Inflation squeezing margins and performance of retailers


Kenya is currently in the grip of an unprecedented high cost of living. Life, for many people, has become tenuous as prices of fuel and food items, be they fresh or processed, are at an all-time high.

We have not even recovered from the negative effects of the Covid pandemic. The pandemic was obviously a major contributor to the dire state of the economy.

Businesses were greatly affected as research by Statista showed, with nearly six in 10 registering a decline in sales in the first months of 2020. Also, 56 percent of these firms were affected by cross-border restrictions, while 44 percent faced inadequate access to raw materials.

At least 55 percent of them reported a decline in sales. The pandemic also disrupted global supply chains, making access to and movement of goods across borders more expensive.

Kenyans generally consume plenty of imported goods, be they raw materials or finished products. Covid disrupted international supply chains tremendously, with containers stuck in various ports, ships remaining immobile and players keeping away from work. This led to shortages of both raw materials and finished products.

Kenya is heavily reliant on food imports and the country is already experiencing price shocks and disruptions in global supply chains for major commodities such as wheat and cooking oil. The result?

An 800 gramme loaf of bread now costs Sh30 more than it did barely five months ago, with the two kilogramme packet of wheat flour now up by at least Sh40 in all major retail out-lets. The price of cooking oil has also more than doubled over the past several months.

While these are the prices at formal retail stores, the upshot of these increases is that more Kenyans have been pushed into the kadogo economy’, where they now buy food items in smaller quantities. This is despite the fact that it is eventually more ex-pensive for them.

But even as individual Kenyans go through the motions of adjusting to the new environment, retail businesses have not been spared. This is especially due to the prevailing fiscal policy relating to running formal retail outlets in the country.

For formal retail businesses, fiscal policy not only affects consumer demand, it also impacts the cost of doing business and determines investment decisions.

Did you know that an average formal retailer in Kenya needs to comply with 25 licenses every year? These range from permits to catering and music.

Some are national while others are specific to counties but the overall effect is that retailers are subject to an inordinate number of unnecessary taxes that have exceptionally driven up the cost of doing business. It is our considered view that all the 25 licenses can be collapsed and integrated into a single point of taxation such as happens with the single business permit.

Tax-related fiscal policy affects retail businesses by changing the amount of disposable income people have to spend. Higher taxes, or an expansion of taxable items, lowers consumers’ net income, making them more budget-conscious and apt to limit expenditures to necessities.

Lower taxes leave more money in consumers’ pockets to spend on goods and services retailers offer. When fiscal policy results in higher interest rates, retailers pay more for lines of credit thus higher interest rates on loans. Taxes also affect retail business expenses and thus the cost of doing business.

The other issue for formal retailers is high energy costs, which the government had promised to rein in. Pressure from the International Monetary Fund is said to have also pushed the national government to raise taxes with VAT now levied on cooking gas and fuel at 16 percent.

But what people can’t see is also costing them. Petroleum derivatives hide in thousands of everyday goods and household products, from microfiber to moisturiser to medicine. Their prices are rising, too. Everything made out of — or packaged in — plastic will be more expensive since a lot of plastics are made with polypropylene or polyeth-ylene.

The knock-on effect of record high energy costs spills into other industries, particularly those tied to transportation and hospitality. It only exacerbates the supply chain-related and material cost increases retailers, distributors and restaurateurs have already been dealing with.

A combination of expensive goods, low purchasing power and the high cost of doing business is frustrating for both the consumers and investors. As long as customers delay purchases and reduce their number of store visits, retailers must cut costs, including hiring, in order to remain afloat since retail sales are driven by the economic environment.

And with Kenya’s economy predicted to register slower growth this year, we can only tighten our belts and dig in for the short haul.

Wambui Mbarire is the Chief Executive Officer of the Retail Trade Association of Kenya (RETRAK)