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4-Traders Homepage  >  Equities  >  Euronext Paris  >  Carrefour    CA   FR0000120172

CARREFOUR (CA)
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Carrefour : Kenya's Nakumatt supermarket chain foiled by explosive growth

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11/09/2017 | 05:04pm CET
A till worker serves a customer inside the Nakumatt supermarket within the Village market complex mall, in Nairobi

The implosion of a family-owned Kenyan mattress shop that grew to become East Africa's biggest supermarket chain is a cautionary tale about trying to grow too far, too fast to cash in on the rapid growth of the country's middle class.   

Kenya's High Court will rule on Nov. 16 on Nakumatt Supermarkets' petition for protection from creditors to whom it owes more than $300 million (£228.7 million). Thousands of jobs are at stake, and France's Carrefour (>> Carrefour) and South Africa's Shoprite (>> Shoprite Holdings Ltd) are already moving to fill the gap.

It's an ignominious fall - with more than 60 outlets and 1,500 suppliers, turnover at the company once equalled nearly one percent of Kenyan GDP.

Former employees, suppliers, fellow business people and private equity investors paint a picture of a firm whose management capacity did not keep up with its prodigious growth.

"It's a tragedy that needn't have happened," said Andrew Dixon, who was hired in a scramble to revamp management. A former executive at Tesco and Burt's Bees, Dixon quit as chief marketing officer last month and this week took a job with Uchumi, another struggling Kenyan chain.

A fatal fire in one store, the demolition of another and an attack by militant Islamists on their flagship Westgate outlet in 2013 created a "perfect storm" of disasters for Nakumatt, Dixon told Reuters. Outdated management practices exacerbated other problems like endemic theft of cash and stock, he said.

"The business outgrew the management capacity," said another Nairobi businessman familiar with the company, asking not to be named so that he could speak candidly. He pointed to a balance sheet loaded with short-term debt, problems paying suppliers and outdated IT systems.

Answering questions through his publicist, Managing Director Atul Shah, of the founding Shah family, rejected the idea that management was not modernised fast enough. Over the past decade, when the business was thriving, the only family member of management was Shah himself, he pointed out.

He acknowledged that theft of 10-15 percent of goods or stock did not measure up well against a global average of 2-3 percent, and investment in a modern warehouse management system from Oracle two years ago came too late.

But he said the chain’s main undoing was the significant costs of a 2010 expansion plan that assumed sustained Kenyan economic growth of more than 10 percent per year. The chain went from 36 shops in 2011 to a peak of 62 in 2016.

"By now we would be talking about over 100 branches. In terms of revenue, a significant growth was also expected which never materialized but even if it didn't materialise, investments and related financing were undertaken," the publicist's statement said.

Shah wants to restructure Nakumatt so it can re-emerge as a leaner chain, according to public court documents.

The court's protection "is reasonably likely to achieve a better outcome for the company’s creditors as a whole and ensure continuity of the business ... as opposed to the drastic action of winding up the company," Shah said in the documents.

WELCOMING ELEPHANTS

For more than two decades, Nakumatt's blue-and-white signage and large bronze elephant statues enticed well-heeled Kenyans into its shops to buy anything from imported meat to the latest flatscreen TV sets.

Atul Shah's father started Nakumatt in the Rift Valley town of Nakuru. The family still owns the bulk of Nakumatt shares.

Atul, the fourth child, moved to the United States in his early twenties and worked on the shop floor at Wal-Mart. He came back to open the first Nakumatt superstore in Nairobi in 1992.

While the scale and ambition of the business expanded, many aspects of the way it was managed remained the same, however.

The company hired three top managers from outside the company, including Dixon, only this year. But it was too late.

"Investing in family businesses can be challenging ... past success blinds them to the fact there are certain roles that require professional management," said Ayisi Makatiani, managing partner at private equity firm Fanisi Capital.

Foreign investors could have helped overhaul management and inject cash, but despite a swarm of suitors, no deal was made.

One concern for investors was the stake held by former lawmaker Harun Mwau, who was named in 2011 under the U.S. Foreign Narcotics Kingpin Act for alleged drug trafficking, which he has denied.

Two sources with knowledge of potential investments said the role of Mwau in the company was the main stumbling block because they did not want to fall foul of U.S. law enforcement, who froze Mwau's U.S. assets after the designation.

Nakumatt has said in the past that Mwau holds shares in the company but declined to confirm or deny it to Reuters. Mwau did not respond to Reuters calls and text messages seeking comment.

"Nobody acquiring was prepared to have him remain on the shareholder register," said a source involved in one transaction with a London-based fund that fell through in 2011.

"They would have walked with about $110 million cash and the debt would had been taken over," said the source, an account backed by several other sources with knowledge of the deal, including a Nairobi fund manager and an ex-employee.

Nakumatt declined to comment on the deals.

CARREFOUR, SHOPRITE

What happens to Nakumatt could have far-reaching effects for Kenyan retail and the wider economy, which has been expanding by more than 5 percent in recent years and is expected to grow by 5 percent this year. The World Bank designated Kenya a low-middle income country in 2014.

Nakumatt has estimated in court papers that closing the chain would affect the livelihoods of more than 30,000 people, including 6,720 direct employees.

Finance Minister Henry Rotich told reporters on Tuesday that while the government did not want to interfere in private businesses, it was looking at how to protect suppliers from non-payment so that debt didn't build up all along the chain.

Kimani Rugendo, chairman of the Suppliers Association of Kenya with more than 2,000 members, said Nakumatt collectively owes them more than 30 billion shillings (£220.8 million).

His company, Kevian Ltd, which manufactures juices, bottled waters and sauces, is owed 90 million shillings. Nakumatt declined to comment on the claim.

"It is hurting the production and distribution trade," he said. He stopped supplying Nakumatt two months ago.

Wambui Mbarire, the CEO of the retail trade association of Kenya, said Nakumatt's woes had forced suppliers to tighten their credit terms, demanding payment upfront.

The big international supermarket chains sense an opportunity. Shoprite confirmed to Reuters it wants to take Nakumatt's lease in one prime shopping mall after it was kicked out last month over rent arrears.

Carrefour, which opened two hypermarkets in Kenya last year through its UAE-based franchisee Majid Al Futtaim, will open a third this month in another shopping mall vacated by Nakumatt.

"The success of the stores has given us the impetus to plan a greater expansion of our footprint in Kenya," said Frank Moreau, the Kenya head of Majid Al Futtaim retail, adding the first two stores are among the most successful in the franchise.

But Carrefour Kenya cannot fill Nakumatt's big shoes just yet, said Boris Planer, the global chief economist at Planet Retail, a global retail consultancy.

Two decades of growth and peak annual turnover of $700 million would be hard to replicate anytime soon, he said.

Rugendo said that he would miss the retailer if it folded, even as he counted his losses.

"It is better the devil you know than the angel you don't," he said with a sigh.

(Additional reporting by Katharine Houreld; Editing by Katharine Houreld and Sonya Hepinstall)

By Duncan Miriri

Stocks treated in this article : Carrefour, Shoprite Holdings Ltd
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Financials (€)
Sales 2017 79 721 M
EBIT 2017 2 042 M
Net income 2017 775 M
Debt 2017 4 117 M
Yield 2017 3,76%
P/E ratio 2017 16,17
P/E ratio 2018 14,14
EV / Sales 2017 0,21x
EV / Sales 2018 0,21x
Capitalization 12 825 M
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Carrefour Technical Analysis Chart | CA | FR0000120172 | 4-Traders
Technical analysis trends CARREFOUR
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Mean consensus HOLD
Number of Analysts 25
Average target price 19,6 €
Spread / Average Target 19%
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Managers
NameTitle
Alexandre Bompard Chairman & Chief Executive Officer
Matthieu Malige Chief Financial Officer
Nicolas Bazire Non-Independent Director
Jean-Laurent Bonnafé Director
Thierry Breton Independent Director
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