Kenya’s retail journey has undergone dramatic transformation over the past decade and half
By Victor Adar
The evidence is clear: if you’ve gone around Nairobi, you must have noticed how market players like Carrefour, Naivas, and QuickMart have aggressively taken up prime retail space, especially in malls initially occupied by troubled retailers such as Shoprite, Tuskys, Uchumi, and Nakumatt.
Supermarkets appear to be on an expansion spree. Naivas supermarket recently opened stores in Kilifi, Kisumu, Nakuru, Eldoret, and Nairobi; Carrefour opened stores in Kwale, Nairobi, and Kisumu; QuickMart in Nairobi, Eldoret, and Kisii; Cleanshelf in Nakuru, and Chandarana Food Plus has a new outlet in Eldoret.
According to investment analysts, the current expansion is fueled by consumer behavior, market failures, and the affordability of retail spaces, among other factors. Kenya’s major urban spaces, such as Kisumu and Nakuru, have attracted retail investments due to their affordable rents, having recorded rental rates of Sh101 and Sh59 per square feet, respectively, against the market average of Sh118 per square feet in 2021.
Wilson Mwangi, a financial analyst, says there exists a dichotomy between the Kenyan shopping patterns and the general economic conditions, which are explainable by the very nature of our economy – that Kenya is generally a consumer market. On the other hand, the recent failures of supermarket chains in the country can be attributed more to corporate and inventory management failures and not a reflection of the economy.
These failures, Mwangi says, “have an impact on the economy as debts owed to suppliers and manufacturers cripple or affect their operations. Most also operate through one main core banker who provides both short and long-term financing, and the failures lead to huge bad debts write-offs. On the other hand, the successful and rapid expansion of the current market leaders is attributable to the access to cheap capital, both debt and equity, from private equity firms that are also instilling better corporate management practices to avoid past industry traps and failures.”
The behavioral effect of a consumer-led economy means that Kenyans still throng shopping malls and mini markets for their basic retail shopping even when economic conditions disrupt their levels of disposable incomes. And, as Mwangi explains, consumers attach an emotional connection with certain retailers and shopping malls driven by convenience either in terms of accessibility, availability of products, or additional amenities present such as banks.”
A report on well-being in Kenya published by the Kenya Bureau of Statistics shows that only 4.7% of households purchased their food items from supermarkets. Three sources accounted for three-quarters of all food purchases, namely, general shops (27.9%), open markets (26.6%), and kiosks (22%). These three would form a better representation of household purchases for both food and non-food items.
One of the most visible retail stores today is Quickmart. The retail chain’s 15-year journey started back in 2006 in Nakuru city, where it launched its first store amid the then understated vibrancy of the town.
Then, it ventured into the capital Nairobi in 2010 to open its first store in Ruai, followed by another in Kiambu (Ruaka) and gradually growing its presence in Kajiado, Laikipia, Machakos, Trans Nzoia, Uasin Gishu, Kisumu, Kilifi, and Mombasa, and Kisii.
Today, the store has 46 branches across 12 counties employing more than 5000, and serving an average of 3 million customers in a day. In August 2020, QuickMart and Tumaini Supermarkets announced a merger and business integration approved by the Competition Authority of Kenya to form a unified retailer.
“Our strategy is to grow our footprint within Kenya and be Kenya’s leading retailer in the next few years,” QuickMart’s head of marketing, Betty Wamaitha, told the Nairobi Business Monthly. “We’ve seen steady growth in the retail sector. There have been challenges, of course, but we have overcome those. So, the focus has been on food and commodity products – everyday products like milk and bread. Those are the products that customers are buying, and we are pleased that our suppliers have been consistent, meaning the supply chain remains constant.”
A Cytonn Research paper released in September themed “Rapid Expansion by Retailers to Cushion the Retail Sector” reveals that in 2021, the Kenyan retail sector registered increased market activity evidenced by the aggressive expansion by major local and international retailers. This is in contrast to 2020, which was marked with lockdowns leading to retailers scaling down their businesses to cushion themselves against the pandemic.
The report also shows that challenges that affected growth and overall performance of the service sector include online shopping and e-commerce, controlled and low buying power, and limited access to loans.
For example, the e-commerce strategy is still being adopted in various parts of the country, thus causing declined demand for physical retail space and an overall hindrance to its growth and performance. This is partly why some retailers are exiting their spaces.
“In my considered view, formal retail is not a bellwether of demand-side,” George Bodo, CEO of Callstreet Research and Analytics, told Nairobi Business Monthly in an exclusive interview.
“The rapid expansion seen over the past two years is a case of fattening the bull by the institutional owners of capital in these brands. The truth is that retail in Kenya is such a thin-margin business with net margins ranging from 3 to 5 percent. I would have expected an expansion towards online commerce instead of brick-and-mortar because that’s the sweet spot, and current consumer demographics are changing thanks to the pandemic,” said Mr. Bodo.
Another puzzle is that of new malls coming up – and how they will aid growth of the retail sector. In Mombasa, City Mall Phase II project is in progress. Crystal Rivers Mall in Mavoko and Imara Mall along Mombasa Road are also set to cash from the aggressively expanding retailers. The increasing number of malls across the country could possibly be a signal that rent will be manageable.
Kenyan retail sector performance recorded a 0.1% increase in the average rental yields to 6.8%, from 6.7% in 2020, as per the Cytonn Research. In addition, average occupancy rates and rental rates also increased by between 1.8% points and 2.2%, respectively, to 78.4% and Sh118 per square foot in 2021 from 76.6% and Sh115 per square foot in 2020, as a result of an improved business environment.
In the Nairobi Metropolitan Area, the retail market recorded average rental yields of 7.5%, similar to 2020, with occupancy rates coming in at 75.8%, a 0.6% points increase from the 75.2% realized in 2020 due to the increased demand for spaces. Rental rates, however, have remained subdued at Sh168 per square feet in 2021, 0.2% lower than Sh169 per square feet recorded in 2020 as landlords continue to give incentives such as lowering rents to attract and retain tenants.
This positive trend was mainly attributed to an improved business environment and local and international retailers such as Giordano, Carrefour, Optica Limited, and Naivas aggressively going for new retail spaces, and those previously occupied by legacy players such as Tuskys, thus cushioning the overall performance of the retail market.
“Major urban cities such as Nairobi, Kisumu, Uasin Gishu, and Nakuru continue to witness oversupply. Overall oversupply stands at 1.7 million square feet in the Kenya retail market, thereby causing developers to halt their construction plans as they wait for the absorption of the existing ones,” said Cytonn Research.