Voluntary Report - public distribution

**Date:** 7/28/2006

**GAIN Report Number:** KE6006

KE6006

**Kenya**

**Retail Food Sector**

**Market Dynamics in Kenya\'s Retail Food Sector (Supermarkets)**

**2006**

**Approved by:**

![](media/image1.wmf)Jennifer Barnes

U.S. Embassy, Nairobi

**Prepared by:**

Carol N. Kamau

**Report Highlights:**

Despite the current situation in Kenya\'s retail food sector
(supermarkets), the market continues to be viable and vibrant. Good
prospects exist for U.S. food and agricultural products.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Nairobi \[KE1\]

\[KE\]

# [Market Dynamics in Kenya's Retail Food Sector (Supermarkets)]{.underline}

Kenya's retail food sector has in the recent past been dominated by two
major supermarket chains namely, Uchumi Ltd. and Nakumatt supermarket.
Both chains reportedly have a combined market share of 70 per cent. The
other 30 per cent is shared between second tier and independent stores
such as Tusker Mattresses, Ukwala Supermarkets, Skymart, and Woolmart
etc.

In the last five years, the sector experienced rapid growth both in
sales volume and number of retail outlets opened countrywide. The market
has also experienced dynamic shifts in customer and brand loyalty. This
was as a result of competitive pricing, comprehensive product range and
introduction of non-traditional conveniences such as pharmacies,
bookstores, automated teller machines, and delicatessens, fresh produce
section, bakeries and even in-store restaurants.

As a result of the rapid growth, some of the less competitive
supermarkets such as Metro Cash and Carry (South African) have closed.
Unlike the Ugandan and Tanzanian markets where the South African chains
Shoprite and Game dominate. Local Kenyan supermarkets are strong enough
to make it difficult for foreign competitors to get into the market.

**[Uchumi Supermarkets]{.underline}**

Uchumi is currently the only publicly listed supermarket chain in East
Africa, trading in the Nairobi Stock Exchange. The Government of Kenya
(GOK) is a minor shareholder (9.5 per cent), others being, Kenya Wine
Agencies Ltd. (KWAL) and Industrial and Commercial Development
Corporation (ICDC).

Previously, Uchumi supermarket was the largest and most popular retail
outlet both in terms of network of outlets and number of customers. It
was credited for having revolutionized the retail food sector by giving
customers a variety of products to choose from and introducing the
concept of self-service. It has also been a major outlet for local
manufacturers and suppliers of fresh produce (over 2500 suppliers with
an 85 to 15 ratio in favor of local suppliers vis-à-vis imports). The
name 'Uchumi', which is Swahili for economy, has a very strong retail
heritage.

The October 30, 2001 earnings announcement of a 68 per cent decline
heralded the beginning of a trend. Prior to this, the supermarket had
reported profits annually for 14 years, maintained a significant growth
in turnover over the same period and had no long-term liabilities.
Uchumi was so liquid that excess funds had been invested in treasury
bills.

Detecting trouble, the Board of directors appointed a new Managing
Director who started a major house cleaning through, cost cutting,
hiring of new managers, sprucing up the brand image and launching of new
products. Uchumi embarked on major national and regional expansion
strategy that would cost Kshs. 2.5 billion (US \$ 32 million) in five
years and spent Kshs. 400 million (US \$5 million) on capital
expenditures such as an inter-branch information technology network. The
new managing director's turnaround strategy was to invest the excess
funds in the company's core business instead of the money market.

The expansion strategy did not pay off as expected. A spate of spiraling
costs emanating from expansion, coupled with sluggish sales growth
against a backdrop of a declining revenue growth sank the company deep
into debts and deferred dividend payouts.

The Kshs. 246 million (US \$ 3 million) losses recorded by the chain at
the end of financial year 2003 left the market shaken as year 2002 had
recorded a Kshs. 80 million (US \$ 1 million) pre-tax profit. A net loss
of Kshs. 699 million (US \$ 9 million) was announced in 2004.

The media reports that mismanagement, corruption, inefficiencies and the
high cost of operations are the main factors that caused the downward
trend, leading to a significant drop in the share price.

In 2005, the retail chain faced serious financial challenges that saw
its shareholders inject Kshs. 1.1 billion (US \$ 15 million) through a
rights share issue.

*The fall:* Uchumi supermarket however, went down in June 2006 under the
weight of indebtedness and was closed after the management board
declared it insolvent. It owed creditors (banks and suppliers) more than
Kshs. 3 billion (US \$ 41 million) against a total asset base of Kshs.
1.8 billion (US \$ 24 million). This left the consumer market with no
option but to shift loyalty to remaining chains.

*The rescue effort:* After 45 days of closure, the GOK injected Kshs 675
million (US \$9.4million), as part of cash required to kick start
Uchumi's business operations. Various shareholders are expected to
inject some Kshs. 300 million (\$ 4.2 million) as part of
recapitalization of the Company. Key Uchumi creditors, Preferential
Trade Area (PTA) bank and Kenya Commercial Bank (KCB) have formally
agreed to a 12-month moratorium on the company's principal loans. Key
suppliers have accepted a staggered payment plan for outstanding amounts
owed to them with firm commitments on their part to resume supplies.

The chain initially re- opened 5 of its super stores within Nairobi down
from 30 stores countrywide. And has announced as July 27, 2006 that all
other branches will soon re-open.

At national level Uchumi has provided ethical competition in the
supermarket and retail business and also served as a check against
monopolistic tendencies by one or two chain supermarkets. Despite its
financial problems, Uchumi has been tax compliant and (one of the top 40
taxpayers in the country) and has not defaulted on its loan repayments.

**[Nakumatt Holdings Ltd.]{.underline}**

Nakumatt is a privately owned supermarket chain and previously, the
second largest player in the market, but now the most significant in
light of Uchumi's woes.

It is credited for developing exclusive in-store outlets that offer a
wide choice of local and international brands. Nakumatt has mastered the
law of successful retailing by transforming shopping into a lifestyle
experience providing everything from automobile spares, clothing,
furniture, music equipment, restaurants, shoes, photo labs etc. The
chain store has 17 outlets strategically located in the major
towns/cities countrywide (Nairobi, Mombasa, Kisumu, Eldoret) targeting
the high-end market.

To compound the challenges facing the retail market sector, Nakumatt is
reported to be under investigation on claims of tax avoidance and
evasion amounting to Kshs. 18 billion (US \$ 243 million) adding further
uncertainty in the market.

**[Tusker Mattresses Ltd.]{.underline}**

A family owned business that has expanded in the recent past, is
increasing competition within the market. It targets the middle and
low-income consumers.

The chain store has 12 outlets strategically located near bus
stations/public transport system and spread within the major towns in
Kenya (Nairobi 8 stores, and one store each in Eldoret, Nakuru, Athi
River and Ongata Rongai). Tusker Mattresses is also reported to be under
investigation on claims of tax and evasion.

### Ukwala Supermarkets

Another family owned business and at relatively the same market level
with Tusker Mattresses. Basically, targeting the same kind of customers
and competing on price.

The chain store has 8 outlets located in Nairobi (5) and Eldoret (3).

### Other Retailers

There are an estimated 40,000 retail outlets in Kenya according to trade
sources, 70 per cent of which are based in Nairobi.

## The Future

It is not competition or adverse market conditions but sheer
incompetence, poor management and lack of business ethics that distort
the market in Kenya.

The retail food sector is continues to be viable and vibrant even taking
into account the issues raised above. When Uchumi closed two months ago,
more than 30 companies put in bids to buy it. Second-tier players have
intensified their presence in the market through promotions and price
offers since the fall and rise of Uchumi supermarkets.

Good prospects exist for U.S. food and agricultural products in Kenya.
Finding and working with good agents and distributors remains the key to
developing exports of U.S. consumer-oriented food items.

Consumer purchase decisions are largely based on brand awareness, market
value and service level. With the modest growth in the economy over the
last three years consumer spending is expected to increase as well. The
consumer has become more sophisticated, demanding quality, variety and
exceptional service