Why Uchumi painfully closed Uganda, Tanzania operations

In September 2014, Jonathan Ciano, the then Uchumi chief executive officer told shareholders in Nairobi, Kenya it was no longer tenable for them to keep operating their branch at Freedom City Mall on Entebbe Road because it had failed to perform to expectation.
Thus, in a statement to shareholders, Ciano said they had closed off the outlet because the mall had failed to attract traffic numbers to cushion the operations of a high end supermarket such as Uchumi.
The outlet had by the time of closure operated for close to four years having opened at the fold of 2011.
But beyond the vagary , there in lay a larger financial mess that insiders said, was buffeting the core of the Nairobi-based retail chain.

Earlier in June the retailer had issued a profit warning, telling shareholders that earnings for the year ending June 31, 2014 would be lower because of increased losses in its Uganda and Tanzania subsidiaries.
A profit warning is a statement of accounts issued through the stock exchange cautioning investors of an anticipated loss or a cut in earnings.
Indeed, the poor performance was highlighted in its subsidiaries, especially in Uganda where the company has since 2011 not posted a profit.
Uchumi Uganda for the year ended June 31, 2013 registered a net loss of Shs10.3b, before going on to post another of Shs8.9b for the year ending June 31, 2014.

Therefore, the closure of the Freedom City outlet, although inevitable could have been the kick start into a financial abyss that the retail chain had found itself in.
An investigation conducted by this newspaper in September 2014 found that Uchumi’s operations had started faulting through its persistent failures to pay rent, utility bills and suppliers with the most glaring being at its Freedom City outlet.
The retailer, as we found out, was forced out of the Freedom City Mall for failing to pay more than Shs350m to Grapes Construction, which had been accumulated in rent arrears, utility bills and supplied goods.
The same would later be manifested in other outlets, worsened by a series of bad cheques to clients, court cases and emptying shelves.

Indeed the fault lines had deepened and in June 2015, Ciano, together with his chief finance officer, Chadwick Omondi Okumu, were sacked for “gross misconduct and negligence” with the board recommending a forensic audit into the company’s fading fortunes and worsening revenue position.
Hipora Business Solutions East Africa, a loss control, management and investigations company, was hired in July with the then acting chief executive officer, Owino Ayondo, saying they would investigate staff theft of merchandise off the supermarkets shelves and theft of hard cash from tills, starting with the Ugandan operations.
In a brief to investors, the Standard Investment Bank warned then about the increasing theft and losses which if not controlled “could have far reaching implications” for the listed retail chain.

“The retailer must seek for ways to stop internal pilfering that continues to impact the company’s consolidated earnings,” the brief issued then, reads in part.
Why Uchumi closed in Uganda
In a board briefing Khadija Mire, the Uchumi chairperson, on October 13 told members they had taken a decision to close their regional subsidiaries because they have perennially continued to post losses with no end in sight.
Therefore, the decision to close, according to a statement, especially in Uganda and Tanzania would take immediate effect, pending approval from shareholders.

On the next day (October 14), a statement to media houses signed by chief executive officer, Julius Kipng’etich said the two subsidiaries, which make up less than 5 per cent of the company’s operations were draining Uchumi’s finances at a time when they needed to turnaround the faltering retailer. Thus, they immediately cease operation.
“Our outlets in Uganda and Tanzania make up only 4.75 per cent of our operations yet they account for more than 25 per cent of our operating costs,” he said.
The board, he said, had decided to shut the two subsidiaries and “all stores in both markets are now closed and will be liquidated”.

The two subsidiaries (Uganda and Tanzania) have been getting a monthly capital injection of more than Shs7b, according to details obtained from Uchumi Supermarkets.
In a closure notice released on October 15 and signed by the Uchumi company secretary John K. Wambugu, it was noted that despite the Shs7b capital injection, “efforts to turnaround these businesses had proved futile and the board considers that it is no longer tenable to continue the support”.
“The financial drain arising from supporting the two subsidiaries which together comprise less than five per cent (5 per cent) of the revenues of the group is placing pressure on the liquidity of Uchumi and it is imperative that urgent action is taken to stem further losses,” Wambugu said in the statement.

Situation in Uganda
But amid all these boardroom decisions, the retail chain in Uganda had had a series of bruises on its operations that had started with the self imposed closure of its Kabalagala outlet over a Shs70m electricity bill.
The outlet, together with the one in Natete, was later permanently closed with the acting country manager, Gichamba Chege saying they were waiting for communication from Nairobi for any further action, especially in relation to staff deployment and payment.

But the raid conducted on the Garden City outlet by court bailiffs days into the closure of the Natete and Kabalagala outlets could have been the last nail as Kipng’etich quickly announced the following day (October 14) that they would permanently close the Ugandan subsidiary.
Kipng’etich, who is barely two months into the hot seat, was hired from Equity Bank Kenya to cut the retailer’s losses and could have seen it fit to wield the axe on the regional operations.

Indeed an investment brief from Barclays Investment Plc noted the move “could be in good time to lift the retailer out of the losing abyss”, as indicated in its financials.
For the year ending December 31, 2014, Uchumi reported a consolidated pretax loss of Shs9.2b ($2.54m).
And another loss is expected since the retailer has already (for the year ending June 31, 2014) issued a profit warning, expecting a 25 per cent decrease in its half year revenues compared to the same period last year.

Left in the dark
Uchumi has been employing more than 900 staff in the two Uganda and Tanzania subsidiaries, however, many of these had no clue the retail chain would close.
In Uganda at least 400 where rendered jobless, but details released by Kipng’etich in a media briefing indicate the board was making arrangements to pay off all pending payments due to staff.
“We are making arrangements to pay all monies due to workers who are contracted to Uchumi,” he said.
However, workers who spoke to this newspaper on condition of anonymity said nothing has been communicated, highlighting they never saw the exit coming.

Similarly in a notice Wambugu said: “The board of Uchumi is cognizant of the responsibilities in respect to obligations of the two subsidiaries to various stakeholders. We are pursuing various avenues of raising funds to meet our obligations.
“We are in the process of engaging all stakeholders, including suppliers, employees, financiers and regulators”, he added.
In Uganda, the retail chain has an estimated debt obligation of more than Shs7b due to suppliers, utility bills, employee salaries and rent arrears.

The suppliers’ dilemma
Adam Ddungu of Trusted Global Trading Company has been supplying Tunic Coffee to Uchumi but he is one of the suppliers who were caught unaware.
“I just read in the papers. I had no idea what was going on,” Ddungu said, adding, “In April I supplied coffee worth Shs35m and I was told I would be paid after 90 days.
However, they (Uchumi) have been telling me they have cashflow problems, asking me to be patient.
Ddungu’s dilemma is not unique but highlights many large and small scale suppliers who have been caught up in the maze.
After the chain announced its exit, hundreds of people including suppliers, workers and key stakeholders converged at the retailer’s head office in Kampala to see if they could salvage anything.

However, the visible disorganisation at Uchumi officers was another story that revealed there was no coordinated plan for suppliers to recover whatever is owed to them.
According to Ddungu, suppliers have no grouping through which they can demand what is due to them. Thus, as he says, this could be the biggest undoing as many are now searching for ways through which they could recover their due in supplies.
Some have resorted to court with others petitioning government with a view of using diplomatic means to recover their money.

Impact on USE and NSE
The appointment of Kipng’etich as Uchumi’s chief executive officer last month, according to Aly Khan, a Nairobi based equity analyst, had rallied the Uchumi share at the Nairobi Stock Exchange rising by 4.02 per cent to trade at Shs345.3 from Shs336.8
However, the closure announcement could have had an impact on the share which fell by 5.03 per cent to close last week at Shs321.3.
The retailer says it intends to maintain its cross-listings at the Uganda Securities Exchange and Dar el Salaam Securities Exchange.
At the USE, the Uchumi share closed Friday at Shs356.80 registering a fall of 0.15 per cent.