There were no red flags that Nakumatt Supermarket was on the verge of collapse.
Like the elephant on its logo, Nakumatt, with 63 outlets in three countries at its peak, looked like it was too big to fall.
But this was a BIG lie. By 2018, the retailer was a shell, its glorious years undone by untamed debt-fuelled expansion, poor business practices and monumental looting.
Even at its zenith when it opened branches at a dizzying rate and boasted having everything that shoppers needed, the retailer had very little assets and no products of its own on the shelves.
Nakumatt also had very little cash and cash equivalents of its own. Its balance sheet was inflated by suppliers’ and creditors’ money.
This is not just the story of Nakumatt, whose blue-themed brand has joined the ever-growing list of nostalgic products, but the sad tale of Kenya's so-called retail giants that, unfortunately, continue to run like the dukas from which they were supposed to have evolved.
There are those who have learnt the hard way the metamorphosis of a typical supermarket in Kenya.
It ends in premium tears for small suppliers who have been the biggest losers in the collapse of Nakumatt. The story of supermarkets in Kenya is almost akin to that of pyramid schemes.
In the beginning, you have to pump in your money for the first branch, says a supplier who has been dealing with retailers for over 20 years and who requested anonymity as he still supplies many of them. He says he lost Sh100 million when Nakumatt went down.
With the first branch, a supermarket could easily make annual sales of Sh600 million.
Unfortunately, a turnover of Sh600 million is not enough to attract the “10 big boys,” including Coca-Cola, Uniliver, Bidco, Brookside, Reckitt Benckiser.
To lure these big suppliers and enjoy massive discounts, you need bigger volumes.
With a turnover of Sh600 million, you can approach the bank for a facility to open the second outlet. You will tell the bank that with a second outlet, you could easily do an annual turnover of Sh1.2 billion.
Now with Sh1.2 billion, you the big boys can play ball. In addition to the backing of the big boys, you can also negotiate with suppliers for a longer payment period.
After all, you have the goodwill of creditors and landlords who have made you an anchor tenant.
Every small supplier is dying - and some even bribing - to have their products on your shelves. If you were paying in 15 days, you can pay in 45 days.
Ordinarily, 70 per cent of the items in a typical shopper’s trolley are consumables like milk, bread, eggs and sugar, which have very low gross margins of around three per cent, according to calculations by our supplier.
But durables have a gross margin of around 22 per cent, which brings the total average gross margin of a shopping basket to about 10 per cent.
However, because you want to continue pushing the margins, you open a third outlet. Only this time, you will use money from the suppliers to open it.
“They use that money to leverage against their bank debts,” says Mark Gakuro, the official government receiver, whose office has been handling some of the insolvent supermarkets.
By the end of 2016, retailers owed suppliers Sh40 billion in arrears, with the five largest supermarkets taking up 92 per cent of the debt owed to suppliers for more than 60 days, according to a 2017 report by the State Department of Trade.
Even if they make sales, these retailers still keep customers’ money, which also speaks of poor cash management due to untamed expansion, thus unnecessary overhead costs.
It is such tactics that the big supermarkets use to exploit suppliers, leading to the formulation of regulations against the abuse of buyer power.
Carrefour is the first retailer to have fallen to the sword of these rules after the High Court fined it a financial penalty of 10 per cent of its gross turnover for 2018, amounting to Sh124,768 for the sale of Cool Fresh Yoghurts owned by Orchards Ltd.
Carrefour was penalised for unilateral termination of Orchard's contract, imposition of rebates, transfer of commercial risks to the supplier by returning goods already ordered and transfer of commercial costs by demanding the firm deploy permanent staff to Carrefour stores.
In total, the Competition Authority of Kenya (CAK) investigated 25 medium and large retailers for buyer power abuse in the 2019-20 period.
Four of them were found guilty of delaying payments to local suppliers for more than 90 days. Tuskys paid Sh2.1 billion to retailers during this period.
Back to our fictitious supermarket. It now has a turnover of Sh1.8 billion with three branches. However, its overhead costs have also soared due to the dizzying expansion.
Remember, the 10 per cent average margin is gross. If you pay rent, workers, electricity, among other bills, you are left with a margin of seven per cent. Remove taxes and you are left with a net margin of 4.9 per cent.
“At a margin of 4.9 per cent, if you lose stock, which is very easy and common with a supermarket as they do not have strong systems, you are done,” says our supplier.
The theft is on net margin and wipes out almost everything that the supermarket would have made.
“But before people notice that you are losing stock, and you are in loss because your volumes are very high, it may take years,” says the supplier.
It is at this point that the owners of the supermarket, realising that the retail chain might go down, also join in on the looting.
The culture of stealing by both suppliers and staff, says Dan Githua, the former CEO of Tuskys, has been aggravated by impunity.
He describes theft in supermarkets as endemic, thus difficult to address.
Only one out of 2,000 cases of theft in supermarkets have been successfully prosecuted over the last 10 years, says Githua.
That is less than a 0.01 per cent prosecution success rate. “So it doesn’t deter continued crime. It perpetuates the culture of ‘we-can-get-away-with-it',” says Githua.
Peter Kahi, who has been a receiver-manager for most of the retailers, insists loss from fraud constitutes about 10 per cent of the retailers’ turnover.
Mr Kahi also blames debt-fuelled growth, poor governance, mismanagement and over-trading for the collapse of retail chains.
He concedes that there is no law that requires family-owned businesses to reveal their finances.
"However, if a retailer goes for more than 120 days without paying, that is a warning sign," says Kahi.
Indeed, before Nakumatt and Tuskys, Uchumi Supermarkets was the largest retail store in Kenya.
The retail chain went public in 1992. It remains the only supermarket that has ever been listed at the Nairobi Securities Exchange (NSE).
Despite being regulated, managerial weaknesses, unsound investment decisions, including tying resources into the non-core business, and overaccumulation of dead stocks contributed to its undoing.
The mismanagement at Uchumi was so bad that in 2002, the retailer purchased Christmas cards that could not be sold in 10 years.
Nonetheless, with almost all supermarkets not open to public scrutiny, the majority of the so-called retail giants have been able to hoodwink suppliers that they are in enviable financial health even as they continue to bleed internally.
For the Carrefour franchise in Kenya, owned by Dubai’s Majid Al Futtaim, its turnover is captured in the parent company’s annual report for 2020.
It is estimated at Sh26.2 billion as of the end of 2020, an increase of a third from Sh20.1 billion a year earlier.
On the other end, even with creditors on its neck, Nakumatt, which was seeking an administration order to keep the business as a going concern, did not want to lay bare its books to the court in 2017.
Ironically, when things start going south, it is the big boys who are first to leave, according to official government receiver Gakuro.
As soon as they get wind that any retailer is struggling, the big boys will insist on being paid first.
And the supermarkets have to pay because, well, shoppers will immediately smell a rat when they find Coca-Cola products missing from the shelves.
“You will find that Nakumatt never went down with the big boys’ cash. The guys who went under are those who were supplying things like tissues they have branded for themselves,” says Gakuro.
The big supermarkets also need to discard the duka mentality which might have served Nakumatt and Tuskys well in their formative years in Nakuru in the 1980s.
Having expanded into a complex business, these retailers needed to have put in place complex processes and systems, according to Elizabeth Irungu, a general manager in charge of business development at ICEA Lion Asset Management.
For Tuskys, whose board is almost entirely made up of siblings, the governance of the business is a family affair, with the children of the founders at some point jostling for a piece of their father’s estate after the patriarch’s death.
As far back as 2012, Yusuf Mugweru, one of the sons of the Tuskys founder (Joram Kamau), accused his siblings of stealing and mismanaging their father's business.
And while the case remains unresolved, Tuskys is today deep into debts and is staring at two wind-up petitions. Perhaps Mugweru, the rabble-rouser, has been vindicated.
The fact that some of the theft is orchestrated by the business owners, oftentimes the children of the founders who are not as invested in the business as their parents, points to poor succession planning by most family-run entities.
“The mzee has held on to the business for so long so that by the time they are letting go to the next generation, it is like it is their time to eat," says Ms Irungu.
Besides strengthening internal control processes and opening up to public scrutiny, experts advise big supermarkets to adopt the franchise model to deal with the issue of theft of stock.
With the franchise model, the owners of the brand only get to be paid for the name and deploy their system. But they do not pay suppliers. That will be done by individual owners of the system.
Tuskys had actually sought advice from CAK in the 2019-20 period on a proposed franchising project.
But the best thing Naivas might have done is to sell their shares as it brought in some professionalism into the business.
“Opening up the businesses enables you to share in a bigger pie rather than having a smaller pie by your own,” says Irungu.
Although private companies are not required by law to reveal their books, there was an opportunity for suppliers to get a glimpse of the financial health of Nakumatt and Tuskys should the two have have gone public by listing at the Nairobi Securities Exchange (NSE) as they had indicated. But this never materialised.
This, analysts say, was partly because their financials were not as rosy as painted. But also these retail chains were reluctant of going public with their owners fearing that listing would amount to giving away their family jewel.
The jewels went down anyway.