Retail chain Tuskys Supermarkets yesterday shut down two of its Nairobi branches after the competition regulator stalled its bid to acquire six stores belonging to rival Ukwala in the city’s central business district (CBD).
Hundreds of employees were locked out of their workplaces after the stores were closed overnight in compliance with the Competition Authority of Kenya’s (CAK) directive allowing Tuskys to acquire only one of the Ukwala stores it targeted. The CAK last Wednesday wrote to Tuskys giving it the green light to buy Ukwala’s Jogoo Road branch, but not the five outlets within the CBD.
“The authority has approved the transaction conditionally, subject to exclusion of the business and assets of the five Ukwala branches at Hakati Street, Ronald Ngala Street, the two branches on Tom Mboya Street (Tom Mboya and Hyper and the one on Haile Selassie Avenue,” the CAK says in a July 30 letter to the two retailers.
The authority maintains that an unconditional buyout of the six outlets would result in Tuskys’ market dominance and reduce competition in Nairobi’s retail sector, ultimately reducing choice and negatively impacting both consumers and suppliers. The two retailers have effectively been ordered to terminate and roll back the acquisition of Ukwala’s Tom Mboya and Ronald Ngala branches or risk criminal prosecution.
“They (Tuskys and Ukwala) should be advised that they will be in violation of the relevant provision of the Competition Act if they continue with the arrangement between themselves in respect to Ukwala branches other than the Jogoo Road branch.”
Tuskys’ management yesterday closed down the two former Ukwala stores in Nairobi’s CBD but left Jogoo Road open, a pointer that the retailer intends to buy it as directed by the CAK. Tuskys employees attached to the two stores were caught off guard by the closures. They reported to work as usual only to find notices stuck on closed gates.
The two stores were open through the weekend. “In complying with the CAK orders, the two branches will remain closed until further notice,” Peter Leparachao, Tuskys’ supply chain general manager, told employees in a memo pasted on the closed doors of the two branches.
“Kindly report to the head office on Thursday August 7, 2014 at 10 am for further instructions,” the notice said.
Suppliers, who delivered products like milk and bread to the two stores at dawn, had to leave them at other Tuskys stores in the CBD where customers were also advised to do their shopping.
Tuskys bought Ukwala’s Tom Mboya, Ronald Ngala and Jogoo Road branches for Sh200 million in April 2013 without regulatory approval as a precursor to acquiring the rival’s entire business. The deal opened the way for Tuskys to acquire Ukwala’s stock, rebrand its stores, set commodity prices, absorb staff in the three branches and operate them for several months.
The CAK, after investigating the matter in June this year, faulted the deal as being anti-competition, fined the two retailers Sh5.3 million and ordered them to terminate the pact.
Tuskys, which has about 50 branches countrywide and which posted Sh25.2 billion sales in 2013, did not do so but instead put in a fresh and enhanced bid on June 30 for six Ukwala businesses, including the initial three. It is this latest request that the regulator has now rejected, saying Tuskys can go ahead and acquire only one of the stores for an undisclosed fee.
The authority says in a letter to the retailers seen by the Business Daily that its decision was informed by geographic location of the CBD stores, the retailers’ market share, the ease with which new or existing players can set up in the CBD and how these factors affect competition.
Tuskys has 11 branches in Nairobi’s CBD and just like the five stores belonging to Ukwala, they are all located near bus stops or on streets with high human traffic. The branches have proven a hit for retailers because they offer convenience for consumers looking for “top-up shopping” to carry home after work.
Nakumatt has five branches in the CBD, Naivas and Uchumi have two branches each while there are several other private retailers operating within the CBD.
According to the CAK’s calculation, Tuskys is the market leader in the CBD with a 39.3 per cent market share and if allowed to buy five more stores, would increase its stake to more than 50 per cent.
“If it is allowed to acquire the five Ukwala branches, its market share of the CBD would markedly increase to 57.15 per cent. Given the dominance threshold is recognised as 50+1 per cent, Tuskys would be the dominant retail firm in the Nairobi CBD,” the regulator says.
Because dominance is not necessarily illegal, the authority also considered the ease with which the existing players can in future expand their investments in the CBD, offering competition to Tuskys, and concluded that scarcity of rental space in the CBD is a “significant barrier to entry by potential entrants.”
This demand was demonstrated last April when Eastmatt snapped up the Tuskys Daima branch (located next to the Fire Station on Tom Mboya Street) after it was shut down over a lease dispute.
The regulator also notes that the deficit of rental space is not going to improve in the “foreseeable future” and, therefore, approving the sale of five Ukwala stores in the CBD would gift Tuskys a “market power” that would be “indispensable.”
“The proposed transaction is likely to prevent and substantially lessen competition in the market for secondary/top-up shopping for the branded retail groceries and household goods within the Nairobi CBD,” the authority says, adding that “the Jogoo Road Ukwala branch is not in the same relevant geographic market (CBD).”
It concludes that acquisition of the Jogoo Road branch will not lessen competition in the relevant geographic market it is located in. Tuskys is a family-owned business, which is currently run by five brothers – all of whom are directors under Stephen Kamau, the managing director.
The brothers took over the company from their father Joram Kamau, who died in 2002, and have grown it into a household name. Directors of the two firms have repeatedly declined to comment on the ownership structure of Ukwala when contacted by the Business Daily.