Woolworths forms new company to run Kenya business
A local branch of Woolworths. Woolworths has replaced its franchise business model with joint venture partnership with Deacons Kenya. Photo/FILE
What you need to know:
Deacons will own part of the joint venture dubbed Woolworths Kenya Proprietary Limited with the South African firm expected to own a majority stake in line with similar transactions it has carried out in the region.
Woolworths has replaced its franchise business model with joint venture partnerships as it expands into the rest of the continent.
Woolworths will have an opportunity to call the shots in the Kenya operation and ultimately grow its earnings from its brands since they account for the largest share of Deacons’ sales.
Clothing and household goods retailer Deacons Kenya has formed a joint venture with Woolworths, ending their franchise partnership in what will see the South Africa firm have greater control of its products in Kenya.
Deacons Tuesday said it would own part of the joint venture dubbed Woolworths Kenya Proprietary Limited with the South African firm expected to own a majority stake in line with similar transactions it has carried out in the region.
The deal means that Deacons, which plans to list at the Nairobi bourse in coming months, will remain with other top franchises including Mr Price, Truworths, and Angelo that contribute about 68.2 per cent of sales.
Woolworths has replaced its franchise business model with joint venture partnerships as it expands into the rest of the continent in what has seen the giant retailer ink a deal with Tanzanian businessman and former franchisee Ali Mufuruki for a 51 per cent stake in Uganda and Tanzania.
In Kenya, the two firms remained guarded on the finer details of the joint venture. Deacons CEO Wahome Muchiri failed to respond to the Business Daily’s calls and text messages on the deal.
“Director of Deacons Kenya wish to inform shareholders that the company on 10th December 2012 entered into a conditional agreement for the sale of its Woolworths retailing business to Woolworth’s Kenya Proprietary limited,” Deacon’s chairman Peter Njoka said in a press statement.
Woolworths has historically preferred trading under the franchise model where they would sell products to partner firms with limited involvement in the business.
In September 2010, the firm decided to stop using this model, saying that it was becoming increasingly “more complex and expensive to operate a separate franchise business model with its own systems and processes”.
“By moving into a partnership model, we are going to be getting more involved in the retail side of the operations,” John Fraser, Woolworths’ executive for international business, told the South Africa media in an earlier interview.
“We will be working a lot closer with our partners in terms of ensuring we’ve got . . . the right product ranges in each of those environments and trying to ensure that the in-store experience you get in (the rest of) Africa is the same as if you were in South Africa.”
Under a joint venture, Woolworths will have an opportunity to call the shots in the Kenya operation and ultimately grow its earnings from its brands since they account for the largest share of Deacons’ sales.
Woolworths’ share of Deacons sales stood at 31.4 per cent in the year to December, coming second only to Mr Price (40.4 per cent) and ahead of Truworths, which contributed 8.8 per cent.
“The joint venture could see increased revenue as both parties increase investment into the brand which could replicate its model in South Africa,” said Standard Investment Bank in a market report on the Kenyan transaction.
Deacons reported a 3.7 per cent increase in net profit to Sh112 million in the year to last December on sales of Sh2.42 billion, up from Sh1.79 billion a year earlier.
For Deacons, the new partnership could boost its share of profits from the Woolworths brands and offer it an opportunity to boost its other business units, especially its internal brand established in 2004, and Truworths, a franchise deal entered in 1999, both that Citi Group reckon are underperforming.
The joint venture deal is also set to affect the retailer’s plans to list at the Nairobi Securities Exchange (NSE), where it had set a target of third-quarter 2012.
“The directors will provide further information on the proposed listing of the company’s shares on the Nairobi Securities Exchange after the above transaction is concluded and the relevant approvals obtained,” Mr Njoka further noted.
