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Kenya’s supermarket chain foiled by explosive growth
November 11, 2017
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NAIROBI: The implosion of a family-owned Kenyan mattress shop that grew to become East Africa’s biggest supermarket chain is a cautionary tale about trying to grow too far, too fast to cash in on the rapid growth of the country’s middle class.

Kenya’s High Court will rule on Nov. 16 on Nakumatt Supermarkets’ petition for protection from creditors to whom it owes more than $300 million. Thousands of jobs are at stake, and France’s Carrefour and South Africa’s Shoprite are already moving to fill the gap.

It’s an ignominious fall - with more than 60 outlets and 1,500 suppliers, turnover at the company once equaled nearly one per cent of Kenyan GDP.

Former employees, suppliers, fellow business people and private equity investors paint a picture of a firm whose management capacity did not keep up with its prodigious growth.

“It’s a tragedy that needn’t have happened,” said Andrew Dixon, who was hired in a scramble to revamp management. A former executive at Tesco and Burt’s Bees, Dixon quit as chief marketing officer last month and this week took a job with Uchumi, another struggling Kenyan chain.

A fatal fire in one store, the demolition of another and an attack by militant on their flagship Westgate outlet in 2013 created a “perfect storm” of disasters for Nakumatt, Dixon told Reuters. Outdated management practices exacerbated other problems like endemic theft of cash and stock, he said.

“The business outgrew the management capacity,” said another Nairobi businessman familiar with the company, asking not to be named so that he could speak candidly. He pointed to a balance sheet loaded with short-term debt, problems paying suppliers and outdated IT systems.

Answering questions through his publicist, Managing Director Atul Shah, of the founding Shah family, rejected the idea that management was not modernised fast enough. Over the past decade, when the business was thriving, the only family member of management was Shah himself, he pointed out.

He acknowledged that theft of 10-15 per cent of goods or stock did not measure up well against a global average of 2-3 per cent, and investment in a modern warehouse management system from Oracle two years ago came too late.

But he said the chain’s main undoing was the significant costs of a 2010 expansion plan that assumed sustained Kenyan economic growth of more than 10 per cent per year. The chain went from 36 shops in 2011 to a peak of 62 in 2016.

“By now we would be talking about over 100 branches. In terms of revenue, a significant growth was also expected which never materialized but even if it didn’t materialize, investments and related financing were undertaken,” the publicist’s statement said.

Shah wants to restructure Nakumatt so it can re-emerge as a leaner chain, according to public court documents.

The court’s protection “is reasonably likely to achieve a better outcome for the company’s creditors as a whole and ensure continuity of the business... as opposed to the drastic action of winding up the company,” Shah said in the documents. For more than two decades, Nakumatt’s blue-and-white signage and large bronze elephant statues enticed well-heeled Kenyans into its shops to buy anything from imported meat to the latest flatscreen TV sets.

Atul Shah’s father started Nakumatt in the Rift Valley town of Nakuru. The family still owns the bulk of Nakumatt shares.

Reuters

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