Uchumi stumbles through a maze in its quest to regain glory
By Otiato Guguyu | January 29th 2017
Listed retailer Uchumi Supermarkets is quite literally a cat with nine lives. It has ducked darts, danced through barbs and almost closed shop four times but now lives to fight another tough round.
But for now shareholders of the troubled retail chain will have to hold onto the rails for longer as the management redrafts its strategy to make yet another attempt to turn around Kenya’s oldest retailer.
After surviving a monumental court battle to close it down last year, the company is back to the drawing board hoping to start off on the turnaround journey it had set out. “The winding up suit petition is behind us now after we reached an amicable settlement with suppliers. It was an extraordinary moment that demonstrated the high confidence suppliers and Kenyans have in the Uchumi brand,” the retailer’s Chief Exchange Officer Julius Kipng’etich said.
Uchumi has now come to terms with new developments that require a complete rethink of its strategy beyond the drop by drop lifesaving survival due to goodwill that has kept it afloat. When he joined Uchumi, the former Equity Bank Group’s Chief Operating Officer exuded confidence with vast experience that saw him succeed at Kenya Wildlife Service. Dr Kipng’etich saw Uchumi as a straightforward case he could easily turn around as a master of strategy.
But when he came on board he found Uchumi’s books with a gaping hole, a black hole in essence that was collapsing on itself. When an audit reassessed Uchumi’s books, the listed retailer owed suppliers Sh3.6 billion and banks Sh2.5 billion. This pushed it into a negative cash flow position.
The amount was up from Sh1 billion supplier debt estimated when former CEO Jonathan Ciano was bundled out of office. Undaunted by the task, Kipng’etich still saw hope, leveraging his banking network, his charming frankness and a strong resolve even as the retailer struggled to hold on.
He set up a team and drew a strategy that would have seen Uchumi’s shelves stocked and suppliers paid by now. But as fate would have it, his turnaround plan was not only tested but was put on trial literally. Suppliers who had lost confidence in Uchumi sought to liquidate its assets and have Kenya’s oldest retailer auctioned.
First, Kipng’etich sought help from United Bank for Africa-Kenya (UBA) for a credit facility of Sh250 million to help the retailer that was struggling with cash-flow problems. He was to use part of the cash to pay suppliers who had started agitating for their money.
The retailer also borrowed an additional Sh500 million from Kenya Commercial Bank to pay some of its suppliers. Once settled, Uchumi would liquidate non-core assets, which included Ngong Hyper, Lang’ata and land in Kasarani to inject much-needed liquidity into the business. While on the capital raising binge, the retail chain embarked on making itself leaner through cost cutting and restructuring.
With deep pockets
It closed down regional operations in Uganda and Tanzania. Kipng’etich said that for eight years, the Ugandan subsidiary never brought in profits while the Tanzanian unit was in the red for six years. Also, seven stores were shut down in Kenya.
Uchumi then retrenched 2,230 workers and overhauled its management bringing in a new team to replace former managers incriminated by an audit report. The retail chain’s new management also sought shareholders’ approval to bring in a strategic investor with deep pockets to allow it not only enough room to wiggle but muscle to get back on track.
The retail market was being annexed by an expansionist Nakumatt Supermarkets and foreign incursions from Botswana retailer Choppies, which bought out Ukwala, French giant retailer Carrefour and America’s Walmart, through Massmart, its South African subsidiary.
Uchumi was also exploring government intervention which would come in the form of a bailout package in terms of a bridging loan structured just like the Sh678 million offered when Uchumi was placed under receivership a decade ago. The ambitious plan could have even seen them re-enter the regional market in just three years.
KCB keep the proceeds
But before the rubber could meet the road, the plan was thrown into a tempest. KCB, cautious of the winding up petition, withheld proceeds of the sale of Ngong Road Hyper after Uchumi sold the property for Sh1.4 billion, at a time when the retailer was almost running on empty shelves and badly needed the cash.
Kipng’etich said the retailer’s board has since been forced to change strategy as a result and decided to let KCB keep the proceeds to reduce finance costs. “The proceeds from the sale of Ngong Road Hyper helped reduce Uchumi’s debt owed to financiers from Sh2.5 billion to Sh1.1 billion,” Kipng’etich told Weekend Business. “Part of our focus in the stabilisation phase is debt reduction and these efforts will continue until Uchumi is debt free.”
The Government also delayed on the disbursement of Sh1.2 billion bailout loan with the initial Sh500 million still caught up in bureaucratic red tape of approvals. Its second property, at Uchumi Lang’ata Hyper fell into dispute with the Kenya Airports Authority (KAA) over the 3.7-acre land on which the retail chain sits.
However, Kipng’etich said the matter has been resolved. “The matter with Lang’ata was resolved last year. Immediately we came out we consulted the government and it was resolved, they have no claim on that land,” he said. Kipng’etich said the parent ministry decided that Uchumi had the legitimate title deed. “But we are not selling it, we mortgaged it and it has brought in liquidity to our stores,” he added.
The third property, a 20-acre piece along Thika Road under Uchumi’s subsidiary, Kasarani Mall Limited, is still embroiled in an ownership dispute. A group of settlers Njathaini Electricity Project are trying to block its sale in court even as Uchumi tries to iron out other ownership disputes.
Uchumi accused the self-help group posing as squatters of misleading the court claiming they had been on land in Roysambu for more than 30 years, a move that saw the judge issue an order restraining Uchumi from selling the property. But Uchumi is seeking an out of court settlement with the disputants and is hoping to settle the matter to allow it sell the parcel soon.
Uchumi’s search for a deep pocketed investor was also sent on a tailspin after it became apparent that suppliers had to be roped in to get a stake in the firm that had been reserved for a strategic investor. To appease the suppliers, Uchumi negotiated a deed of settlement that would convert old supplier debt into equity, under a long term payment plan then resume supply of products to their shelves.
Kipng’etich, however, says the search for an investor is not yet over and will be pursued once the retailer is back on its feet. “When we have stabilised we will still explore that route, we are still in talks with investors who see our attractiveness, especially since we are structured and professionally ran, an advantage over the family-owned retailers,” he said.
At the moment, Uchumi’s boss says after they managed to survive last year, they are now focusing on recovery. To effectively utilise space, Uchumi is now partnering with furniture and electronic merchants like Sony and LG to sell their products directly and pay the retailer a commission rather than buying the stock to sell.
He also wants to trim the use of their floor space and let out sections to bring in rent. The company has also prototyped retail franchises where they plug into small branded shops stocking low-volume packed items to target the micro-market, with the first Uchumi Express opening its doors in Mwiki early this year.
Kipng’etich says the retailer is planning five shops by the end of March this year and 15 in the first half of this year with an overall target of 200 franchises across the country. Uchumi is also planning to launch a private label, the Red Label targeting the ‘Kadogo’ economy, the low end market, which Uchumi believes will propel its revenues.
The Red Label, unlike Nakumatt’s Blue Label, will not be placed in premier outlets but channelled through the Uchumi express shops and retail mini-shops. Uchumi also plans to spruce up its food court section, offering free wifi and guaranteeing farm to fork produce at lower market rates.
He said Uchumi’s Fresh will be the retailer’s differentiation in terms of pricing and quality of vegetables, meat, milk and bakery in the market.
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