Supermarket chains vie to unlock Kenya retail market

When Kaleli Muli needed to buy rings for his wedding, he popped into his local superstore in a suburb of Kenya's capital to avoid the hassle of a trip downtown to find a jeweller.

He left 20 minutes later clutching a plastic bag with two gold bands worth 45,000 shillings ($492), happy with his purchase but also the time saved. Before the advent of hypermarkets, the rings might also have cost hours of shopping.

"It is more convenient and there is a wider variety of products that I can choose from," said the agri-business consultant, who also does his weekly grocery shopping and bought his flat screen TV at Nakumatt, Kenya's largest retail chain.

Nakumatt and other local retailers have long served Kenya's market but now international store chains and private equity investors are also coveting the strong growth prospects in east Africa's leading economy.

Kenya, with a GDP of $53.4 billion, is a gateway to regional trade, but it holds other attractions for retail investors.

Analysts say the penetration of formal retail is 25-30 percent, double that of Africa's biggest economy Nigeria. In addition, the average value of a shopper's basket has risen 67 percent in five years to $20, making Kenya the continent's fastest-growing retail market, say industry executives.

Nairobi's shopping malls hit the headlines in September 2013 when Islamic militants attacked the upmarket Westgate shopping centre and killed at least 67 people. It remains closed and security at other malls has been tightened, though shoppers are undeterred.

BARRIERS TO ENTRY

New market entrants face numerous challenges in addition to local competition. They must race to complete buildings on time, overcome legal hurdles and establish reliable supply chains.

Wal-Mart's bid to enter Kenya through an acquisition flopped in 2013 due to a court case involving the owners of local retailer Naivas, which it sought to acquire through its South African business, Massmart.

"The dominance of local chains in the modern retail segment makes it difficult for new entrants and resistance to foreign takeovers complicates mergers and acquisitions," said research firm Euromonitor International.

French retailer Carrefour says it will inaugurate its first Kenyan store this year through its Dubai-based franchisee Majid al Futtaim.

By contrast, Nakumatt, which has annual sales of $750 million, bought four stores in Tanzania from South Africa's Shoprite last year, taking its total in east Africa to 52, as it ramps up its presence in underserved neighbours.  

It has 38 outlets in Kenya, up from 11 a decade and a half ago, eight in Uganda and two in Rwanda.

In Kenya, the Naivas ownership row has been resolved in court and the company says it is open to talks with potential suitors, although not with Massmart.

"We are open to talks with parties that can actually help us improve the business," said Willy Kimani, Naivas' head of business development.

Massmart said it still wants to expand into east Africa, where it will open its Game brand store at a new shopping mall to be opened in Nairobi this year.

Nakumatt is also looking to expand by selling a quarter of its shares, though the process has taken more than five years. Managing director Atul Shah said the company was in talks with an investor but declined to give details.

PROBLEMS STOCKING SHELVES

New investors still have to deal with delays in the construction of shopping malls in big cities and a lack of retail space in upcountry towns.

Paul Kavuma of Catalyst Principal Partners, a $125 million private equity fund invested in a local pharmacy retail chain, warned that failure of real estate developers to keep pace with the growth in retail could curb investments.

"The real estate industry has to also be modernising and evolving, not just within Nairobi but also upcountry into other commercial centres," he said.

Retailers can also face problems stocking shelves, said Ayisi Makatiani, managing partner at Fanisi Capital, a $50 million private equity fund.

"It is one thing to build beautiful supermarkets. The other thing is can you get good, constant supply of eggs? Can you get good, constant supply of quality vegetables?" he said.

Fanisi has invested in a food distribution business and a meat processor in Kenya to fill that supply gap.

Uchumi Supermarkets, Kenya's only listed retailer, prefers local suppliers where possible, said chief executive Jonathan Ciano. Retailers have been left vulnerable by a recent exodus of manufacturers to Egypt from Kenya due to high costs.

Cadbury and Kenya's Eveready closed their production plants in Kenya last year, opting to supply the market with chocolate and dry batteries from their plants in Egypt instead.

"If you have challenges in Egypt, of course they won't deliver," Ciano said. (Editing by Matthew Mpoke Bigg and Vincent Baby)