Personal Finance

Ailing retailers raise questions on governance

Shoppers at a supermarket in Nairobi. PHOTO | SALATON NJAU | NMG
Shoppers at a supermarket in Nairobi. PHOTO | SALATON NJAU | NMG 

I have observed that a number of Kenyan supermarkets have faced or are going through some survival challenges few years after recording high growth levels.

The pattern may be an area to research on to establish what are the causes of this and what would be the adequate remedial steps to take to prevent it from happening.

Many of these retailers are national and regional brands. It is, therefore, unfortunate when they begin to face survival challenges.

However, in my view, the main challenge the supermarkets face is a governance issue. While the boards may not be to blame for this state, I believe governance contributes to the good performance of any enterprise.

Some of the strategic decisions made may not be the best for the companies.

I participated in a study of an ailing corporate giant. The first issue we found was that these retail giants had an ambitious expansion strategy, which was mostly financed using debt capital.

This, in turn, brought about liquidity problems and such entities were not able to meet regular costs such as payment of staff salaries and suppliers.

I believe the same applies to the supermarkets in question.

While I am not privy to the financing model that has been used to raise capital for expansion, I believe financing rapid expansion with debt capital may give rise to cash problems in any entity.

Poor liquidity creates a high liquidity risk for the company and in most cases; it is not able to settle fixed costs such as rent, salaries and suppliers.

It is a tough situation because a high liquidity risk also means the company may not be able to service its debt regularly further exposing it to the risk of liquidation.

The creditors may not have an interest in the long-term survival of the company as long as the debt is repaid.

There is also a high litigation risk that arises from the failure to meet the needs of labour, suppliers and creditors.

All these give the supermarket a bad public image, as does lack of stock, therefore, affecting profitability significantly.

I believe a well-thought-out expansion strategy would save a lot of these supermarkets and perhaps further research needs to be done on this subject.

There are some remedial measures such as restructuring, renegotiations with creditors as well as mediation with employees and suppliers.

However, a long-term solution should be sought to establish the causes and recommendations. As I did this paper, I came across several articles on corporate failures.

However, the question remains: why do most Kenyan supermarkets face the same growth and failure pattern?