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Retailers must innovate to be competitive

Shoppers at a supermarket in Nairobi. FILE PHOTO | NMG
Shoppers at a supermarket in Nairobi. FILE PHOTO | NMG 

The downward spiral of local giant retail store, Nakumatt, has been a puzzle to both academics and analysts. But not all is lost. Innovation could catapult it from the abyss.

Much has been said as to what happened, but immediate suspicion was that the family-managed company was failing because of poor management, failure to innovate and inability to cope with a rising competitive environment.

Others suspected that its rapid expansion caused it to fail.

Whatever is ailing this giant brand, it is a classic case of companies that never get to the top. Rick Newman in a USA Today article, ‘‘10 Great Companies That Lost Their Edge’’ notes that with today’s rapid technological change, companies rise and fall faster than ever before.

However, his interview with Vijay Govindarajan, a professor at Dartmouth’s Tuck School of Business and co-author of ‘‘The Other Side of Innovation’’, reveals that successful companies tend to fall into three traps that impede their growth.

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First is the physical trap, in which big investments in old systems or equipment prevent the pursuit of fresher, more relevant investments.

Second is the psychological trap, in which company leaders fixate on what made them successful and fail to notice when something new is displacing it.

Last is the strategic trap, which occurs when a company focuses purely on the marketplace of today and fails to anticipate the future.

Some unlucky companies fall into all three traps. Although the concept of poor management includes all these traps, it also encompasses other aspects that are pertinent to the company’s survival.

These in my view include financial and human resource management. For example, in ‘‘The Other Side of Innovation’’, Govindarajan and his co-author argue that innovation equals to idea generation and execution. They further argue that in addition to innovation, ideas and execution are not sufficient without motivation.

In the lead up to the start of Nakumatt’s slide, they had started a sudden expansion through acquisition of retail space in the expanding malls in the country.

It was a strategy to stifle new entrants like Carrefour and Choppies that may have gone sour as the company increased the fixed cost.

Unfortunately, this is a cost that does not change when there is a decrease or increase of goods sold. Whether or not the company is making money, these are expenses that must be paid.

If debt was used in the rapid expansion, then it is almost certain that the company will experience a cash flow problem. If they had paid attention to Uchumi’s 2006 woes, they would never have tried to stave off competition.

In an effort to block the expansion of Naivas and Tuskys, Uchumi decided to rapidly expand, but the strategy didn’t work. Instead, Uchumi found itself in the jaws of receivership.

The government stepped in to resuscitate the ailing retailer. It worked, but not for too long as corruption brought it to its knees once again.

It is still too early to write off Nakumatt. The company still has great brand value that they can leverage to re-engineer a comeback. That is if they do not surrender some of its strategic locations.

The retail market is clearly going through a very difficult moment with new innovations, especially those that are developing the new supply chains.

Future survival depends on how fast old establishments adapt to emerging innovations. The grocery market is still one of the most inefficient segments of enterprise in the country with losses amounting to almost 50 per cent. It is an area that is ripe for new innovations.

In the Vision 2030 development blueprint, we had envisaged several new distribution points across the city to address the increased population in Nairobi, but that has not happened. City Market is overwhelmed and the cost of food has skyrocketed in the past five years.

Food alone takes more than 30 per cent of the earnings in Nairobi. This is where retail stores could play a key role to revive their enterprises. Improving productivity lowers the cost of production and triggers a positive knock-on effect on wages.

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