What you need to know:
- For months now, Nakumatt, short for Nakuru Mattresses, has been tottering under the weight of mounting debts, estimated to be upwards of Sh15 billion.
- While acknowledging the elephantine scale of his company’s troubles, Mr Shah then turned the tables by blaming the government for the current financial woes.
- Mr Shah alleged the closure was forced by people who wanted to forcibly take over the family business.
A combination of factors including gross mismanagement, poor strategic decisions, tax issues and massive internal losses perpetrated by some wayward employees and suppliers are the main reasons behind the slow death of giant supermarket chain Nakumatt, multiple sources familiar with the retailer’s financial tribulations have told the Nation.
One of the sources likened the retailer’s fate to the way a pyramid scheme is eventually fated to collapse after some time: “For a long time Nakumatt has worked hard to keep this façade of a profitable company while knowing that the opposite was true,” the source said.
Since it was founded in the 1980s as a small retail outlet in Nakuru town, the supermarket’s iconic logo of an elephant clutching a shopping bag in its trunk symbolised its stability and reliability. But the elephant is no longer at ease.
For months now, Nakumatt, short for Nakuru Mattresses, has been tottering under the weight of mounting debts, estimated to be upwards of Sh15 billion.
But being a private company, the true extent of its financial burdens — just as it has been with its profits — remains a secret only known to its owners.
The sad pictures shared by customers confronted by rows of empty shelves in its 66 branches across Kenya, Uganda and Rwanda, and nearly idle employees, tell the sad story of its rapid descent down the abyss since mid-last year.
And now the government is worried Nakumatt’s sorry state of affairs may have far-reaching ramifications not just to its suppliers and others owed mountains of cash by the retailer, but to the entire economy.
CLOSURE OF BRANCHES
In a letter to Nakumatt managing director Atul Shah, dated May 9, 2017 — and seen by the Nation — the Principal Secretary for Industry, Trade and Cooperatives Chris Kiptoo, expressed the government’s concerns about the closure of some of the retailer’s branches .
“This news … has the potential of triggering panic in the wholesale, retail and manufacturing sectors and further complicating government efforts in stabilising the domestic economy that is already reeling from the effects of high inflation and rising prices of essential products,” the PS wrote.
But Mr Shah’s reply must have taken the PS by surprise.
While acknowledging the elephantine scale of his company’s troubles, Mr Shah then turned the tables by blaming the government for the current financial woes.
In a caustic four-page letter to Mr Kiptoo, dated May 23, 2017, Mr Shah recounted a series of events and government actions against Nakumatt over the years which he claimed have cost the retailer more than $350 million (Sh35 billion) in stock, cash and business opportunities.
Mr Shah started by reminding the PS of the losses Nakumatt suffered in 1998 when the government closed its stores across the country after the discovery of canned beef from the United Kingdom which was contaminated with mad cow disease.
It was later discovered that the infected beef had been sold to the British military and the Kenyan Armed Forces Canteen Organisation as well, prompting the reopening of the stores.
Mr Shah alleged the closure was forced by people who wanted to forcibly take over the family business.
After failing in their mission, he alleged the same unnamed persons caused the Kenya Revenue Authority (KRA) to issue a Sh1 billion tax demand and an agency notice to all banks thus crippling Nakumatt’s operations in the same year.
“Nakumatt… was forced to trade as a kiosk, by keeping and making cash payments to suppliers for a long time until the court found that the (tax) assessment was a hoax done in bad faith intended to achieve ulterior motives,” Mr Shah wrote.
Furthermore, he questioned the government’s decision to demolish Nakumatt Thika Road branch in November 2008 ostensibly to pave way for the construction of the Thika Super Highway. The branch was demolished with stock and cash running into millions despite a prohibitory court order, he said.
“On November 1, 2008, at hours of darkness before sunrise, government earth-moving machinery and a heavy contingent of armed administration police officers woke up the residents of Garden Estate and Thome with heavy noises from the destruction of Nakumatt Thika Road by the government.
The demolition of the Nakumatt branch was done with stock inside including the previous day’s cash collections without notice and notwithstanding a prohibitory court order,” Mr Shah wrote.
“Purportedly, the government needed space to build a road, but when you drive there today, it is clear that the action was not to clear space for the road but to achieve other undisclosed ulterior motives.
In addition, he claimed engineers repairing a transformer on Kimathi Street were responsible for a power surge that sparked a fierce fire that razed Nakumatt Downtown in January 2009, claiming 29 lives.
BRING DOWN BRANCH
Lastly, Mr Shah believes the government’s decision to bring down its branch at the Westgate Shopping Mall during the 2013 siege by al-Shabaab militants was “really not necessary.”
The four attackers who carried out the massacre that left 67 people dead were believed to be hiding in the supermarket.
After that attack, the government ordered that the neighbouring Nakumatt Ukay be closed indefinitely, which led to further losses.
Mr Shah lamented that despite his businesses being seriously disrupted, there was opposition to his plans to retrench some 4,000 employees to bring the business back to profitability. Instead, Nakumatt was forced to open more branches to absorb the idle employees.
“It is important to note that during all these and sufferings (sic), Nakumatt devotedly paid its banks, suppliers, employees, landlords, and government revenue without fail and the above events are what have strained the company into the current cash flow challenges,” he wrote.
He ended the letter by requesting the government to bail out the troubled supermarket — just as it did with Kenya Airways and Mumias Sugar Company and miraa farmers.
“If such goodwill can be extended to Nakumatt, we would be very grateful considering the current situation is not of Nakumatt’s making whatsoever.”
We could not establish how the government reacted to Mr Shah’s rant as efforts to get the PS to respond did not yield fruit.
The PS had not returned our calls nor responded to a text message sent to him.
Reached for comment on Saturday on the woes facing Nakumatt and whether there is indeed an imminent collapse, Mr Shah admitted the company was going through tough times but maintained optimism that the business will turn around.
“We know there are concerns out there and this is not the first time Nakumatt is going through challenging times.
All I can tell you now is that we are aware of the fears and we are doing all we can to see the business through all this in the shortest time possible.
We have done it before and we will overcome again,” Mr Shah told the Nation, promising a detailed response on Tuesday.
WEAK MANAGEMENT STRUCTURE
However, sources familiar with the Nakumatt operations say that even though the giant chain blames others for its woes, the situation is largely compounded by a weak management structure that has exposed it to unnecessary losses.
They particularly pointed out poor corporate governance as one of the issues that has affected operations just as it has been evident in other local retailers which are also family owned.
The company has also in the past been forced to deny allegations of money laundering and tax evasion — with some claims contained in entries in WikiLeaks, a whistle-blowing website, linking it to the collapsed Charterhouse Bank.
The retailer has over the years grown into Kenya’s most successful indigenous chain of supermarkets with a regional presence.
At its peak, the retailer was estimated to be worth between Sh50 billion and Sh60 billion, according to a source with close knowledge of Nakumatt’s operations.
Some critics have faulted its rapid expansion for its current woes, but our source said that this, in fact, is what kept Nakumatt in business for this long.
“The profit margins in retail business are small and the only way to make money is to sell bigger volumes. This means opening more outlets,” one source said in confidence.
Despite its massive size, Nakumatt remains a tightly controlled family affair.
It is not listed at the Nairobi Securities Exchange which would have exposed it to greater financial scrutiny by shareholders and regulators.
Most likely, its financial troubles would have been detected much earlier.
The other downside of a behemoth such as Nakumatt being kept tightly in family hands is that sometimes it does not benefit from good corporate governance, where ideas and decisions are subjected to intense interrogation before being implemented.
Mr Shah runs Nakumatt as a tight ship together with his two sons Akoor and Neel. The three have the final word on the daily affairs of the business.
The unwillingness to open the company to a wider business leadership may have led to some decisions that have cost the company dearly.
A source pointed to the company’s decision to sign a 20-year lease with the National Social Security Fund for the Nakumatt Lifestyle building in Nairobi as just one example of the many decisions it is paying dearly for.
When it agreed to rent the entire building, Nakumatt’s intention was to lease out some of the premises to people who wanted to establish auxiliary businesses to benefit from the high human traffic within the supermarket.
A bank housed in the building shifted when NSSF started construction to add more floors to the structure.
However, the slump in Nakumatt’s business has seen these auxiliary businesses close shop leaving the retailer to foot the rent for the building — which we understand runs into millions of shillings — even when it is hardly making profit.
Wayward employees and suppliers have taken advantage of this weak management structure to steal from the company — also known as “shrinkage” in retail parlance. Unscrupulous employees often collude with suppliers to pay for goods not delivered.
In some instances, the retailer has accumulated a lot of “dead stock”— goods which it has already paid for but which are not moving off the shelves.
Employees keep on finding new clever ways of fleecing the company.
Our sources told us the supermarket lost millions of shillings in a credit card scam whereby certain employees pocketed money from credit card purchases which were cleverly stopped from reflecting on the company’s system.
Every month until the scam was discovered, the retailer paid millions of shillings to banks for the credit card purchases which fell far short of its actual collections.
SENIOR EMPLOYEE FIRED
This scam was perpetrated by a senior employee who has since been fired. The death of an auditor who was killed on Mombasa road a few years ago was linked to the discovery of this scam.
Further, under pressure from employees and the Central Organisation of Trade Union, Nakumatt’s management was forced to allow their employees to form a union to bargain for higher salaries.
This further ate into the retailer’s slim profit margins. As a consequence of the current problems, staff are yet to be paid their May salaries.
Industry insiders say Nakumatt’s tribulations have exposed the soft underbelly of the retail business in Kenya.
“Most of them are grappling with the same issues as Nakumatt but to varying degrees,” said a source.
“Being the biggest retailer in the region, the outsized focus on Nakumatt is just in keeping with the maxim “the bigger they are the harder they fall,” he said.
Yet despite its challenges, Nakumatt remains one of the most strategic supermarkets in the region.
Its assets and network of infrastructure remain the most extensive of any supermarket in Kenya — things that strategic investors look for.
Last year, businessman Harun Mwau sold his 7.7 per cent stake in the supermarket chain.
This was to pave way for entry of a strategic investor from abroad.
PRIVATE EQUITY FIRMS
A source said Nakumatt has so far received more than 10 offers from international private equity firms who are ready to inject more cash.
However, most of these firms are only willing to do so on the condition that the Shah family cedes control of the business.
“All negotiations have ended at that stage. The old man (Atul) cannot bear to lose control of the company.”