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Nakumatt’s debt driven growth now haunts retailer

Nakumatt Chief Marketing Officer Mr Andrew Dixon

Kenya’s retail sector is known to be conservative and resistant to global trends, leading to the dominance by family-owned supermarkets.

But things are changing fast. Last week, Nakumatt Regional Director Thiagarajan Ramamurthy left the retailer after organisational restructuring. Ramamurthy has since joined Bidco Africa as Chief Executive Officer.

The former executive director of UK retailer Tesco, Mr Andrew Dixon, who is currently Nakumatt chief marketing officer, has assumed duties previously undertaken by Mr Ramamurthy. He will be assisted by the regional chief officers. The management shift precedes acquisition of a major stake in Nakumatt by an undisclosed strategic investor, who is expected to pump in about Sh7.5 billion.

In the three months that Mr Dixon has been on board, the retail chain has closed two outlets at Katwe in Uganda and Ronald Ngala Street in Nairobi. Its close rivals Tuskys has also shut down its branch on Sheikh Karume Road, pointing to a struggling sector.

Retailers are bleeding losses, inventories are slipping out of control and relations with suppliers are at an all-time low, casting doubts about the viability the model of family executives running expanded businesses they built from scratch.

When Nakumatt stood up to American giant retailer Wallmart — which entered the market through its South African subsidiary Massmart — it sought to demonstrate that a local family-owned franchise could challenge the global muscle and have the last laugh.

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It not only competed for space with Massmart’s Game stores at Garden City, but went on a branch expansion binge that saw it open its 63rd store at NextGen Mall, Nairobi, in December last year. “When you are in the retail space, you want to maintain your market share and one of the ways to do it is increasing your branch network. You want to be visible in every region,” said Sterling Capital Analyst Eric Munywoki.

But the retailer, Kenya’s largest, was not fighting on just one front. French giant Carrefour had opened shop in Karen, targeting the same clientele.

Before the foreign interest, Kenya’s formal retail market was dominated by family-owned businesses such as Nakumatt, Tuskys and Naivas, with only one listed supermarket chain, Uchumi. However, local supermarket chains are struggling with huge supplier debt estimated at Sh40 billion, reduced foot traffic at prominent locations and tough competition.

“Some of these companies are borrowing heavily for their expansion drive and find themselves in a tight liquidity situation. They have opened some branches in places where there is high competition and headcount is limited. With that kind of arrangement, the supermarkets find themselves in slowing profitability,” said Mr Munywoki.

Relocate Embakasi branch

In the onslaught by global brands, the rest of the stores retreated to smaller markets, while Nakumatt chose to make the last stand, but is now falling at the feet of competition from structured, professionally-run conglomerates. “When you decide to scale up, you need a lot of third-party capital to come in, which none of them had,” said Mentor Management Chief Executive James Hoddell.

Nakumatt has accumulated a huge debt from Sh4.7 billion in 2012 to an estimated Sh18 billion now, and South African ratings agency Global Credit Ratings downgraded the retail chain’s credit risk profile to ‘watch list’ as it struggled to pay suppliers.

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When asked whether they regret the model of loan-funded expansion, especially into mall spaces as anchor tenants, Mr Dixon said the firm will stick with the strategy. “We have no regret (for that). We shall continue pursuing expansion programmes within key malls and are currently looking forward to relocate our Embakasi branch to the upcoming Southfield Mall,” he said.

The retailer is putting up a brave face even as the windfall of the Sh7.7 billion deal has been delayed and slow operations are hurting its cash flows. Nakumatt expected to pocket Sh4.1 billion by the end of last month but has now been shackled by the delayed disbursements. It was to get the Sh3.6 billion balance by June this year to complete the purchase of 25 per cent of its stake. “A depressed trading environment and poor sales at specific branches has heavily constrained our cash flow, necessitating the ongoing restructuring and capitalisation efforts. We remain committed to resolving the current constraints,” said a Nakumatt spokesperson.

The retailer’s Katwe branch in Kampala  was shut down last week because it owed  Sh8.5 million in rent arrears, barely one month after the closure of its Ronald Ngala Street branch in Nairobi. Nakumatt is almost staring at empty shelves due to apprehensive suppliers who have threatened to withdraw stock from its shelves.

A pact brokered by Trade Principal Secretary Chris Kiptoo is the only thread that is holding the supermarket together. A source privy to the negotiations told Weekend Business that Nakumatt bosses promised to pay Sh3.2 billion upon receipt of the first tranche from the foreign investor.

“We are worried about the state of affairs in the retail sector. We are having a meeting next week with all stakeholders and the Government to give our common stand,” said Association of Kenya Suppliers Chairman Kimani Rugendo.

The entry of a private equity firm into Nakumatt’s books may mark the last stand of family-owned Kenyan retail businesses against global behemoths.

Massmart’s Game opted to set up its own stores in Kenya after failure to acquire a majority stake in Naivas Supermarkets. It was forced to call off its quest for the 51 per cent shareholding after a Naivas family feud derailed the takeover.

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Nakumatt’s hand, however, was forced after it ran into financial difficulty. The retailer had resisted selling 25 per cent stake to cover the expansion since 2012 when it was reported that 10 suitors had lined up for it. Now, after the sale of the stake, we may see a significant change in how the retailer is run with expectations that professionals will be brought in, pushing the family to the fringes of the business they created.

Infighting and intolerance

Nakumatt, Tuskys and Naivas all started in Nakuru as family stores that, incidentally, supported each other. Nakumatt was founded by Hasmukh Shah as Nakuru Mattresses. Hasmukh later sold the business to his brother Mangalal and sons Vimal and Atul. Tuskys, on the other hand, was started by Joram Kamau, who would take goods from Nakumatt on credit and sell at low prices. Later, Mr Kamau, who was busy building an empire as Tsuker Mattresses, left his first shop to his brother Mukuha Kago — the founder of Naivas.

With such shared history, the retailers’ experiences may help us know what to expect in the changes that now face Nakumatt as it seeks to transform itself.

Tuskys has, perhaps, become an example of infighting and intolerance of professionals, who are viewed as outsiders. After Mr Kamau’s death, the retail chain brought in Dan Githua as the chief executive — and he instantly faced family battles that almost forced him out.

Nakumatt’s Dixon says his experience is different, with the retailer having set a good foundation for performance-based growth. “We do not expect any insurmountable challenge. We have been undergoing the transition from a family business to a contemporary corporate firm in the last three years. As you may be aware, 98 per cent of the business leadership rests on the palms of professional business managers. These include the respective branch managers, regional managers, country managers and chief officers at the headquarters level,” says Mr Dixon.

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