Experts see a bright future despite retail turbulence

Sunday November 12 2017

Shoppers at a supermarket in Nairobi. FILE PHOTO | NMG

Shoppers at a supermarket in Nairobi. FILE PHOTO | NMG 

By JAMES NGUNJIRI
More by this Author

The uncertainty brought by the prolonged electioneering period and a tough operating environment characterised by low credit have seen the retail sector go through one of the toughest times recently.

This has dampened the prospects of developers who are banking on supermarkets to take up the ever increasing shopping space.

Lately, there has been increased supply of retail space, which grew by 41.6 per cent year-on-year in Nairobi alone from 3.9 million square feet (SQFT) in 2016 to 5.6 million SQFT in 2017, and is expected to expand further by a three-year compound annual growth rate (CAGR) of 7.3 per cent to 6.9 million SQFT in 2020.

Sector analysts have said the significant 41.6 per cent expansion is mainly due to the bullish view of developers in retail sector in the long-term. Such is the outlook that malls such as Two Rivers, which opened in February, are banking on.

Also, increased competition — with new entrants such as Carrefour and Choppies — and challenges facing retailers on financing and supply chain management, especially Nakumatt and Uchumi, will have an effect in space uptake.

These challenges have led to a decline in performance of the sector, with average rents declining by nine per cent countrywide from an average of Sh154.9 per cent per SQFT in 2016 to Sh141 per SQFT in 2017.

There was an occupancy decline of 2.7 per cent points from 82.9 per cent to 80.2 per cent, resulting in a 0.4 per cent points decline in yields from 8.7 per cent in 2016 to 8.3 per cent in 2017 for the entire country, and 0.4 per cent points decline for Nairobi from 10 per cent in 2016 to 9.6 per cent in 2017.

“The sector is likely to experience a shake-up, with the leading retail outlet, Nakumatt, exiting its flagship stores and leaving some malls as the anchor tenant. This is likely to be an opportunity for more foreign retailers to come into the country, thus changing the landscape of the sector,” said sector analysts from Cytonn Research team.

They cited reduced development activity especially in Nairobi following rising supply.

Also, increased dominance by foreign retailers, who are making inroads due to stronger financial muscle, better governance and management systems, lower costs of goods and government incentives such as tax holidays, could change the future outlook.

For instance, Carrefour has taken up the space vacated by Nakumatt in Thika Road Mall, and Choppies is set to be the anchor tenant in the upcoming Kiambu Mall. It will also take up space in Spur Mall, Ruiru.

Analysts say developers may offer less space to anchors to mitigate over-reliance on one brand or have other retailers other than supermarkets, such as fast food stores, as anchors provided they can attract the relevant foot fall.

A Kenya retail sector prompt payment report released by the State Department of Trade in July says the sector is at a crossroads due to late payment traced to the past two years.

This challenge is manifested in the estimated Sh40 billion dues for goods delivered, with some payments being delayed by between 180 and 240 days.

Retail Trade Association of Kenya (Retrak), however, says overdue credits amount to less than Sh1 billion. It observes that Sh40 billion entails short and long term financing instruments, which are still in service as no defaults have been reported by any financier.

“The government places the amount owed to suppliers at an even higher figure than Sh40 billion, given disclosures obtained from troubled retailers whom the government has engaged in trying to understand their challenges,” the report said.

Despite the conflicting numbers of the amount owed, all parties are in agreement that late payment is a challenge that requires urgent action.

Already, suppliers, manufacturers and retailers, through a process being facilitated by the State Department of Trade, have established a task force to address this challenge and propose remedial measures.