Here's why expanding too fast can stymie your cash flow and customer trust

The story of former retail giant Nakumatt had been retold countless times, making it an envied business success model that went from one branch to 62 spread out in four countries within a span of a decade.

Then it started shutting down one branch after another, before it finally closed shop in 2020, leaving suppliers and customers to count their losses.

Simon Muraya, an economist, says the retailer's quick expansion spree is what might have finished the once-giant supermarket.

"Businesses can draw a lesson from its story. Expansion is not always a sign of business success. It could be you trying to tell the competition you're the dominant market giant and thus the household brand," he says.

Nakumatt was said to be sustaining its stores through borrowing and using suppliers' money to stock its shelves and pay rent.

When the suppliers held back their supplies, that is when the monumental collapse journey began.

"Before you think of opening another branch, is your main one profitable and cash positive? Can it restock and pay rent for three months without borrowing? Those are the questions you should be asking yourself. Otherwise, that new branch could be a wasted investment if it'll be dependent on the main branch for survival," Muraya says.

It also pays to know the cultural lifestyle of the places where you're investing. Let's say you run a popular franchise of coffee cafes.

 You open an outlet deep in a Maasai territory where the locals could be having a different beverage culture that might affect your investment. "You find they associate that special coffee with the wealthy, or tourists, because the pricing alone is different from what that enormous cup of tea across the roadside kibanda charges," he notes.

Also, that local community could be used to tea prepared with herbal spices that your special coffee doesn't have, and more, the herbal spices are seen as more medicinal, hence the preference.

"So, it pays to study if that business model will work well there before copying it because it worked elsewhere; otherwise, you're expanding in the wrong territories."

In case you are an entrepreneur in the mall business, Muraya says, your rent shouldn't be more than 15 per cent of your sales. "I've seen a business model of a global brand that expanded too fast with franchises. It was a premium price-sensitive business targeting high-value customers. Then customer traffic began thinning. Sales couldn't sustain salaries and rents. Slowly, it pulled out of the market," he says.

Faith Obiero, a business lady, learned the hard way when she opened another branch of her beauty business.

"You can't be present at once in two places to supervise. I trusted a relative to oversee the operations of the new branch, but she was silently stealing from me. The business could not pay for itself even at its peak. I had to hire a competent manager," she says.

Compared to a relative or a friend, a manager could be pressured to meet certain daily targets, whereas the former could rely on your trust on them to get away with everything. But there is a bigger challenge when founders exit the stage.

"When the founder dies, we see the once flourishing businesses with branches almost everywhere collapsing. If they're not fighting over who is the overall boss, they're in courts suing each other, including contesting the will of the deceased if one feels cheated of their stakes and questioning the sanity of the founder at the time of drafting the will," he says.

The founder could have envisioned building generational family wealth, but family wrangles and feuds diminish it in a day, instead of taking that vision to the next level.

Even foreign brands expanding to Kenya find the local market tough. For example, South Africa's Castle Beers tried to penetrate the Kenyan market with its signature brew but found the going very tough.

The dominant market player, East Africa Breweries Ltd, gave it a run for the money, so it quit the market. Similar to how Kwese TV and GTV were run out of the Kenyan market by another market monopoly in sports entertainment, MultiChoice.

"Expanding in a new market may be seen as bringing that needed competition, but no market leader would sit back and watch their customer base being clawed away literally under their feet. They'll go a long way to protect their market share.

Market monopoly is seen as anticompetitive as customers have no other choices because if a monopoly sets a price for good or service, they've to pay it, willingly or not.

However, this has consequences for the market leaders, though.

"This is the reason why you see Kenyans downloading illegal streaming apps to enjoy football and circumvent that market monopoly. They can even go for counterfeits because the original is beyond their reach," he says.

Experts argue that this could be the reason why MultiChoice was forced to review its DStv package prices so as to bring its lost customers back into the fold.

Before thinking of expanding, therefore, there is a need for market research first. You may see a county as the leader in milk production and rush to expand your milk business into a mini dairy processor but still lack stock, as farmers had been contracted in long terms to supply their milk to specific processors.