his executive team had understated the debts by about Sh1.8 billion. Uchumi also announced a possibility of inviting a strategic investor, in a radical step that could be pegged on recommendations of a business advisory. Such a decision could be made within the year.

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