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Kenyan retailers fight for middle and low-end shoppers amid growing competition

By Gloria Lihavi Aradi | May 30th 2017 | 6 min read
By Gloria Lihavi Aradi | May 30th 2017

Two Rivers Mall, one of the largest retail entertainment and lifestyle centres. 

Brian Tirok, 23, a resident of Ruaka town, does most of his shopping at the local mini-supermarket just outside his home. He cites convenience as the main reason behind his shopping habits.

At his local supermarket, he can shop when he needs to and get back home easily. “I don’t see the need to go far to shop when I can get the same goods here,” he comments, observing that shopping at his local supermarket saves him time.  “When I want things like electronics, I just buy online,” he further states.

Tirok’s shopping habits mirror those of many other Kenyans. It is these habits, influenced by affordability and convenience, which are reshaping the dynamics of the Kenyan retail market and spelling doom for top-tier retailers.

Nakumatt, Kenya’s biggest industry player, continues to endure worrisome financial woes while Uchumi, which was once at the helm of the industry, is yet to make a full comeback.

As these retailers suffer, the retail spending of Kenyans reached Sh1.8 trillion in 2016, an increase of 13 per cent, according to a study by Procter & Gamble. While one would expect Nakumatt to swim in increased profits as a consequence, its debt has in fact risen from Sh4.7 billion in 2012, to around Sh18 billion at the start of 2017.

Clearly, there exists a sharp disconnect between the industry’s performance and that of its largest player. This could only mean that small and medium-sized retailers are the ones raking in most on the country’s increased retail spending, in the midst of a fast-growing and increasingly competitive retail space.

Nakumatt’s recent history has been characterised by empty shelves, closure of branches both locally and regionally and complaints by unpaid suppliers.

Uchumi, the once dominant firm in Kenya’s retail sector, underwent an eerily similar fall from grace, clogged by issues identical to those of Nakumatt. The stalled performance of both outlets has been blamed on managerial miscalculations that have meant consequential financial implications. While internal shortcomings are the biggest factor leading to the blow-ups in both cases, Nakumatt and Uchumi have also traditionally appealed to the moneyed middle class. As part of this appeal, Nakumatt has acquired a reputation of offering unique products and pleasant shopping experiences, factors that have helped the retailer distinguish its brand name.

The result has been a widespread connotation within the public, associating the outlet with class and costliness. Naturally, low income earners have shied away, preferring to shop from commonplace outlets which they perceive to be cheaper since they offer simpler shopping experiences.

According to Nakumatt spokesperson Alfred Ng’ang’a, the widely-held perception by the public that the retail chain sells more expensive goods is a misconception they counteract. “All our prices are benchmarked against the recommended retail prices from various suppliers. At all times we strive to provide value to our loyal customers by meeting their needs cost effectively,” clarifies Ng’ang’a.

Mr Ng’ang’a notes that even if pricing by retailers was unregulated, retailers simply do not have the luxury to set prices as they wish. “You have to understand that even middle class consumers are conscious,’’ Mr Ng’ang’a notes, indicating there is no way the middle class will be willing to pay exorbitant prices for the promise of class and elegance.

With the recent surge in the number of lavish malls, most of which are strategically positioned in suburbs, high-end retailers such as Nakumatt, Game and French retailer Carrefour have been in a rush to open outlets at these malls, hoping to profit off a dismal and volatile middle class.

According to Dr X.N. Iraki, an economic expert and lecturer at the University of Nairobi, this retail business model of exclusively targeting the middle class is doomed to fail. “The big malls and supermarkets are targeting the small group of middle class which is “floating”, they will go for the newest mall, supermarket, then go back to where they normally shop,” says Dr Iraki.

“After all, sugar is sugar, it does not matter where you buy it. The small outlets have dedicated shoppers who live in the neighbourhood.” Although there are varying quantification and definitions of the Kenyan middle class, it is agreed that the middle class comprises households that spend at least half their income on goods and services that are not basic necessities. The “floating” middle class, which Dr Iraki mentions, refers to the group of the middle class that can easily recede into the lower class. Inclusive of the floating middle class, the African Development Bank (AfDB) places the Kenyan middle class at 44.9 per cent and excluding them, the real middle class stands at a low of 16.8 per cent.

When you walk into upmarket malls such as Garden City and Two Rivers Mall, which house these high-end retail stores, it is critically obvious that many of the so-called ‘shoppers’ are not really shoppers but more of tourists, strolling around casually and taking pictures (selfies), without really buying anything.

Success of banks

Simply put, appealing to just the moneyed in an increasingly competitive market, where the vast majority of the population falls within the lower class is a tactical mistake.

Small and medium-sized retailers such as Tuskys and Naivas have recorded success for focusing their marketing strategies on the large lower class, a strategy that was more famously initiated by Equity Bank and emulated by other banks. “Maybe big malls and supermarkets need to learn from Equity Bank...which saw money in poverty, targeting the lower end as other banks were left fighting for the small high end customers,” notes Dr Iraki.

However, just as Equity Bank realised it is more profitable to cater for a wider market segment through creation of a corporate department, so have these retailers. Many of these small and medium retailers have packaged themselves to attract the middle class, mainly by setting up stores in locations convenient to high-end market, as well as offering better shopping experiences meant to attract this market segment.

Mr Ng’ang’a says Nakumatt’s scope of diversity on the market sometimes goes unnoticed. “Nakumatt’s target market covers a wide and general scope. It is neither middle nor lower class. This is well illustrated on our branch footprint and also the wide variety of stocks sold at our stores,” stresses Ng’ang’a.

“In Kenya, we have branches in 17 counties from Westlands to Kayole, Nanyuki to Diani all stocked with a wide variety of retail products and services that appeal to a broad spectrum of customers.” It is for this reason that upmarket retailers are starting to venture out into the lower class niche and small and medium-sized retailers as they seek to attract the middle class as well.

High-end retailers now have separate tills for customers purchasing small amounts of goods. This provides convenience for all types of customers.

Large, medium and small retailers are realising they can no longer afford to appeal to just specific segments of the market. With increased competition, retailers are increasingly focusing on both the lower and middle classes.

With new dynamics like increased online shopping, especially among the Millennials, retailers are trying to be innovative. Online retailers, notably Jumia, Kilimall and OLX are mounting pressure on the traditional retailers with physical outlets.

A December 2016 report by Euromonitor International pointed out that the sales for non-store retailers reached Sh9.6 billion in 2016, signaling a nine per cent rise. Online retailers accounted for 75 per cent of these sales, recording an 11 per cent growth on their own.

According to the World Bank report, achieving middle income status by 2030 are implausible and unrealistic as up to 80 per cent of the jobs are in the informal sector.

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