Uchumi Supermarkets has opened a multi-pronged legal battle against landlords who pocketed hundreds of millions of shillings in down payments for proposed outlets in Kenya and neighbouring countries.
The retailer said on Friday that it had instructed its lawyers to serve the landlords with demand letters seeking refunds following the suspension of expansion plans.
The payments, which were made under the retail chain’s former chief executive Jonathan Ciano, now appear to have left the company with a huge legal battle that might take years to resolve.
“These uncontrolled expansions had no basis and now appear to have been well-calculated schemes to defraud Uchumi in the name of expansion and to hoodwink the investing public that the company was doing well,” said a director who sought anonymity.
Uchumi chief executive officer Julius Kipng’etich confirmed that the retail chain was pursuing the landlords to recover the money, which he said runs into millions of shillings.
“A decision to recover the money has been made. Our lawyers are handling the issue and have made good progress,” Mr Kipng’etich said in a telephone interview.
“There was no co-ordination on how these branches, if operational, would have helped revive Uchumi’s fortunes.”
Property dealers say potential tenants pay goodwill and rents of between five and 10 months for early bookings.
“After the goodwill, the tenant pays five- to 10-month rents depending on the kind of business one intends to do. For malls and hypermarkets, goodwill is always expensive because these are commercial ventures,” said Anthony Mugo, the chief executive of Falcon Development Ltd, a real estate developer.
Uchumi is said to have made Sh2 billion in pre-payments, a figure we could not independently verify.
Out of the 55 new branches Uchumi was eyeing in the mid-term, 23 were in Kenya, 12 in Tanzania, eight in Rwanda and one each in Uganda and South Sudan, where the retailer planned to make a debut.
Seven of the Kenyan branches were to be opened in Nairobi, including Kawangware, South B, Utawala and Embakasi. Kapsabet, Narok, Kitale, Bungoma and Machakos were the other locations.
Mr Kipng’etich did not disclose the outlets for which Uchumi had made payments.
Mr Ciano, the former CEO who helped revive Uchumi in 2006 when it was put in receivership and given a government-led bailout, was ousted earlier this year alongside his chief finance officer after the retailer failed to pay suppliers.
Uchumi said in June – when it announced Mr Ciano had been fired – that it was conducting an audit to see how the Sh896 million it had raised from a rights issue was spent.
The retail chain in October closed its loss-making Tanzanian and Ugandan businesses as part of a turnaround plan that also led to the loss of 900 jobs. Former employees in Uganda have sued over the layoffs.
Last month, Uchumi announced plans to reorganise the management of underperforming branches, indicating that it could close or relocate the worst performers.
The retailer has started selling its non-core assets like land to boost cash flow and reduce its reliance on borrowing from banks.
The sale of assets has, however, entangled the retail chain in legal battles with Kenya Airports Authority, a government agency that has claimed ownership of the land on which Uchumi’s Langata Hyper, next to Wilson Airport in Nairobi, stands.
Uchumi is facing stiff competition in Kenya from supermarkets such as Nakumatt, Naivas and Tuskys as well as international retailers like France’s Carrefour, which plans to open stores.
South Africa’s Massmart has also opened shop in Nairobi and is looking to expand.
Before the closures in Tanzania and Uganda, plus two outlets in Kenya, Uchumi had a total of 37 branches.
It made a pre-tax loss of Sh262 million for the half year to December 31.
The retailer said in August its full-year earnings were expected to fall by at least 25 per cent from the previous year — a signal that its turnaround will take longer.
Mr Kipng’etich, a former chief operating officer of Equity Bank, took up his post at Uchumi in August to help revive the retail chain.
This story has been edited to remove reference to the Centum-owned Two Rivers Mall as one of the tenants who had received an advance deposit payment from Uchumi.