The battle for control of Uganda’s retail market is set to intensify as foreign megastores roll out expansion plans. With foreign direct investments increasing, competition is bound to surge, forcing foreign chains to seek to out do each other in search of profits to remain in business.
These foreign megastores are said to be repatriating a big percentage of their profits back to their home country. And as expanding supermarkets jostle for the pie, some are bothered by the repatriated profits. Their increased presence has seen many more consumers opting to shop from these stores, regrdless of the size of their money purses.
But the squeeze on consumers stands in stark contrast to the growth of retail businesses. The bonus is that these projects employ Ugandans and put money back into the government’s coffers through taxes.
The influx has taken advantage of the spate of ease with doing business in Uganda although its position dropped in the latest global report commissioned by World Bank. In the 2012 World Bank ease of doing business report, Uganda’s ranking fell to 123 out of 183 economies surveyed globally—a four-point drop from 119 in 2011.
Supermarkets in Uganda are dominated by South African and Kenyan chains while Kenya’s presence is also felt in Rwanda, and Nakumatt (originally from Kenya) is preparing its entry into Burundi in 2012. A 2011 report commissioned by World Bank dubbed: “Beyond the Nakumatt Generation: Distribution Services in East Africa shows that annual retail sales in Uganda hit 13 per cent while in Kenya, Rwanda and Tanzania, they hit seven, 15, and 12 per cent, respectively.
Uganda National Chamber of Commerce analyst Allan Katwere explains why foreign megastores are growing faster than the local ones. First, the interest rates charged on foreigners’ loans are lower than those for the locals. “Financial institutions and government avail low interest rates to them compared to local counterparts,” Mr Katwere explains.
The other reason is derived out of the urge to increase foreign investments by the investment authorities yet the personal financial circumstances for a large number of people in the country are extremely limited.
“Tax holidays and rebates are availed to these foreign investors through UIA’s [Uganda Investment Authority] investment initiatives to promote foreign investment,” says Mr Katwere.
These foreigners also get leased land at a low cost because they have the capacity to make it profitable. “Because land is a function of expansion, which local supermarket owners do not have access to, foreigners take the lead in developing it. With their expertise in this particular trade from the managerial aspect down to the last wire of the supermarket business, they are international franchises and thus have a larger playing field to expand,” explains Mr Katwere.
These foreigners’ products also boast of international certification which the local ones lack, coupled with being imported duty free—something that may make them cheaper than local ones. In economically stressed times as these, many Ugandans, even those with jobs, fear that this expansion spree could lead to a fight for sales, ultimately taking a toll on supermarket profits.
Consumer’s spending power has been and is still squeezed, spelling tougher days to come, as long as salaries remain the same.
Averagely, customers are revisiting their shopping lists – putting at least an item less into their shopping trollies when shopping weekly. Such consumers would opt for purchases during mid-week to top up as a way of eliminating wastage. The shift away from bulk shopping to top-up shopping could continue for the next months if disposable income remains under pressure and food prices continue rising.
With a stark divide between the wealth of businesses and people where companies are flourishing and households reeling from economic stress, this expansion only leaves a set of questions. Yet again, one wonders: are Ugandans adept at expanding businesses compared to their counterparts in the region?
Enterprise Uganda Director George Oumo said that foreign supermarkets have an upper hand in this market because they are easily trusted compared to locals who have not yet established themselves. “The success factor of foreign supermarkets lies in the fact that they are given credit and have also made a name for themselves over the years.” This, he attributes to the amount of working capital they make from the supplies obtained on credit yet most Ugandan businessmen will look to the banks that do what their jobs demand-lend with interest.
Unfortunately, that source of capital is not exactly a gift to those who struggle to raise money to keep operating their businesses. In short, Ugandan businessmen have failed to attract low cost capital when nurturing their businesses, something that has kept them in the back seat as their counter parts take over the growing market.
The other reason is shelled in the fact that the foreign chains do not sell goods on credit but benefit from a 90-day period in which to complete their fees on the supplies obtained on credit. But one must also remember that the same megastores reap profits from their working capital and not banks like most Ugandans do, which allows them to consider expanding without fear.
Asked about supplying goods on credit and getting a 90-day period to repay for them, Nakumatt Marketing Co-ordinator, Renson Matundura, argued: “We have internal mechanisms on the payment of suppliers. Those who supply under consignment are paid immediately after the end of every month. Those under normal supply (LPO) are paid depending on the signed agreement by both parties.”
Kenyan supermarkets started increasing within the East African Community (EAC) since 2002 and have since kept pace in penetrating the regional market. The three largest Kenyan supermarkets: Nakumatt (3), Tuskys and Uchumi have a combined total of seven branches in Uganda.
Uchumi and Nakumatt supermarkets for example still have expansion plans this year in what they call a ‘brimming resourceful’ Uganda. They are also expanding into the outskirts of Kampala where there is more room for growth in order to reduce on congestion in the city.
Uchumi plans to pitch camp at Freedom City, Entebbe road in a month’s time and in Nateete before May this year. Nakumatt—the fastest growing retail chain in East and Central Africa—targeting middle and upper income earners plans to open two supermarkets this year. The first should be open in Mbarara by June and other in Entebbe before the end of this year.
The major driving force of expansion here is Kampala’s shifting retail landscape. Nakumatt and Uchumi argue that much of their expansion is driven by the convenience in the stores. Uchumi Supermarket Country Manager Jeff Nchaga says that the change in Uganda’s consumption trends and growing business has propelled them to move that way. “There is a considerable change in Ugandans’ consumption trends and we are reacting to this growing demand in form of more stores.”
“Ugandans have learnt about one-stop shopping points and most now want to access everything at the same place,” Mr Matundura said. These supermarkets have managed to stave off double-digit inflation, weakening currencies and rising interest rates by concentrating on products that people can hardly do without.
“What has kept us in business is concentrating on fast moving items because in difficult times like these, people only focus on the basics that leave the shelf very fast,” Mr Matundura said.
Their survival strategy just in case they expand and consumers reduce Mr Wiseman Mwaniki, the Deputy Manager at Nakumatt says that the business intends to spread the purchases between stores.
But the problem here is one. “This might weaken returns,” says Mr Oumo.
However much these investors are contributing substantially to this country’s growth, the local business community is dissatisfied, saying that the country will soon be run by foreigners. Nakumatt for instance, has more expatriates than Ugandans as employees.
“Out of the 350 employees, 32 are Ugandans and the remaining 318 expatriates,” said Mr Matundura.
With stiff competition, retailers are looking for the best spots outside Kampala to get the best out of consumers’ spending. But woe unto them should they fail to do well because they will have to pay their landlords.
So how is the competition being handled? “We have managed to acquire and retain our target clientele ‘Class A, B, C1’ by making sure we are always ahead of our competitors. There are so many elephants in the field, only one leads,” Mr Matundura argued. The target clientele constitutes the people who are not really hard hit by inflation, Mr Matundura added.
The issue of foreign supermarkets expanding faster than the local ones may question the business acumen of Ugandans. But the truth lies in the reasons that make these megastores score better in terms of doing business in this country.