Nakumatt City Hall branch in Nairobi. [Photo: File, Standard]
From outside, the sight of a leading retail brand might tell a story of might, profits and a booming consumerism. However, beyond that glittering façade of leading supermarkets, proprietors have adopted the dukawala mentality where they spend the daily collections as petty cash at the expense of the suppliers.
At the peak of its glory days, one of Kenya’s oldest retailers, Uchumi Supermarkets, could count Sh4.3 million in daily sales from its Sarit Centre branch. Every close of month, the branch, located in Westlands, Nairobi, could bank about Sh130 million. The retailer had more than 25 branches with ambitions to dominate the East African space.
That was in 2015. But, two years later in 2017, the listed retailer is debt-ridden, cash-strapped and has empty shelves. Its branches have reduced to 20.
It is a sorry state that its CEO Julius Kipng’etich says can only be cured with Sh4.8 billion cash injection. The firm is reaching out to the Government and deep-pocketed investor(s) for help.
And it is not Uchumi alone in turmoil. Nakumatt Supermarket, associated with might and strength as depicted by the elephant as its symbol, has soaked in Sh30 billion debt.
Suppliers, have borne the brunt of retailers’ debt-curse. Nakumatt leads the pack of rogue retailers with Sh278 million debt of the 22 sampled suppliers, followed by family-owned Tuskys at Sh174 million and Uchumi at Sh123 million.
Uchumi, in which the Government has a stake, has already benefited from a Sh700 million bail-out from the State. And now, embattled Nakumatt is also asking for Government help.
Trade Principal Secretary Dr Chris Kiptoo says the Government cannot just risk taxpayers’ money unless the “black box” in the sector is brought to the table, opened and analysed.
“We must focus on regulatory framework. The retail sector is liberalised but has continued to expand unregulated. We need order in both small and larger chains,” Kiptoo told Weekend Business.
The Retail Trade Association of Kenya (RETRAK) has now had to eat the humble pie and accept that the sector needs policing. “What we have agreed is that regulation would or might be necessary and we have an agreement on prompt payments but it is not binding. We shall have them in our agreements with specific suppliers,” Retrak CEO Wambui Mbarire said.
In the process of strengthening domestic trade as a pillar in vision 2030, the State department of Trade has identified three sub-sectors; retail, wholesale and distribution and informal trade- where reforms must be carried.
Latest data from the Kenya National Bureau of Statistics show that the three sub-sectors contributed 10 per cent to the country’s gross domestic product (GDP), a measure of total value of all goods and services produced last year. However, industry players say the sector’s decline is alarming having plummeted from 8.3 per cent in 2011 to 3.8 per cent last year. And the net effect has been shutting down of small business including Tharaka Honey Limited.
PS Kiptoo believes the whole supply chain is soiled and something has to be done if the Government wants to get the industry into a path to growth. “The working conditions for most SMEs which in turn supply goods to the big retailers is pathetic. When you compare their hygiene with what they are handling, it is not really good,” said the PS.
Since businesses were started by families and are run by a closely knit web of owners, managers, suppliers and creditors in secret, the Government sees a veil of corporate indiscipline as a threat to the economy.
Last week, an expert in trade-related matters confided to Weekend Business that Nakumatt’s debt position was Sh30 billion and not Sh18 billion as it has been said.
The source warned that its debt position was straining SMEs, banks and fund managers. The situation is too dire that the Ministry is concerned that suppliers might have gotten a raw deal as the retailers went on an expansion overdrive.
“These people handle a lot of money, but right now they are in problems. They grew at the expense of suppliers. The growth is just driven by real estate development,” said Dr Kiptoo. He added that it was a mistake that retailers have just been expanding without checks. In the banking sector, for instance, a bank must seek approval from Central Bank of Kenya before opening a new branch.
But now things are changing fast, supermarkets may now be required to tell government how much money they are pumping into the business and disclose their sources too.
Shock of Sh30b undisclosed Nakumatt debt
“There is nobody who says how much capital to put in retailers. Owners just register a company then start borrowing. They get everybody to bring in their goods, sell then retain the money,” he said.
Supermarkets, the Government observes, have been in an abusive relationship with suppliers. Most suppliers of first moving consumer goods (FMCGs) are complaining of late or defaulted payment. “Why would I supply fresh milk and vegetables to the supermarket then wait for three months to be paid yet it has sold them in the first seven days of supply? And they sell in cash,” asked Kiptoo.
The Cabinet has approved a plan to regulate the sector to end unfair trade practices. Retailers will have to ensure prompt payment. “If they work on the code of practice and perfect it well, even the regulator we bring on board will have less work. But we must begin with the legal backing,” said Kiptoo.
Some of the issues the retailers will now be regulated on are listing and risk of delisting, bouncing cheques, unjust return of goods, transfer of commercial risks, forces of supply and self-labeled goods. It is estimated that suppliers are owed about Sh40 billion.
Besides the late payments, suppliers are issued with bouncing cheques, and when they complain the retailers threaten to delist them from their log of suppliers. So lopsided is the arrangement that a supermarket can return your goods if they are not sold, and that can include fresh produce that cannot be resold.
The supermarkets set prices which a Ministry of Trade report claims are ‘excessively lower’ than they would fetch elsewhere irrespective of their own costs thus undermining their small businesses cash flows.
“Retail impose listing fees that are disproportionate to the risk incurred in stocking a new product together with other unjustified fees such as slotting fee to gain access to shelf space, joint marketing contributions which are unfair dealings to the suppliers,” the report reads.
And after all the mistreatment, the supplier has to compete with the retailers’ private label products like Nakumatt’s in house Blue Label products which are slightly cheaper.
The Government hopes to address the problem of late payment using interest rates. Unless where suppliers and the supermarket agree at the beginning that the supplier is offering goods as a loan, late payment will attract charges. “If you delay (to pay suppliers) you must pay interest. And it is going to be above commercial bank interest rates to discourage retailers from the practice,” Kiptoo told Weekend Business.
Ministry officials had intimated that late payment will attract a charge of 14 per cent (market rate interest charges) to scare retailers to pay on time but Ms Mbarire said discussions had seen a much lower figure.
“The charge sighted was way lower than 10 per cent. We have agreed on an interest charge on delayed payments but we are yet to discuss the specifics,” she said when Weekend Business asked her whether retailers would prefer the Central Bank Rate. The Government wants to form a tribunal to support Competition Authority of Kenya. Unless amendments are done to the CAK Act, Kiptoo believes that the sector may require a specific regulator, even though this is yet to be agreed upon.