Exit of foreign companies from Uganda

Tuesday September 14 2021
pros5pic

A man walks past Shoprite and Game Stores in Lugogo before they announced intentions to close. PHOTO/RACHEL MABALA

By Dorothy Nakaweesi

The post Covid-19 era is going to be a very difficult period for many business. Some will fall off while others will fight to the end.

Make no mistake, Covid-19 has hit every business. In fact, it has accelerated the collapse of a large portion while exposing others to cave in to vulnerabilities that they would easily shake off.

But beyond Covid-19 is a serious challenge that government must examine and think of long-term solutions to enhance business resilience even in the face serious volatility.

In the last 10 years, a number of big brands including British Airways, Vodacom, Barclays and Etihad Airline, among others, have left Uganda.

Of these, some, such as Barclays and British Airways had fought through decades, banking on growth projections and prospects. 

However, the numbers at the time of their exit, were not making sense thus choosing to cut short their losses.

Advertisement

In analysing the current business environment, we need to focus a little away from what has been happening lately.

Perhaps that is how we shall understand after which we can seek solutions or put to account those in charge.

Rightly, the last few weeks have been difficult for the Ugandan economy.

Large brands such as retail chains including Shoprite and Game Stores, and telecom company, Africell, have announced their intention to leave Uganda, citing shrinking sales and returns or slow growth.

Others, including Pep Stores, Tuskys, Uchumi, Nandos and Nakumatt, among others, had seen it sufficient to leave earlier, which signals a problem beyond Covid-19.

Indeed, economist Fred Muhumuza concedes to this and notes that the problem started away back, but could have been accelerated by Covid 19.

“Covid-19 found us already in trouble. Businesses had been exiting before Covid-19. Certainly, it has accelerated the exits and could continue to affect more businesses both local and international brands,” he says. 

Economy has slowed

In the last five years, experts have previously argued, the economy has been growing below potential, falling below moderate targets set by official data.

The below target growth, some argue, has largely been because of bulky investments in public investment that have no immediate returns.

However, beyond this, they argue, there has been the challenge of corruption that has given an impression of a fast growing middle class in suburban and satellite cities – yet such investments are proceeds of unaccounted wealth that cannot give a true picture of what the market can offer.

“Corruption has taken a toll on the economy. It might get worse before it gets better,” Muhumuza says and notes that the burden of growing debt and public administration have starved government of resources to lift the economy out of the doldrums.

Simon Kaheru, is a business leader in the private sector and currently acting as the chairman East African Business Council.

Just like Muhumuza, he believes there could be other possible exits. However, he says, it is high time government and economists assessed the situation before it gets worse.

“Sometimes a headache is just a headache but sometimes it’s an indicator of something much serious. So the right diagnosis would be life-saving,” he says.

Kaheru, who is also the Coca-Cola Beverages Africa public affairs and communication director, also notes that studies from both multilateral and government agencies have pointed to the problem that must be studied further with the view of getting solutions.

In February, a World Bank report on Uganda’s economy noted that the country’s real gross domestic product had reduced to 2.9 per cent in 2020, down from 6.8 per cent in 2019.

The growth had slowed down largely due to Covid-19, resulting into a sharp contraction in public investment and deceleration in private consumption.

Therefore, the impact of Covid-19 has already deterred recovery in the exports sectors and adversely impacted a rebound in foreign direct investment, tourism and remittances.

All these contractions have in a way affected businesses, which as the World Bank has predicted “could lead to more severe social and economic impacts and amplify external and fiscal imbalances.”

As a result, there have been widespread business closures, layoffs and a slowdown in business activity, particularly in the urban informal sector and a movement of labor back to farming.

Additionally, household incomes have fallen, exposing a lot of vulnerable people in the absence of social safety nets and impacting human capital development.

Therefore, from the above analysis, Covid-19 has severely impacted retail and wholesale trading, which, for instance have had to operate at 10 per cent capacity, amid lockdowns.

pros5pic1

Africell’s head offices in Kampala. Africell which took over Orange’s operations in 2014, will cease operation on October 7. PHOTO/Rachel Mabala

Growth of online retailing

But beyond this is the issue of coping up with new technology, which in some areas has made business easy yet hard for the traditional brick and mortar businesses.

“Online platforms target middle class buyers that retail stores depend on. It complicates the business model for the likes of Game and Shoprite,” says John Walugembe, the chairman of the Federation of Micro, Small and Medium Enterprises.

But beyond this, big supermarkets, which must adhere to a number of international standards have been swallowed by local dynamics, in which micro small and medium enterprises are kings.

“This has exposed them to competition,” Walugembe notes but adds that it has been difficult for them to compete in such spaces where local companies operate.

Internal challenges

However, it would be a mistake to overlook internal challenges.

Beyond the announcement, analysts believe, brands such as Shoprite could no longer put up with the losses, with subsidiaries such as Uganda, depending on the parent company in South Africa. 

Aly Khan Satchu, an equity markets analyst based in Nairobi, has earlier said: South African businesses have had a chequered history outside their home market with some posting outstanding success while others have had high profile retreats.

Therefore, he says, Shoprite could have been a victim of the chequered history, taking a cautious decision to “cut its losses rather than dig in for the long haul”. 

However, he notes, the market has been building capacity supported by the entry of an international brand – Carrefour – on which it will strengthen resilience.

Beyond supermarkets, there have been some challenges in other sectors, where businesses have exited.

For instance, when Africell took over Orange operations in 2014, it had inherited a loss making company, whose losses had accumulated to Shs771b.  

Therefore, in taking over a company in such a state, Africell had assigned itself an obligation to ensure that it reduces the losses or completely wipes them off its balance sheet. 

However, things would go from bad to worse as accumulated losses grew further hitting Shs1.5 trillion by 2019. 

The situation was extremely dire, worsened by growing indebtedness, which by 2019 had grown to Shs258.3b.

Therefore, it was always going to be difficult for Africell to compete.

Shrinking middle class

Away from that, is the issue of a shrinking middle income class that most businesses have cited as the main reason for their exit.

In July 2015, British Airways in a statement, said it would stop all flights to and from Uganda because the route was “no longer commercially viable”.

This could have touched on a single sector but British Airways went further to blame its decision on the poor performance of economy that could no longer support its projections and prospects.

Possible solutions

Therefore, in finding solutions for the current challenges, there is need to re-examine government data, which some have said gives a wrong impression of what is really on ground.

Beyond this, government must find a way of supporting home grown businesses without disadvantaging those started by foreigners.

This, Kaheru says should start now because: “We have to fill the gaps that have been left behind, to create a market for goods that had been stocked by exiting retail chains.

“We should move quickly as the private sector to pinpoint these opportunities and establish the right manufacturing and value chains to take them over,” he says.

Morris Rwakakamba, the Uganda Investment Authority chairman supports Kaheru’s arguments and notes, “By building local capacity, we shall be enhancing the import substitution agenda that for years has not been lifted off the ground.

“These manufacturers have networks across the country. We must continue and build resilient home-grown retail stores,” he says. 

This, he says, can be achieved but it must be a multifaceted approach that is supported by government with a well laid out plan.

“We continue to see expansion in a quest for investment licensing in sectors targeting import substitution,” he says, and notes, they engaging businesses that have shown intention to exit.  We believe, our interaction will help us change for now and the future of the investment in Uganda,” Rwakakamba says.

Mistakes of multinationals 

According to Havard Business Review, research shows that multinational companies are making three mistakes in Africa: 1) Companies set unrealistic targets due to misunderstanding the drivers of consumer spending power;

2) Companies underestimate the extent to which local factors determine how, where, and why consumers make purchasing decisions; and

3) Companies are not considering how the consumer class (those living on $ 3.90 and above per day, the point at which people can spend beyond mere survival) is changing.

Advertisement