Kenyan Retail Sector Shows Optimism as International Brands Make Inroads

Retail investors are presently focused on Kenya, as both local and international retail brands and developers continue to penetrate the market. This has made it the most dynamic in the East African region.

“Growth in Kenya’s retail has been driven by the country’s constant steady growth,” Robert Tashima, Managing editor: Africa, Oxford Business Group. The Group ranks the sector as second-most formalized in Africa. This is due to the increasing urbanization with a rise in the levels of disposable income driving consumer’s preference for organized retail.

Cytonn Investments project the country’s retail sector to have a growth Compound Annual Growth Rate (CAGR) of 7.4 percent in the next 2-3 years.

The French-based retailer, Carrefour, opened the 4th outlet at the Junction Mall on a Gross Lettable Area (GLA) of 14,000 SQFT and announced plans to open another retail store in the Sarit Centre Shopping Mall in April 2018,

Naivas Supermarket announced plans to open its 44th outlet at Freedom Height Mall in Lang’ata occupying a GLA of 18,000 SQFT by May 2018,

A South African retailer, Shoprite, announced that it had secured space in 7 prime malls in Kenya, with lease agreements already concluded for the Westgate Mall and the Garden City Mall in Westlands and Thika Road, respectively, with the stores set to be opened in 2018,

Choppies, the Botswana retailer, opened its 12th outlet at Southfield mall along Airport North Road and also took up space in Nanyuki Mall, and,

Chinese retailer, Miniso, a low-cost variety store chain that specializes in household and consumer goods including cosmetics, stationery, toys, and kitchenware, opened its first branch in Kenya at the Village Market, with plans to open another at the Junction Mall and Thika Road Mall in the space vacated by Woolworths.

Real estate company Cytonn Investments has maintained a bullish outlook on Kenya’s retail market given the strong consumer spending propelled by an expanding middle class and a conducive macroeconomic environment.

“….Given the continued expansion of local supermarkets and the entry of foreign brands that will boost uptake of malls and other retail spaces, positive demographics that will boost demand and recovery of the market from the tough economic environment and the prolonged electioneering period in Q3’2017 and Q4’2017,” according to the firm’s Q1’2018 Markets Review.

However, the sector’s performance softened, recording an average rental yield of 9.4 per cent, a 0.2 per cent point decline from 2017. The occupancy rates as well declined by 0.2 per cent points, while the rental charges increasing by 2.0 per cent over the quarter.

“The decrease in occupancy rates is attributable to increase in mall supply in the market with the entry of malls such as Southfield Mall along Airport North Road and Ciata Mall along Kiambu Road, among others,” observed Cytonn Investment Analysts.

Further, it has not been a gloomy affair for the local retail players.

Andrew Dixon, Chief Operations Officer at Uchumi Supermarkets PLC Kenya writes, “The Kenyan retail sector has over the last 18 months undergone monumental change as the ecosystem has changed from local dominance towards international.”

According to Dixon, Uchumi Supermarkets ( UCHM: NSE), which has been trading for over 40 years is on its third recovery from a financial abyss. The largest supermarket chain Nakumatt which had 62 branches in East Africa including 47 in Kenya, and generated up to $600m in annual revenues, yet over the past 6 months has withered on the vine, with spiraling debts of circa £355m.

“It has closed the majority of its stores and finally gone into administration,” he says.

However, efforts to revive the elephant’s glory have hit a dead end.

A statement by 14 landlords states that they do not intend to renew Nakumatt leases. “The 14 landlords…hereby wish to state they do not wish to continue with Nakumatt as a tenant and do not support the proposals for recovery advanced by the Administrator, Mr. Peter Kahi.”

“Landlords are not being paid rent, and as a result stand at risk of having their properties seized by banks,” said the landlords in a statement.

Further, to deepen their woes, Tuskys Supermarket pulled out of a merger plan that would see the former inject some cash and management skills into Nakumatt’s operations. A deal that would have ended their financial distress and restored the retailer to full operations and inventory levels.

On the other hand, Uchumi is seeking a private-equity fund and other investors over a potential capital injection.

According to Bloomberg,  Uchumi needs to raise over 7 billion shillings this year to hold off the competition and also use part of the funds to roll out e-commerce, franchises and convenience stores.

Dixon further notes that “The resultant gap in the market where organised retail is about 30 per cent, is huge. The net beneficiaries within the organised retail trade are Carrefour and the local Naivas chain.”

Naivas Supermarkets also saw its branch network increase to 45 with the opening of a new branch at Capital Center that was formerly occupied by Uchumi. It also has 24-hour store in Nairobi central business district at the junction of Kenyatta Avenue and Moi Avenue in Nairobi CBD previously occupied by Barclays Bank and Nakumatt’s space along Moi Avenue.

“The expansion of Naivas Supermarkets is a positive development in the retail sector, and highlights the growth of local retailers in the wake of stiff competition from international retailers seeking a foothold in the Kenyan retail market including, Manix Clothes Stores, French retailer Carrefour and Botswana based Choppies,” observes Cytonn Investment.

“However, we are of the view that they ought to exercise proper governance and planning to ensure sound investments and execution of strategy,” they add.

In October, it unveiled a Kshs.180 million e-commerce platform that will see goods get delivered countrywide using their system, Naivas Pay.

The platform includes PDQ point of sale machine and Naivas internal retail software will accept cash, debit and credit cards, and mobile money.

What next? Data

Dixon says data and how to use it is the next great opportunity for the sector.

“Many retailers collect data but no one is really using it to inform business decisions so yet another avenue exists. In short, this is a market of opportunity, albeit not without its idiosyncrasies and is set to have one of the largest middle-class populations in Africa and I am sure it will like many developing nations, leapfrog others in the take up of smart technology and benefit from its application within retail.”