From Akamba to Nakumatt: Why family owned firms face turbulence


As a little boy, Atul Shah, the current managing director and chief executive officer of the embattled and biggest retail chain Nakumatt Supermarkets, did such odd jobs as stacking sacks, making deliveries to customers and manning the till at his father’s shop in Nakuru.

It was while working as a shelf stocker and shop assistant that he learnt the ropes of retailing and vowed to protect his father’s vision. An enterprising young Atul would never lose sight of his father’s dream even during the hardest of times.

It was the vision that pushed him and his brother Vimal Shah (not related to Bidco boss) to work so hard to pay off his father’s Sh1.2 million debts after the old man had been declared bankruptcy.

They would later on acquire Nakuru Mattresses from their uncle who moved to the United Kingdom and merge it with Furmatts – a clothing store they had started, to forge what is today Nakumatt Supermarkets.

Years later, the two brothers would become some of the country’s wealthiest entrepreneurs, having grown the business into a sprawling chain of supermarket stores with footprint across East African region.

Retail chain

With diligence and passion, Atul would help Nakumatt to slowly but surely spread its tentacles from its hometown in Nakuru through Eldoret to Nairobi and finally across the region.

The constant, throughout this momentous journey, has been Atul. Through thick and thin of Kenya’s largest retail store, Atul has maintained a stranglehold on both the ownership and management of the retail chain, protecting his father’s vision.

With the business now in crisis, he might be thinking: “If I made it before, I might weather the current storm too.” Yet this time round, the crisis threaten survival of the business.

Nakumatt, like most family businesses, is now bigger than the Shah family.

The retail giant currently saddled in debts amounting to about Sh18 billion with stores running on almost empty shelves cannot be saved by the management skills of Atul or the financial might of the Shah family alone. The Supermarket which on Saturday closed three outlets in Uganda needs external help to get it out of its current financial rut.

But this is a painful pill to swallow for someone like Atul who – like a mother who watches adoringly her baby grow into a young fine man – has watched the business grow from a kiosk into a high-end retail store that has revolutionised shopping across the region. The retail king has no immediate plans to cede the throne of the Shah Empire.

This is the tipping point for most family businesses. It’s either they go down with their dreams or surge ahead having shared the dream with outsider.

For some family businesses, this has been a painful decision to make. Yet for others, they have chosen to die with it. For Atul, the crisis is having a toll on his life.

“I have not enjoyed my sleep, meals or immediate family time in a long time and I shall only rest when we are out of the woods, ” said a remorseful Atul who, in an interview with Financial Standard, expressed his sincere apologies to all the stakeholders. “We have let you down.” He vowed to turn around the turbulent ship.

“I can’t say it enough, but I am sorry and sincerely committed to facilitating the turnaround of Nakumatt whatever it takes,” said Atul.

Pradeep Paunrana, the current chief executive officer of cement maker, Athi River Mining (ARM), wept when he made this decision. With capital injection of $140 million (Sh14 billion) from a British Government-owned fund CDC Group in 2016, Pradeep’s stake at a company his family founded was watered down.

Starting a cement making company was the dream of late Harjivandas J. Paunrana, father to Pradeep. “I remember him telling me: ‘You see that line of trucks waiting to carry cement at EAPCC, waiting for two to three days at a time? This is a business that we should go into because there is a huge demand and we have got to fulfill that demand,” Pradeep was quoted telling the news site, How we made it in Africa.

ARM was founded in 1974 by Pradeep’s father, the late Harjivandas J. Paunrana. Pradeep, just as Atul, was always around to see his family business grow from a small producer of agricultural lime to become one of the country’s biggest cement manufacturers. But, like Nakumatt, the fast growth came at a cost.

In its expansion overdrive, the company accumulated so much debt that it was inevitable Pradeep’s family had to cede some ownership to make way the entry of a strategic investor who could help make the company afloat. It was a heart-wrenching moment for Pradeep.

Peter Muga, a family business expert at the Institute for Family Business says that it is expected for people to get emotional over something they started. “It is very human that something you have started, there is a certain level of attachment to it,” said Muga, noting that this is the strength of family businesses which makes founders to work for the company with passion.

About 70 to 80 per cent of businesses in Kenya and around the world are family businesses. They are defined by an audit and consultancy firm PricewaterhouseCoopers (PwC) as having at least one representative of the family or kin formerly involved in the governance of the firm.

If publicly listed, the persons who established or acquired the firm from their families or descendants enjoy at least 25 per cent or more of the decision-making rights mandated by their share capital.

In Kenya, family businesses contribute about 60 per cent of the employment in the country, according to Muga. Unfortunately, most family businesses are averse to seeking outside help, fearing to enlist the help of outsiders. This apprehension may stem from their concern about whether the family’s vision for the business will be truly understood and honoured,” points out a Family Business Survey for 2017. But a failure to enlist outside help and allow for professional management of the business has been the reason for the death of most family businesses.

Luther Odhiambo, a business lecturer at the University of Nairobi says entrepreneurs find it difficult to detach themselves from their business because Kenya’s legal framework does not protect them. “From the house-helps, you realise that the law does not listen to owners,” he noted.

Corporate discipline

“Moreover, in this country unlike in developed countries, corporate discipline is poor. As such, a manager who runs down one corporation is not barred from working in another one.

“And that is true of even the Government itself. It simply transfers people managers from a failing institution to another,” says Odhiambo. Business owners fear that they cannot tame the managers.”

The death is even quicker for family businesses that operate in uregulated industries such as transport, retail, hospitality, reckons Muga who is also a course director of the Family Business Programme Strathmore Business School. Here, unlike in such sectors as banking, schools or listed companies, no one can tell the owner that they cannot be proprietor and chief executive at the same time as that would amounts to a conflict of interest.

These companies have failed embrace strong governance structures which have been the source of their undoing.

The result has been death of such famous family businesses as Akamba Bus and Book Point Bookshops. “Nakumatt, for example, has become so big that for all practical reasons it needs other stakeholders the family members might not have,” says Muga. “Once you become a multinational, you can’t sit around a table over lunch and prudently make a decision for the business,” he adds. The passion that owner of a family business comes with can also be its weakness.

“The passion stops you from being objective,” says Muga, noting that there is a temptation to be surrounded with people he describes as ‘yes-men.’

As the Nakumatt saga rages on, Atul has been accused of insulating the business from independent and professional audit, a claim he denied.

Critics link these claims to the main reason why former Nakumatt Holdings’ Regional Operations and Strategy Director Thiagarajan Ramamurthy, popularly known as TRM, exited the supermarket in unclear circumstance.

TRM is reported to have been unimpressed with the manner in which the company was being run. Ramamurthy is reputed to have more than 45 years’ professional experience in business management and leadership in the retail and manufacturing sectors in India and Kenya.

But, perhaps, Nakumatt’s gravest mistake has been its failure to go public when it had an opportunity to do so. In 2014, Nakumatt then valued at Sh1 trillion business, had an opportunity to list and even had announced that it would list at the Nairobi Securities Exchange (NSE).

The retail chain also said that would sell a 25 per cent stake within the next six to 12 months to fund growth. But it never did any of these two.

“When you list, you do not become a big fish in a small pond, you are just a small fish in bigger pond,” explained Muga. You’d rther have 20 per cent of Sh100 billion than 100 per cent of Sh10 billion. “When you don’t invite equity when the brand is strong, you will never get an absolute peak,” says Muga, noting that this is the time to bring in independence in the management.

Nakumatt would not have been the first Kenyan family business to go public. A number of family businesses are listed at the Nairobi Securities Exchanges.

The Ndegwa’s NIC Bank, Aghakhan’s Nation Media Group, Pradeep’s ARM and Merali’s Sameer Group are just a few among others that have taken this path.

Flame Tree Group which deals in first moving consumer group and founded by Heril Bangera is also listed at the Nairobi bourse.

Huge conglomerates around the World started out as family businesses but as they expanded to spread wings overseas, they shed their family tag. “Samsung and BMW are family-businesses that over the years have been able to manage succession,” explained Ouma.

Ouma says that one of the best ways for a family business to grow is through diversification, which is also a good way to control family squabbles- an Achille’s heel for most family business.

He gives the example of Simba Corporation which is now better capitalised having divested into different industries. The family sold its stake at the East Africa Building Societies to Nigerian investors, and got more capital which it used to strengthen its motor vehicle business. They have also moved into hospitality, with a majority stake in Kempinski Hotel and also gone into mining through Acacia Mining.

A recent survey by PwC notes that as family businesses- like all other businesses- have grown to be more complex and there has been a dip in the number of firms planning to keep things in the family. Nearly two-thirds of family firms surveyed say they plan to bring in professionals.

Business magnate

Perhaps Atul, like most founders of family businesses, has reached a point of reckoning: Nakumatt brand is bigger than the Shah family.

In an interview with the Sunday Standard’s Weekend Business, Atul said: “I have sat in many meetings in the last few months and my resolve has been resolute. I have on numerous occasions reiterated that we have made very good progress on the corporate governance front and major outcomes will be announced soon. The family shall never be hindrance to the growth of Nakumatt. That I promise.”

It is time for Nakumatt to truly go global; it is time for Atul to share his father’s dream with the world. The death of Mombasa business magnate Twahir Sheikh Said, popularly known as TSS, also saw the TSS multi-billion business empire tumble like a house of cards.

Weighed down by a mountain of debts, Juja Coffee Exporters Limited, TSS Transporters, TSS Investments Ltd, TSS Unga Millers and a string of hotels and villas, quickly followed their owner to the grave.

However, barely months after the death of TSS, some directors were reported to have colluded in getting loans using T.S.S’s companies, and in the process defrauding the old man of about Sh1.5 billion.

 

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