Kenyan market adopts formal retail as foreign retailers battle for space

Convenience store chains battle to formalise a sector built on informal business

The retail sector in Kenya recovered strongly in 2018 after a slump in 2017, as foreign retailers increased their investments in expansion plans taking advantage of the woes affecting the local retailers.

This has been attributed to Kenya’s rising middle class that has seen the development and modernisation of its retail sector and a financially attractive business environment.

Kenya’s retail sector in 2018 was bullish as notable local and international retailers breathed new life into what was seen as declining sector. This was mainly attributed to a conducive macro-economic environment. “In 2018, the retail sector’s performance recovered from the 2017 slump, recording average rental yields of 8.6%, a 0.3% point increase from the 8.3% recorded in 2017,” Cytonn Investments’ Kenya’s Retail Sector Report 2018 which noted a positive outlook for the sector.

Similarly, Kenya traders’ association chief executive Wambui Mbarire, Kenya’s retail sector market experienced a 33% growth in 2018 attributed to a growing middle class, rapid urbanisation and the opening of modern shopping malls requiring anchor tenants.

However, international retailers only occupy 2% market share.
Retail Space Supply NairobiCytonn Investments’ however, had projected “Reduced development activity in Nairobi, with developers shifting to county headquarters in some markets such as Mombasa and Mt. Kenya regions that have retail space demand of 0.3mn and 0.2mn SQFT, attractive yields at 8.3% and 9.9% and occupancy rates at 96.3% and 84.5%, respectively.”

Cytonn notes that increased supply is likely to constrain the performance of the retail sector, where there is already an oversupply of 2.0 mn SQFT of retail space.

“The Nairobi retail sector in general recorded reduced performance in 2018, with average rental yields declining by 0.2% points y/y to 9.4% from 9.6% in 2017, and occupancy rates increasing by 3.4% points to 83.7%, from 80.3% in 2017. We expect the supply to negatively affect the performance of the sector.”

Read: High Occupancy Rates Driving up Kenya’s Retail Space Supply – Reports

Nielsen report observes that Kenya’s formal retail penetration is 30.0% making it the second highest in Africa, after South Africa’s 60.0%, which has served as an incentive for foreign retailers.

Further, the sector will continue to grow at a compound annual growth rate (CAGR) of 4% at constant 2016 prices over the 2017 to 2021 forecast period, according to Euro monitor International 2016 estimates.

Locally-owned retail chains, Tuskys Ltd., Naivas Ltd., Ukwala Ltd., and Chandarana Food Plus Supermarket Ltd., have managed to hold off the international retailers evidenced by countrywide and regional coverage.

However, Nakumatt Holdings and Uchumi Supermarkets previously the leading retail store in East africa continued to undergo a severe cash crunch leading to the closure of most of their flagship stores in the country, Uganda and Tanzania in a bid to stay in business.

Uchumi Supermarkets has announced plans of making reforms in its store in a bid to return to normal operations. Mohamed Mohamed, chief executive Uchumi in a statement said, “We are putting in place a plan to create sustainable operations while ensuring we expeditiously meet all our obligations.”

“Uchumi Supermarkets’ board and management has put in place a team of external legal, accounting and retail consultants who will identify and advise on the best options available for the listed retail to settle its obligations as well as restructure the company’s liabilities,” said the statement.

Tuskys Supermarket announced a 3-year plan to increase its foothold by 56.3 percent to 100 new stores in Kenya and Uganda by 2020, from 64 stores presently. 

End of 2018, Tusker Mattresses, which operates Tuskys Supermarkets and Mavazi Lifestyle clothing stores launched an eCommerce portal powered by an Amazon Online retail engine. 

“The launch of a Tuskys Online store is part of our customer promise to continuously enhance their experience through a range of convenient retail platforms,” Dan Githua,  Tuskys CEO said, adding that, “This platform, also allows us to expand mutual value for our suppliers who will now enjoy wider market reach.”
Naivas Supermarket also expanded to the current 46 outlets countrywide.

The retail is likely to experience a paradigm shift with international retailers such as Carrefour, Shoprite, The Game and Choppies making inroads to the Kenyan market in the last 3 years taking advantage of the gap caused by the crisis and malls replacing supermarkets as anchors by other retailers such as fast-food stores which have high footfall.

Read: Kenyan Retail Sector Shows Optimism as International Brands Make Inroads
Moreover, retail platforms such as Masoko, Jumia, Africa Sokoni, OLX, Vitu Zote and Kilimall among others, supported by mobile payments, increased internet penetration, access, and usage.

Related: Carrefour partners with Jumia to sell groceries online

The retailers are also increasing space for general merchandise that has seen the entry of Hugo Boss Mango, Miniso to tap into the growing consumer market and to grow sales revenues due to a growing demand for quality international brands driven by high consumer awareness and exposure.

Zara brings new fashion trends to Kenya in global expansion
Going forward, Nielsen says the defining factor will be a convenience in all forms.

“When it comes to the fast-moving consumer goods (FMCG) space, convenience is not only about store formats, products or packaging. It means more than the latest technologies or new engagement strategies. Rather, it is about every encounter, interaction, and action that can help fulfill consumers’ growing demand for efficiency,” states Nielsen’s 2018 quest for convenience report that looked at changing consumer needs around the world, specifically focusing on factors driving consumers’ increasing need for convenience.

“No matter where or for whom, at its essence, convenience has three core attributes: ease, utility and simplicity. In providing these, convenience solutions can enable more fulfillment, enjoyment, and balance in consumers’ busy lives,” part of the report says adding “To deliver true convenience, these three attributes must be the foundation for the entire consumption, shopping and engagement spectrum.”

For instance, they say retailers should aim to harvest location-based information to better serve local consumers through improved discovery and delivery, which will enable consumers to engage services more readily based on their immediate circumstances.

Read: What is Driving the Change in Logistics and Warehousing in Kenya

“This starts with automation and pre-empting consumer needs and preferences before they reach the store.”
And as more consumers are purchasing products online, with convenience being one of the major motivators, Nielsen says retailers need to ensure that their e-commerce offerings meet consumer demand for convenience, retailers’ online services should include:

• Same day replacement for incorrect orders
• Precise delivery windows that suit consumer’s schedules
• Rapid responses to special consumer requests
• A range of convenient collection points and home delivery options

Nielsen emphasizes that omnichannel and online shopping has opened up doors to global brands and provides consumers with endless product choices. “Retailers and manufacturers that can integrate individual consumer learning will be well-placed to provide easier, more relevant and more personalised shopping experiences.”