Nakumatt’s creditors have unanimously voted to put the supermarket retailer into liquidation. Overall, Nakumatt’s creditors are owed Sh38bn ($380m). What broader lessons can we learn about expansion, governance and financial sustainability?
Peter Kahi, the court-appointed administrator said at the creditor’s meeting:
“An attempted turnaround of the business would be very costly and the company is likely to be lossmaking for the better part of the turnaround window, implying that such a turnaround would need to be financed by additional debt to sustain operations before achieving breakeven.”
Nakumatt’s final six branches – it once had 64 outlets across East Africa – were sold to rival Naivas in November for Sh422m ($4.2m).
The premium Naivas paid for these stores attracted some attention and in fact Naivas’ growth story is interesting in its own right. Bear in mind that when the scale of Nakumatt’s debts to suppliers started to come out, the Kenyan Association of Manufacturers compiled a list of what the major supermarket chains owed. To nobody’s surprise, Nakumatt had used the mechanism of delaying payment times to manage cash flow as it sought to expand. What was perhaps surprising is that all the major Kenyan supermarket chains were guilty: Nakumatt, Uchumi, Tuskys and Naivas.
As at 31st December 2016, Naivas had $2.5m of debt over 60 days old owed to suppliers. Tuskys had slightly more aged debt.
Dial forward three years and Nakumatt and Uchumi have collapsed. As a sideshow, Choppies, which picked up a handful of stores from another failing retailer, Ukwala, has also exited Kenya. Tuskys has opened some new stores but closed others – notably culling some of its Ugandan stores. But the interesting story is Naivas, which accelerated its store opening programme from 2017 onwards and has now bought up the remaining Nakumatt stores.
Where is the funding for Naivas coming from? We don’t know if Naivas has received outside investment. Meanwhile for the past three years it has invested heavily in opening new stores – exactly the same activity that put Nakumatt and Choppies into financial distress. The problem is that new stores are expensive to fit and stock, and a store opening programme stretches management resource and tests a retailer’s resilience. Incidentally, some of Naivas’ new stores are expensive fit outs – the chain has also been trying to push itself more upmarket.
It is possible, absent any other evidence, that Naivas is sailing along. Certainly it has been smart in avoiding one bear trap: international expansion. But if Naivas is expanding in a financially sustainable way, it is doing so at a time when Majid Al Futtaim’s Carrefour is taking market share in Nairobi, and Shoprite is also getting in on the act. Athough we know Shoprite is either struggling to open stores quickly or electing not to – it launched in Kenya with a plan to open 7 supermarkets but has managed top open just three in the two years since.
When we talk to investors about retail in Kenya, this is what they say: it’s not a good time. This isn’t universally true: Adenia Partners invested in both Tumaini and Quickmart. But broadly speaking, investors are less confident about investing in supermarket chains, especially in Kenya.
And we think they have a point.
Stories of supermarket chains managing to grow quickly, organically and sustainably are rare. History tells us that its hard to escape the forces of gravity. That is what is spooking investors: governance.
