Uchumi begins testing new franchising model

Uchumi Supermarkets has begun testing a new franchising model ahead of a roll-out later in the year that is expected to offer private and mostly small supermarkets the opportunity to trade under its brand name as it seeks to spring back to profitability.

The new business model, if successful, is likely to trigger a chain of reactions by other giant retailers, according to analysts, as it will lead to a scramble for the majority low-end shoppers who mainly depend on the largely informal retail industry.

At least two stores running under the brand name Uchumi Xpress are already in operation, with more set to be rolled out.

One is located in the middle of Nairobi’s Mwiki estate in Kasarani, where it is competing for shoppers with local shops. The Nation found curious shoppers streaming in, signalling interesting times ahead.

Uchumi chief executive Julius Kipng’etich is, however, tight-lipped about these developments.

“We haven’t rolled out the franchises yet. We will be ready to talk about this in a couple of weeks so it would be too early to shout about it. At the moment we are setting up and testing the systems,” he said.

BIG BRAND

The franchise model in which a big brand allows smaller players to use its name in a particular market in return for royalties has been in operation in other sectors such as manufacturing, hospitality and transport with mixed results but is yet to be tried in the mainstream retail industry.

Nakumatt supermarkets, thought to target middle-class and high-end shoppers, prefers malls while Tuskys, Naivas and Uchumi, which target middle-tier shoppers, set up stores in areas with high traffic such as shopping centres or near bus terminuses.

The low-end market, which has for a long time been snubbed by the four retail giants but is increasingly becoming lucrative, is currently the playground of low-end tier retailers such as EastMatt, QuickMart, CleanShelf, GreenMart, Mulleys, Mathias and KassMart.

These retailers have been on an opening spree of stores in the estates and low-income neighbourhoods, bringing goods and services closer to the people and denying the giant retailers traffic.

It is this under-exploited “kadogo economy” that Uchumi is targeting by taking on kiosks and convenience stores but without overhead costs.

Tuskys had also announced that it would go the franchise way but its chief executive Daniel Githua was non-committal about it when asked about these new developments.

'THEIR PLAN'

“No comment. Let us leave our friends to continue with their plan,” he said referring to Uchumi.

Tuskys’ proposed franchise model is almost similar to Uchumi’s but on top of that, it has signed a deal with Vivo Energy Kenya, which will enable it to open 75 convenience stores at Shell-branded petrol stations, a move once completed will make it the largest retail chain in the country.

Currently, family-owned Nakumatt is ahead of the pack, with 63 stores followed by Tuskys with 58. Naivas closes the top three with 39 stores.

Nakumatt, which is currently testing a dedicated store concept at the Westgate Mall, said they have no immediate plans of going the franchise route.

“We are focusing our energies on enhancing our operating efficiencies and guaranteeing a world-class customer experience. For this reason, we shall be maintaining our expansion programme with several stores set to be opened in Nairobi and hopefully several more in upcountry towns,” managing director Atul Shah said.

Analysts, however, are sceptical of the franchise model, as Kenya’s retail industry is not yet mature enough.

STANDARD MODEL

“The franchise model works when you have perfected the standard model. The reason it hasn’t worked so well in Kenya is that we like cutting corners,” says Bitange Ndemo, an associate professor at the University of Nairobi’s Business School.

He adds, “I am not saying that they will fail but they would have to adhere to standards which would be difficult.”

The government owns a 14.67 per cent stake in the loss-making retailer and is the second biggest shareholder behind tier-three lender Jamii Bora, which controls 14.90 per cent of the once dominant retail chain until a rapid expansion plan left it on its knees in 2006 with a debt of over Sh3 billion.

Since then the one-time retail giant has been trying to make a turnaround. It did so briefly after 2011 when it resumed trading on the Nairobi Securities Exchange only to fall back into the red four years later in 2015 after it fell back on paying its creditors.

Saddled with a debt load of Sh3.6 billion, the listed retailer in June last year survived a suit by its creditors, who wanted it liquidated in order to recover their debts.

It is yet to announce its full-year 2016 financial results after postponing the announcement twice, citing problems with getting proper financial information from its closed Uganda and Tanzania operations.

It is searching for an investor to inject up to Sh5 billion in exchange for a controlling stake but has only managed a Sh500 million government bailout given at the end of last month by the Treasury.