The retail industry in Kenya is gearing up for exciting times, with the impending entry of a South African giant into the local market.
Massmart, which is owned 51 per cent by US retail firm Wallmart, confirmed to Smart Company the booking of space in Garden City shopping mall on Thika Road. Construction of an outlet is to start in December this year and be completed by May 2014. This will mark the entry of the first multinational retail chain in Kenya.
“The Kenyan market meets Massmart’s market assessment criteria that include, but are not limited to, factors such as size and concentration of urban consumer market, application of the rule of law and availability of retail sites,” Massmart Group corporate affairs executive Brian Leroni said. He, however, declined to comment on the amount of money they intend to invest in the venture.
“It’s still very early in the process and is, therefore, premature to disclose the potential value of the investment,” he said.
To protect their turf, local supermarkets have rolled out attractive promotions, offers and discounts on purchases. Most have invested heavily in loyalty programmes. Shoppers are issued with reward cards and earn points on subsequent shopping.
The points are later redeemed, allowing customers to shop free of charge for the value of the points accumulated, or even to go on holiday.
Nakumatt has 750,000 smartcard holders; Uchumi about 600,000, Tuskys 300,000, and Naivas approximately 160,000 in their loyalty programmes.
Some supermarkets have also partnered with banks and telecoms to provide secure payment systems and other convenient modes of transactions. They will, however, need to up their marketing efforts to capture more customers and retain the existing ones.
In East Africa, Massmart has a store each in Uganda and Tanzania, operating under the Game brand name. Its major South African competitor, Shoprite, which is also Africa’s largest food retailer, has three outlets in Uganda and two in Tanzania.
A Citi report indicates that East Africa is the most under-represented region for the South African supermarket giants, as their Tanzania and Uganda outlets account for merely five out of Shoprite’s 193 outlets on the continent (outside South Africa).
Massmart’s outlets in Uganda and Tanzania account for only two of the retail giant’s 26 stores in Africa. The two retail giants have a solid presence in Central, Southern and Western Africa.
Massmart’s strategy is pegged on high-volume, low-margin, low-cost distribution of mainly branded consumer goods for cash, through 287 outlets in South Africa and 26 others in 12 countries in sub-Saharan Africa.
However, whether this model will work in Kenya will be the biggest test for the South African retail giant. It may want to borrow from mobile service provider Airtel, whose high-volume, low-price strategy has failed to work, with the majority of Kenyans sticking to what they regard as their local provider.
In the last financial year, Massmart grossed Sh523.2 billion (R52.9 billion) in sales. Nakumatt supermarket’s Sh38.6 billion ($460 million) sales revenues in 2011 pale in comparison over the same period, though the latter operates in a bigger market.
Massmart’s profits after tax stood at Sh9.1 billion (R918.8 million) in the 2011 financial year, a 24 per cent decline from Sh12 billion (R1.2bn) recorded in 2010. The entry, however, will stir excitement in the retail market which, for the past five years, has been one of the fastest growing.
It is also one of the most competitive industries — dominated by six supermarket chains, including Nakumatt, Tuskys, Uchumi, Naivas, Ukwala and Chandarana.
Uchumi Supermarket chief executive officer Jonathan Ciano said the entry of the new firm will intensify competition. “We are not afraid of more players in the Kenyan market. The market is large enough and is open to more supermarkets,” he said.
Tuskys, Naivas and Ukwala supermarkets mainly target customers in the low and medium income groups, while Uchumi targets the middle income segment. Nakumatt and Chandarana, on the other hand, target the middle and high end earners.
A report released late last year by Consumer Insight shows Naivas as the fastest growing, at 750 per cent over the past decade, largely because that was the time it was setting up, followed by Nakumatt at 725 per cent.
Tuskys recorded a 560 per cent growth, while Uchumi Supermarkets tied with Ukwala at 300 per cent. The exponential growth shows the huge potential of the retail market in Kenya and the high affinity of Kenyans to organised shopping, an attribute that has also fuelled huge investments in shopping malls.
Other notable supermarkets across the country include Khetia’s Supermarket, New Nyanza Supermarket, Shariff’s Supermarket, Home Choice Supermarket, Home Depo Supermarket, Magunas Supermarket, Maathai Supermarket, Samrat Supermarket and Kassmart Supermarket.
The four leading ones — Nakumatt, Tuskys, Uchumi and Naivas — command a total of 123 outlets in Kenya and across East Africa. A Citi report indicates that Kenya boasts the second most developed retail market in sub-Sahara Africa after South Africa, with nearly 30 per cent of retail shopping being done in formal outlets.
Massmart, however, noted that the markets it operates in are very competitive. “Our presence in Nairobi will create more competition, to the benefit of consumers. Our approach to all markets is to respect and to not under-estimate competitors. This is equally relevant in the Kenyan market. We will focus our efforts on exceeding customer expectations of service, price and quality,” said Mr Leroni.
Meanwhile, local chains continue to blossom, with accelerated expansion drives across the country and with some firms eyeing regional markets.
Their appetite for expansion has also grown beyond East Africa, with indications that Nakumatt plans to expand to such countries as South Sudan, Zambia, Botswana, Malawi, Zimbabwe, Burundi, Nigeria and Gambia. Naivas, which is yet to extend beyond Kenya, is eyeing the Ethiopia market. Tuskys is eyeing the South Sudan market.
“Our market is still under developed. So it doesn’t matter who the next entrant will be,” said Mr Ciano. He added, without specifying the time, that Uchumi will make inroads to South Sudan and Rwanda.
Last month, the supermarket announced plans to include cafeterias in its outlets to boost sales. It will be adding eateries to its food product line that already includes bakeries, butcheries, grocery and fruit corners, providing consumers with a one-stop shopping experience.
According to Nakumatt Holdings managing director Atul Shah, the developments in the retail sector are attributed to economic growth of the middle class. Also, given the rising disposable incomes and entrepreneurial capacity brought about by growing literacy, opportunities for expansion in the industry are enormous
“With a formal retail penetration of less than 14 per cent, there is enough cake for all of us to responsibly share. We welcome both local and international competition,” said Mr Shah.
A study by Consumer Insight earlier this year outlined the need by supermarkets to include promotional specific products targeting non-traditional shoppers for certain products. This is after it emerged that there were more male shoppers than female ones.
“There is a need to broaden promotional campaigns to include male shoppers as targets for ‘traditional’ female products like diapers, foods or personal hygiene products,” Consumer Insight director of research Nduku Mulwa noted.
The findings, dubbed REJA Study, found out that at 53 per cent, there are more male than female shoppers. The greatest majority of shoppers, 61 per cent, are between 20 and 29 years, with 77 per cent tending to shop alone.
“And in a shift likely to affect marketing strategies, the frequency of shopping has shifted from monthly to weekly,” the study revealed.
The World Bank estimates that about 40 per cent of Kenya’s population comprises the middle class, living on a daily consumption level of between Sh170 and Sh850 ($2 to $10) per person per day. By 2030, with a projected population of over 60 million, Kenya is set to hit the middle income country status.
“GDP per capita has increased substantially, implying that Africa’s household spending should increase, too. The middle class in Kenya is growing significantly, going by the developments we are seeing,” British American Asset Management managing director Edwin Dande said in an earlier interview.
The Economic Survey report released by the Kenya National Bureau of Statistics this year identified the wholesale and retail sector as having registered a 7.3 per cent growth, second after the financial intermediation sector.
The survey identifies the retail sector as having been one of the main economic drivers in the past five years, ranking second to transport and communication sectors at 18.5 per cent and 20 per cent, respectively.
Despite the challenging economic environment, demand for formal retail services has more than doubled in the past five years, largely fuelled by economic lifestyle changes associated with urbanisation and globalisation.
“Consumers have changed their preferences and now enjoy shopping in formal retail outlets than in informal ones,” said Mr Shah, adding that penetration of retail outlets is still low at an estimated 20 per cent coverage across East Africa.
“This means that 80 per cent of the regional retail market comprises of non-formal outlets such as kiosks and small corner outlets,” he said. This has seen supermarkets scramble for customers, with the opening of branches closer to their homes, and also offering services and products under one roof.
Uchumi — which re-listed on the Nairobi Securities Exchange in May 2011 after being under receivership due to financial difficulties about five years ago — is seeking to return to areas it deserted as part of a move to grow its market share.
The retail chain has since returned to profitability after posting a loss of Sh1.2 billion in 2005 when it was revived. Its eyes are now set on Juba in South Sudan and Gulu, Mbarara, Kabalagala, Natete and Quality Mall in Kampala.
It posted a 26 per cent jump in pre-tax profit of Sh204 million in the six months to December 2011, compared with Sh162 million in the same period in 2010 on sales of Sh7.5 billion. It projected a rise in sales by about Sh4 billion to about Sh16 billion in the 2011/12 financial year that lapsed last month.
Another of its competitor, Naivas Supermarket, is planning to open seven branches before the end of this year in Nairobi, Nyeri and Mombasa. Tuskys, which opened a new outlet on Mombasa Road, has in the past three months opened stores in Ongata Rongai, Mtwapa and Matasia (Ngong).
Nakumatt, the biggest supermarket in the region, commanded about 18 per cent of the market share. It is targeting Sh47.9 billion ($570 million) in turnover this financial year.
Its closest rival Tuskys generated approximately Sh31 billion in revenue.
The total revenue by the major retail players in Kenya is estimated at over Sh100 billion, but this is set to increase as more outlets are opened across the country.
A Kenya Economic update report released in June by the World Bank says the East Africa region, with a population of over 130 million people, provides a vast retail market for formal traders.
Further, a Nakumatt Holdings 2011 report indicates that in the next 10 years, over 25 million people across the region will have access to formal retail facilities, with monthly sales hitting Sh58.8 billion ($700 million) and selling space reaching close to 40 million square feet from 15 million currently.