SME sector beats corporate Kenya in job security outlook

Positive outlook shields employees against
Positive outlook shields employees against rampant retrenchment with slow growth 

Millions of Kenyans working for small and medium-sized companies are more likely to keep their jobs in a sluggish economy than their counterparts in large corporations, a new survey indicates, pointing to a higher level of business leaders’ confidence in the SME sector.

Synovate, the consumer market research firm, says 70 per cent of executives in the mid and small enterprises plan to hire new staff in the next 12 months as they expand their operations and launch new products and services to stay competitive in the marketplace.

The finding is contrary to the outcome of a July survey of business leaders in large companies who indicated that they planned to continue with the freeze in employment and the scaling back on expansion to protect their profit margins in a difficult business environment.

Nearly 60 per cent of the large firms said they planned to continue with ongoing cost cutting measures to defend their profit margins in a business environment characterized by a slowdown in growth.

High level of optimism in the medium sized firms is linked to their ability to adapt faster to changes in the business environment compared to large corporations that take time to shift.

“Big companies tend to have long term commitments compared to the SMEs, whose commitments tend to be in the short or medium term leaving them with more room to navigate any turbulence,” said Mr George Waititu, the group managing director at Synovate.

This means that SMEs role as key drivers of economic growth in Kenya has gained impetus and is set to remain so until big business gains enough evidence to start hiring and unfreeze earlier plans to expand into new business areas or launch new products.

It also comes as big relief to millions of Kenyans employed in the small and medium-sized companies sub-sector, and offers hope for sustenance of consumer demand for goods and services at current levels at least in the medium term.

Kenya’s economy has been facing subdued consumer demand for goods and services with recent downsizing of payrolls by the big employers, the continued rise in inflationary pressure and job insecurity for those still in employment.

The economy grew by 3.9 per cent in the first quarter of the year compared to a contraction of 0.6 per cent in first quarter of the previous year but interim data compiled by the National Bureau of Statistics shows that growth slowed to about 2.4 per cent in the second quarter.

High inflation has seen low-end consumers cut back on the purchase of non-basic goods and services, culminating in reduced corporate sales that have in turn forced companies to scale back their spending to protect profits.

Some large corporations such as BAT, EABL, Zain and Haco Industries have been forced to render some of their staff redundant in the course of this year to manage their costs.

Some companies in the fast moving consumer goods market such as BOC Kenya, East African Breweries Limited (EABL) and Crown Berger have reported a drop in profits in the first half of this year compared to last year pointing to subdued economic environment.

While the larger firms have been grappling with emerging challenges in the business environment, small and medium-sized companies have sustained growth through aggressive sales and expansion to regional markets.

“SMEs react to situations faster, have less protocol bureaucracy, operating costs and innovate faster,” said Julie Nyang’aya, a partner at consulting firm Deloitte.

The Synovate survey also revealed that confidence level among business leaders in the medium sized firms stood at 51 points out of a total score of 100 points compared to large firms who returned a level of 47 points. Only firms with an annual turnover of between Sh70 million and Sh1 billion fall in the SMEs category.

Business leaders in small and medium-sized firms say their confidence in the economy is grounded in key changes in their operating environment, citing as recent improvement in infrastructure that has come with the landing of the fibre optic cable in Mombasa and the promise of faster and cheaper internet connectivity.

“It is likely that we will be adding more staff in the next year because more and more of our clients and prospective clients are looking to use the Internet as a core marketing and service delivery channel,” said Mr Moses Kemibaro, the business development director at Dotsavvy — an internet solutions firm.

In the manufacturing sector, which has had a barrage of problems, the medium sized firms hope to make full use of the slowdown period to reorganize their sales strategies to better manage movement of stock when strong growth resumes.

“The sales have dropped in the first six months of this year compared to last year but this is the time for us to search for opportunities of improvement and to move in a different direction,” said Dipak Shah, a director at Uzuri Manufacturers -- makers of cosmetics, garments and plastics.

Mr Shah says the company has recently employed two new management staff to enhance the efficiency of its operations. Players in the import market, where a large number of SMEs operate are optimistic of employing new staff under the current business environment that has seen the shilling lose nearly a quarter of its value against the dollar in the past eight months and the costs of raw materials have also escalated.

“The currency has remained weak and the cost of raw materials and credit has continued to rise,” said Mr Hansal Shah a director of Soko Sweety an importer and distributor of sweets and confectionery. “We however have to look at the alternative means of growing our business, including geographical expansion.”

More medium sized executives say they intend to expand into regional or internal markets in the medium term to cushion their operations against dependence on the domestic economy.

Mr Shah reckons that the urge to hire more staff is not necessarily based on the positive sentiment but the urge to do well. “It is not necessarily optimism of the business environment but the challenge to improve on past performance and grow that is forcing us to ‘look out of the box’ in these lean times,” he said.

At 51 points, SMEs confidence level is lower than the 67 points recorded for the same period in 2008 indicating that the harsh economic environment that has deepened with the onset of the global financial crisis and a rollout of power and water rationing has had a negative impact on the business leaders’ outlook.

The survey was conducted among 277 companies with an annual turnover of between Sh70 million and Sh1 billion, which had submitted their entries for this year’s Top 100 survey run by the Business Daily and consulting firm, KPMG. Some of the other challenges faced by the SME, according to the survey included poor infrastructure, political risk, finding the right quality of staff and access to adequate credit and financing.

The government in attempts to get the economy back on track, has employed the Economic Stimulus Programme which will see an estimated Sh22 billion released to the economy most of it finding its way to infrastructure projects.

Also, the government is betting on banks to break the vicious circle by revving up lending in an effort to stimulate the economy through increased consumer consumption.

Central Bank of Kenya (CBK) has already cut the Central Bank Rate (CBR) four times over the past year and reduced the Cash Reserve Ratio from six to five per cent expecting commercial banks to transfer the same benefits to the customer in the form of cheaper credit.