African Supermarket Chains Enjoy Success, But East Africa Remains A Challenge

By Kurt Davis Jr. AFKI Original Published: September 18, 2017, 5:18 pm
African supermarket chain Nakumatt have struggled to grow of late. Photo: QuartzAfrican supermarket chain Nakumatt is struggling with significant debt. Photo - Quartz

A shopping trip to South African supermarket Game in Maputo can feel like a social affair.

Women stop to chat with girlfriends that they have not seen in days, weeks or months. Kids trot back and forth between their parents and the food trucks, pleading with their parents for Meticais to pay for a hot snack.

On the street outside, crafty Mozambican men are selling coconuts with straws in them for coconut water, fresh pineapple and random gadgets. A short drive on the same street and you can also pick up some fried chicken and fried fish with a side of freshly made French fries.

Game is one of a few brands under South African firm Massmart Holdings Limited.

And, if you are not shopping at Game, the quicker more grocery-focused option may be South African chain Shoprite. Shoprite is a well-stocked, easy shopping experience in Maputo, excusing long lines during busy Saturday mornings or post-work hours.

Shoprite, accordingly, has become a dominant player in some African markets, including Mozambique. The low-cost grocery supermarket and the slogan “low prices for you” has sprawled from small South African beginnings to Africa’s largest retail chain, worth more than $9.5 billion.

The East is not like the South, the West, etc

The story of successful supermarkets, however, have hit a wall in East Africa. Kenya, in the minds of many investors, is becoming the microcosm of the difference between the East and the rest of Africa, at least, in the supermarket space.

Smaller countries, such as Mozambique and Namibia, provide bigger opportunities for expansion (and returns) compared to East African nations.

One can better manage growth expectations and costs (and projected returns) in neighboring southern African countries, including Zambia, than in the rising East African giants, according to one Shoprite insider.

Game, for example, has one location in Nairobi at Garden City Mall. French supermarket chain Carrefour entered the market in 2016 and has thrived with its location at the Hub in Karen. But Shoprite, on the other hand, has danced around this East African market, ultimately choosing to stay out.

Shoprite’s absence, specifically in Kenya, surprises some observers. But analysts and investors point to a few prevailing challenges in East Africa.

First, competition is skyrocketing in the region. Growth in the market is not matching larger economic numbers in the region. And, lastly, supply chains have not worked well for neither the buyer nor the supplier.

Nakumatt and Uchumi as examples

The quick decline of Nakumatt and Uchumi in the Kenyan market epitomizes the changing dynamics in East Africa. The two chains have struggled to keep their head above water in competition against both smaller and bigger brands in the Kenyan market.

Tuskys and Botswana-based Choppies have found small niches in the market with smaller and more localized spenders. Bigger international brands Game and Carrefour have planted themselves in large shopping hubs to take advantage of significant foot traffic and bigger spenders.

Both types of supermarkets have different supply chains to accommodate their divergent consumers. Tuskys stocks specific brands for their consumer base, relying heavily on the consumer loyalty in the market.

Carrefour offers a wide scope of brands in the market to accommodate the stereotypical Saturday shopper in search of a wider range of offerings in grocery and household necessities.

Chandarana is probably the chain seeing the most traffic, with locations across the city, including ABC (Westands), Yaya Centre and Lavington.

Nakumatt and Uchumi are also facing uphill climbs around growth expectations in Kenya and Uganda. Nakumatt is deep in debt, estimated in the multiple tens of millions. Lenders are banging on court doors for some help on recovering their losses.

It is quite a change from several years back when international chains, including Walmart, had surveyed the Kenyan market and researched whether a purchase of Nakumatt could be a bridge of access to the East African market.

Today Nakumatt is soliciting good advice and capital to change its outlook. Yet, investors are not as anxious with the current books and the empty shelves in the stores, especially in the Westgate Shopping Mall, underpinning investor sentiment.

Nakumatt, for once being the giant in the market, is reportedly merging with rival Tuskys to immediately access a supply chain that is lacking on their end. A merger of two rival family businesses, for some sceptics, signals that there are even greater challenges behind the scenes for Nakumatt.

Uchumi has already petitioned for bankruptcy in Uganda, with its shelves at home in Nairobi and abroad in Kampala bare due to some suppliers refusing to supply goods without upfront payment.

Uchumi’s struggles only consume less time in the media because Nakumatt’s is the unimaginable great story turned bad for those following the market.

The local struggles by Nakumatt and Uchumi also further expose the supply chain challenges in the region. A merger with Tuskys will fill the immediate void in Nakumatt’s supply chain.

But it will not help to address a national supply chain that many suppliers grumble about behind closed doors.

For example, payment terms are a frustration to suppliers. The best chains may still take 180 or more days to pay suppliers. Such terms dash the working capital of even the best suppliers and producers. It also allows bad payers to hide until the economic problem has grown to a metamorphic size.

Suppliers want to use the current market structure to change the balance of power, among other things.

In a dream world, as one supplier described it, going straight to the consumer with an Amazon model would eliminate the problems our brick-and-mortar buyers create on our balance sheets. Many suppliers, despite their hopes, know this change is unlikely to happen.

The same supplier hoping for the Amazon model is already wondering if Tuskys’ reported merger with Nakumatt only emboldens struggling African supermarket chains in the region to tread water until an unexpected buyer saves the day, leaving suppliers holding bag on bad debt.

It is not clear if this new merger is likely to include a payment of debts to creditors or immediately address the multiple court proceedings in Kenya and abroad.

If it fails to address creditors and courts, the merger may be the final chapter to Nakumatt’s problems but a prologue to tougher times for supermarkets in East Africa (and those who work to support them as investors and/or suppliers).

Nairobi is not a Maputo or Lusaka or Windhoek. Rather, Nairobi city is not far from matching the combined population of all three cities. Maybe it is that statistic that sums up the confusion on performance of supermarket chains in Kenya and the rest of East Africa.

 

Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.

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