alexa Want to invest your savings in a retail business? Think twice - Daily Nation

Want to invest your savings in a retail business? Think twice

Saturday October 19 2019

A Snack Attack restaurant in Nairobi.

A Snack Attack restaurant in Nairobi. PHOTO | FILE | NATION MEDIA GROUP 

JAMES KAHONGEH
By JAMES KAHONGEH
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ANITA MURAGE
By ANITA MURAGE
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If you ever lose your job, don’t even think about starting a business, advises Evans Mueke, a small-scale investor in Nairobi. You will most likely burn your fingers, he says.

Mr Mueke, a barber in Nairobi's Kasarani area, says that most people who retire or quit their jobs to start businesses end up losing their investment. For the uninitiated in trade, he says, investing in Kenya is a risky affair.

INVESTORS

His sentiments mirror those of many other small-scale investors. The landscape is strewn with costs that eat up a huge chunk of one’s seed capital.

Mr Mueke and his three partners run a salon and barbershop in Kasarani. Five different businesses, all with different owners, are squeezed together in the rented space. There is Mueke the barber, a dreadlocks expert, an acrylics specialist and a hairstylist. There is also an M-Pesa agent.

Operating together has nothing to do with the need to provide different services under one roof or to share rent. Well, there is that, but this arrangement is mostly about easing the burden of compliance with a myriad of operational regulations by the county and national governments.

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“You can’t pay for all these licences alone,’’ Mr Mueke says, pointing out multiple licences and permits that adorn the wall. ‘‘We have to share the cost to make it bearable.’’

BUSINESS PERMIT

We count the permits — seven — including a unified business permit, a fire permit, a permit for playing media and one for signage. There is one Miscellaneous Permit, whose purpose is not clearly stated.

The permits cost between Sh4,500 and Sh5,000 each. Some of them, we are told, are renewed every six months.

Yet having the seven documents doesn’t amount to compliance, Mr Mueke says.

“Whenever county government officers come for inspection, we have to flee because they always find something that you haven’t complied with.’’

The businessman says there are to many demands, and attempting to meet all of them will drive a starter out of business.

Kenya has been touted as one of the most vibrant investment destinations in Africa, with strong support infrastructure in technology and finance, progressive policies and an ever-bulging market. It therefore came as no surprise when Standard Chartered Plc recently ranked the country third among economies with the most growth potential in the world.

EFFICIENT

That may be the case, but the reality on the ground is that setting up and running a business in Kenya is not as efficient and easy as it is often touted to be.

While sustaining a start-up is a nightmare, investors who spoke to the Saturday Nation say the process of setting up is a different kettle of fish. Top on the list of the frustrations are the rigorous licensing and registration processes, long waiting periods and exorbitant fees.

Every day, Kenyan business people take to the internet to vent their frustrations. And for a good reason: local businesses have crashed into hard times, as the operating environment grows tougher by the day. The Saturday Nation sought to understand what it is like to do business in Kenya, and Khider Adam, an investor in the food business, gives a sneak preview.

After 16 years in employment, Mr Adam decided to try his hand at business. He invested his savings in importing vehicles and medicines before he diversified into real estate. After five years of struggling to steady his businesses amid minimal returns, he quit.

“I set up Snack Attack, a food franchise, in 2014. I knew I couldn’t go wrong in the food business. Besides, this type of business has instant returns,’’ Mr Adam recounts.

HEADWINDS

He was wrong. Without experience in food handling, his ambition soon ran into headwinds. To acquire a food handlers’ certificate in Kenya, one must obtain licences totalling at least eight, he says.

‘“You need a business permit, a fire permit, public health clearance, food and safety permit, signage and outdoor marketing permits, VAT compliance and Tourism Board compliance. And you are required to pay for all these,’” he laments.

He says that hotel and restaurant owners are also expected to meet certain standard requirements by the Tourism Regulatory Authority, in line with the Tourism Act of 2011.

Owners of small eateries, however, contend that their businesses don’t fall under this bracket, as they target a smaller local market.

Unlike elsewhere in the world where the licensing of businesses is unified or centralised, in Kenya, these licences are issued by different entities, compounding the cost and prolonging the time it takes to set up business.

“Compliance is a headache,” says Mr Adam. “You have to have someone to deal with public health, the local council, tax authorities, human resources and labour laws, which are time-consuming and significantly eat into your capital.”

CORRUPTION

These compliance procedures punish small-scale investors instead of supporting them, he says. “Small traders often have to make a choice between running a business ‘jua kali-style’ without due regard to the law or to comply and suffer the inconveniences created by red tape and corruption.”

Frank Kuria, a boutique owner, laughs off the government’s assertions that trading has become easier in recent years. He argues that the playing field has only become more lopsided.

“Registering a business is fairly easy,” he observes. “You only need to pay Sh10,000 to get a licence. But after that you’re required to meet tens of other requirements that take months to obtain.”

Mr Kuria is a retailer who bought clothes from importers and resold them until recently, when his suppliers moved to Uganda and Tanzania, where they say the cost of doing business is relatively lower.

After paying rent for four months for an empty stall, Mr Kuria decided to close shop last July, and now trades online.

BUSINESS LICENCE

“It’s cheaper to operate digitally. I save on business licence, fire certificate and other miscellaneous costs,’’ he says.

But their reprieve may soon come to an end. In the 2019/2020 budget, the Treasury minister announced that the government will soon rope e-commerce traders and other Kenyans who work online into the tax bracket to boost revenues. Mr Kuria terms the proposal repressive.

But still many Kenyans prefer to purchase items from a physical shop, so Mr Kuria’s online-based business has not been good.

‘‘To meet my needs, I’ve had to find employment,” he says. What was his mainstay is now a side hustle.

‘‘The government is right to mobilise young people to invest, but the same government is making the business environment more difficult by introducing strenuous compliance measures and taxation plans,” he laments.

Frustrated by the gruelling process, most Kenyans out to start a business opt to pay companies and individuals to do the tedious registration and compliance work on their behalf. The result has been a boon for individuals who have mastered the art of navigating bureaucracy.

Peter Thairu is one of them. He helps his clients to register sole proprietorships, partnerships and limited liability companies and even to search names for businesses.

CLUELESS

He says most Kenyans are clueless about the registration process while others are busy working and can’t afford the time for it.

“Once a client has submitted the necessary documents to me, I register their business and comply with all the other regulations in a week or less,” he adds.

He says he has forged “useful networks within most government offices” over the years.

Kevin Githua, a fashion designer, says when he sought to start a business in 2017, he paid Sh18,000 to a “consultant” to do the leg work.

“It was easier and faster for him and what choice did I have?”

Inspection is a nightmare for those running eateries. While traders agree that the government is within its right to ensure that businesses comply with food-handling regulations, they fault the manner in which the inspections are conducted.

‘‘We get all sorts of people coming to our premises and identify themselves as inspectors from different agencies. As a trader, you just have to cooperate, even when you have no proof that they are genuine government inspectors,” says Mr Adam, adding that it is unrealistic to have multiple agencies doing the same job.

Restaurant owners who spoke to the Saturday Nation cite harassment by local authorities, saying they have to part with Sh5,000 every month to keep the officials at bay.

KOINANGE STREET

After only 10 months in operation, Snack Attack closed down its Koinange Street branch in June 2018 due to incessant demands for bribes by county officials for “non-compliance”.

“We couldn’t bribe them. We opted to go to court. After two years, the matter was thrown out for lack of merit,” Mr Adam recounts.

Hiring a lawyer and bailing out two of their employees left the franchise with a dent of more than Sh600,000. This, Mr Adam says, is not an amount most small businesses would afford, so they opt to bribe the authorities.

“Who wants to waste their time engaging in a tug of war with authorities?” one trader wonders. “It’s even worse when you end up in court. You can’t predict how long the case will take and how much you will have spent. Ultimately, you are the loser.”

The Nairobi County executive for trade and industrialisation Allan Igambi did not respond to our enquiries.

This challenge is not limited to those in the food business. Other traders lament that officers from regulatory bodies frustrate them when they refuse to cave in to their demands for bribes.

“Even after you have met all the requirements, authorities still come to your premises to nag you about minor installations. Some of them simply want bribes. When you defy them, they fabricate offences and threaten to take you to court,” Mr Kuria says.

DELIVERIES

“Whenever I go out to make deliveries to my clients, county officers intercept me saying I have to pay fees for on-site deliveries. As far as I know, there’s no provision for that in law.”

The value of the levies charged on businesses in the catering sector is also being called into question. Business owners cite the catering levy, for instance, which is charged on owners of hotels and restaurants to facilitate training and operations at Kenya Utalii College.

Each hotel and restaurant is required to pay a fee that goes to the Catering Levy Fund. The assumption is that the personnel trained at Kenya Utalii College are absorbed by local hotels and restaurants.

“As hoteliers and restaurant owners, we are yet to benefit from this arrangement by the government,” Mr Adam says, noting that the majority of those absorbed in the industry are trained in private hospitality colleges. “We are paying this fee merely for compliance.”

Inefficiency and corruption

Meanwhile, did you know the Big Mac, McDonalds’ signature burger, costs about $4 (Sh450) in the US and Double-Double Burger, its equivalent at Java in Kenya, goes for Sh1,020?

This is more than twice the price in the US. So, why are Kenyans paying more for food?

CORRUPTION

“It costs roughly $1,200 (Sh125,000) to ship a container from the Middle East to the port of Mombasa. The same container costs the trader the same amount or more to ship from the port to the mainland,” Mr Adam notes.

Cargo takes nine to 11 days from the Middle East to Mombasa, he says. But to get to the trader in Nairobi or elsewhere in the country, it takes between three weeks and one month. Reason? Inefficiencies and corruption.

‘‘Our supply chain is chaotic. To import a product in this country, you have to cover the shipping cost, pay Customs duty, Import Declaration Form and inspection cost, especially for food. Our tariff system is not supportive,’’ he says, noting that all these costs are borne by the trader.

As a result of the inhibitive regulatory framework, inefficiencies in the supply chain and the associated costs, the price of food is pushed up. It is no wonder, therefore, that a meal in Kenya is more expensive than in Europe, the US and the Middle East.

The food business is replete with setbacks, according to Mr Adam, with nearly 90 per cent of eateries closing down after only one year in operation. Only 10 per cent of businesses that survive the first year make it past their fifth year of operation.

CLOSED SHOP

‘‘Food is a pretty volatile business. Six of my friends who set up at the same time with me lost their money and have since closed shop,’’ he says.

His business survived though, but only because he went the franchise way. Had he chosen to operate independently like his friends, he believes he would long have crashed out.

That said, he still believes that the restaurant business is an attractive venture in Kenya, owing to the ready market. Being a cash business also makes it easier to run. With a good location and the necessary support, this venture pays.

‘‘The majority of traders prefer to invest in the food business because of the relative ease of running it and the high circulation of money. As a trader with only a small amount to money, you can’t invest in real estate, for instance, because of the long periods it takes to break even,’’ he argues.