Fight or flight? Dilemma of Kenyan investors in TZ

Tanzanian President Jakaya Kikwete and Kenyan President Mwai Kibaki. Photo/FILE

What you need to know:

East Africa’s second largest economy has good ingredients for business: large geographical size, many natural resources, and a fast growing economy. So why is it proving to be such a hard nut to crack for Kenyan investors?

For many Kenyan companies, going into Tanzania is a mixed bag of fortunes, with some finding the going tough, and cutting their losses by closing down, and others persevering for years before making profits.

Others experience a bumpy ride, with profits fluctuating. One year they make a profit, and the next they are in the red.

“It is true; doing business in Tanzania is harder than in Kenya, Uganda and Rwanda, Infotech Investment Group chief executive officer Ali Mufuruki told The Citizen, our Tanzanian sister publication.

“I have business interests in Kenya, and Uganda and I confirm this to be true in many respects.” 

A selected few have been able to grow their profits year on year, largely by entering the market through acquisitions.


The mode of entry, regional business analysts say, could be what makes the difference between failure, and success for companies wishing to venture into Tanzania.

Right ingredients

As an investment destination, Tanzania has all the right ingredients.

It is large geographically, has natural resources, a good economy that is growing faster than Kenya’s, albeit from a lower base, and plenty of opportunities for trade and investment.

In 2012, Tanzania’s economy is expected to grow at 7.5 per cent, compared with Kenya’s 5.6 per cent. The icing on the cake is that Tanzania has a lower percentage of its population classified as middle class, compared with other countries in the region.

Tanzanian has just 12 per cent of its population classified as middle class — they earn between $4 (Ksh332) and $20 (Ksh1,660) a day, according to a classification by the African Development Bank in 2010.

Similar figures in the region are: Kenya (44.9 per cent), Uganda (18.7 per cent), Rwanda (7.7 per cent) and Burundi (5.3 per cent).

Kenyan companies, therefore, look at it from the perspective that as Tanzania reports stronger economic growth, more of its citizens will make it into the middle class, increasing their purchasing power. But plans do go wrong quite often.

Those who have been in the market cite cultural misconceptions, a higher cost of doing business and human resource challenges.

There is also the notion that, Tanzanians take time to embrace Kenyan brands.

“They are other concerns that one needs to be alive to, like government bureaucracy, unfair practices in issuance of work permits for experts, and unreliable power supply,” adds Mr Mufuruki. 

Two weeks ago, Deacons, the clothing and lifestyle goods retailer, hit the headlines with an announcement that it would close its stores in Tanzania in a week’s time after five-straight years of losses.

The retailer said it lost Ksh13 million in the full year ended December 2011.

The high cost of doing business, especially with rental space per square feet costing slightly more than double what it costs in Kenya and Uganda, and with their target market, the upper to middle income, being very small compared with other countries, led to the decision to exit, the company said.

“Tanzania is a very tough market. We have been there five years and made a loss year on year,” said Mr Muchiri Wahome, CEO of Deacons, in an interview when the retailer announced earlier this month its plans to halt its operations in the country.

Deacons admits to having had its strategy wrong.

“Our locational strategy was not well met. We located the businesses in the suburbs, as opposed to in the CBD. I take full responsibility for that,” Mr Wahome said.

Deacons was located in the Mlimani City shopping mall in the suburbs of Dar-es-Salaam. But in Tanzania, the culture of large shopping malls — like the 200,000 square feet Mlimani City — in such areas is not as deeply entrenched as it is in Kenya.

By going for trendy and classy fashion, Deacons might have shot itself in the foot.

In its information memorandum for public offer of shares in November 2010, Deacons noted that Tanzania’s fashion industry relied heavily on traditional gear (kangas/shukas/kikoys, etc), religious wear and basic clothing.

Lagged behind

Because Deacons did not understand the market well, its sales in Tanzania lagged behind those of its new operations in Uganda, which begun in 2009.

Deacons’ sales in Tanzania were worth Ksh65.6 million in 2009, but nearly double (Ksh127.3 million) in Uganda. In Uganda, Deacons was operating with half of the retail space it occupied in Tanzania.

Meanwhile, as KCB expects to announce a profit from its operations in Tanzania early next month, when the bank releases its full-year results for the period ended December 2011, it will be reflecting on the long journey to profitability in the country.

Operating in Tanzania has been a big challenge for the bank since opening shop in April 1997.

The bank’s Tanzanian subsidiary first made a pre-tax profit of Ksh11 million in 2005, then fell back in the red in 2009, reporting a Ksh141 million pretax loss, and a Ksh110 million pretax loss in 2010.

“Our performance has been mixed, over the years, but we believe we have now turned the corner and should deliver good results going forward,” said Mr Martin Oduor-Otieno, CEO of KCB, on the basis that the third quarter results for the period ended September 2011 showed the Tanzanian operations had made a profit.

Survival of KCB’s operations in Tanzania has been through pumping of money raised from shareholders in the 2004, 2008 and 2010 rights issues.

“KCB has stuck to Tanzania because of the regionalisation story of being in every market in the region,” said Mr Kenneth Kaniu, an analyst at Stanbic Investment Management Services.

He added that Tanzania is important because it has the largest population among the countries in the region.

Tanzania’s population is expected to hit 45 million, compared with Kenya’s 40 million people, in 2012. Mr Kaniu added that KCB faced other challenges, including a high risk of defaults on loans. “The credit quality is not so good. The risk of default is high in Tanzania.”

Poor sales

This risk of default has also affected other companies, with East African Cables, the cable maker, reporting a 38 per cent drop in net profits to Sh183.8 million for the year ended December 2010 as it suffered from non-payment for deliveries and poor sales in Tanzania.

Mr Otieno, the KCB CEO, acknowledges that lack of proper identification remains a challenge in expanding credit to clients in Tanzania.

“Lack of IDs has also hampered effective Know Your Customer (KYC) initiatives.

This contributes to low level of penetration within the banking sector, given the inherent risks,” he said, with the banks forced to use alternatives such as letters from chiefs, elders and voters cards.

KCB and other banks also face stiff competition from local banks, whose brands are easily accepted.

KCB’s peers in the Kenyan market — Equity and Co-op Bank — have given the Tanzanian market a wide berth, instead opting to go into other countries in the region first.

“Our challenges arise from the fact that the market is highly competitive, with the larger local and quasi-local banks with larger networks controlling bigger market shares,” said Mr Otieno.

He added that, generally, local banks receive better acceptance among local customers compared with non-Tanzanian banks.

Some Kenyan companies have pursued acquisitions as an entry strategy to gain easier acceptance.

NIC Bank acquired a 51 per cent stake in Savings and Finance commercial bank of Tanzania in 2009.

East African Breweries chose to acquire a 51 per cent stake in Serengeti Breweries in November 2010, after ending its marriage with SAB Miller in the listed Tanzania breweries.

However, other companies still opt to start their operations from scratch.

Nakumatt and Uchumi both entered the Tanzanian market last year. Nakumatt opened a branch in Moshi while Uchumi opened one in Dar-es-Salaam.

Whether starting from scratch or following the acquisition route, the companies still face a challenge of getting the right talent and a high staff turnover.

“There is also a need for a change of attitude by Tanzanian government officials in their relationship with the private sector to foster a better regional trade in the EAC and improve the investment climate,” says Mr Mufuruki.