Why Are African Retail Chains Failing?

It’s a fact that at least 90% of Sub-Saharan Africa retail, trades through traditional markets like table-tops and kiosks. It’s chaotic, disenfranchised and largely unmeasured. That massive disparity highlights the massive retailing opportunity for Malls and Chain stores across Africa; in a continent where the middle-income consumers are growing in double digits annually.

Kenya as an example, has been building its’ Malls and Chain Stores so fast, that the general trade has reduced to at least 55% (from 15% almost 15 years ago) of the retail market. My opinion; within the next 5 years, they will likely achieve at least 60% Modern Trade penetration. Across the Eastern and Southern African region, leading global retail chains like Carrefour, Game, Pick & Pay, Shoprite, Nakumatt, Tuskys, Spar etc are vying for entry, greater market share and presence.

So why then, through all this opportunity and expansion, are we hearing of chain stores suffering major cash-flow challenges, poor sales and closing outlets? I believe there are six major reasons why...

1.      Consumers are not ready for modern trade

With 90% of consumers that are accustomed to the general trade and the culture of haggling for their shopping, it’s inevitable that a clean, well merchandized, fixed priced and formal retail store will seem daunting. I’ve seen malls in Uganda, Tanzania and Kenya that had limited traffic inside but bustling trading at the gate and bus stage right outside. Ask them why they don’t walk into the mall, the answer is “shopping huko tumeachia walami na masonko [we've left shopping there to the whites and rich]”. It’s a defeatist culture I loathe and it needs to be defeated but currently impacting on traffic flow into the malls.

I must say though, Kenya has done exceptionally well on this mall challenge over the last 15 years, with many consumers across the income scale now well adept to Mall shopping. In my other article I offer some thoughts on how Malls can attract this new potential audience

2.      Over-staffing

Retail chains in the region are not quick to adapt to consumer traffic flow trends. So many times, I’ve walked into retail stores and there are more staff than the shoppers. By the way, equally, there are times I’m shopping and there are far too little till points operating. I digressed. It sometimes feels like there must be unions or cartels that encourage the over-staffing? It is illogical that Retail Executives do not notice the over-staffing, or that they encourage it, or they cannot adapt their staff work times to suit traffic. Technology has moved dramatically today and enough algorithm software’s exist that can calculate JIT staff requirements versus traffic flow. Inevitably, with retail thin margins, overstaffed retail chains will fold

3.      Overstocking on slow moving stocks

Supermarkets, in their quest to woo all manner of consumers, have been stocking up on everything from packaging street delicacies, listing all FMCG, furniture, hardware, clothing, even to motorbikes. And they are holding the stock in-store. All that stock is in-store on insensitive payment terms of 60 to 90 days’ credit to suppliers. And it’s not selling fast. The chains are lucky to get 2 or 3 rotations on non-foods stock, at best. This puts a massive strain on the retailer’s margin-spin, cash-growth and ultimately strains their cashflow. Notwithstanding, the strained relations with suppliers.

4.      Rise of online shopping

Online shopping has grown exceptionally fast and surpassed everyone’s expectations – especially the retail chains. Driven also by mobile-banking, they have made shopping while lying on your couch a common fad for all consumers. No more parking nightmares, till-point queues, hours in the mall. Sadly, retail chains have been exceptionally slow to react to this opportunity.

Most retail chains have answered by resorted to static and boring loyalty programs that basically offer points for your shopping; but few consumers know what they get from the points and how it they are calculated. The question of how the points are redeemed is misunderstood and largely ignored by the consumer. Reward and Loyalty program management, together with its marketing is almost a by-the-way event.

Maybe retail chains assume this is an unnecessary cost, or that they assume the consumer will just catch-up? I don’t know! “Retailers, it’s a captive audience you’re sitting on and ignoring!”

5.      Over-expansion

Retail chains, in their drive to have greater reach to the target consumers and to have a greater competitive say in the market have been investing a lot of capital into their expansions. This capital is either coming from banks, institutional investors or from cash reserves. To be fair though, I don’t think many chains in the region have any cash reserves. What they are doing is paying for their expansions and banking charges through retail revenue. That therefore consumes the margins, consumes the cashflow and leaves the retailer unable to pay their suppliers on time – a situation all suppliers are crying bitterly about lately

6.      Increased competition are reducing margins

With the opportunity for modern retail as obvious as it is, it’s inevitable that retail chains are opening shop everywhere. A 3km radius area in Kenya that I know, has over 8 malls and hyper-supermarkets within it. The retailers are converging to the same opportune spots – targeting the same middle income earners. They are fighting first for consumer traffic, but ultimately the pressure moves to their offers. Promotions, price differentiation, entertainment, retail theater and merchandising become the competitive norm. It’s expensive, its cumbersome and no-one wins other than the consumer and ultimately, significant profitability is lost in the fight.

Conclusion

The retails chains that will learn to adapt faster with new technologies, react logically to the retailing challenges mentioned above and manage their cash in more prudent manner, stand a greater chance of weathering the retailing tsunami currently underway. They stand a greater chance of walking past the potential financial pitfalls that lie in wait. Those that do not survive will be at threat to the acquisition sharks or worse yet, closure. Modern retail will grow in Eastern and Southern Africa, but only the few most agile, will survive.

Farayi Ziswa is a specialist consultant on modern and traditional retail selling as well as developing route-to-market strategies within Eastern and Southern Africa. Get in touch...