Retailer Deacons is at risk of losing its flagship Mr Price franchise barely six months after it lost Woolworths sale deal, an investment firm has disclosed.
Standard Investment Bank has disclosed to their clients that Deacons informed it that Mr Price may be looking at ending the franchise deal and forming own company to feed the Kenyan market with its brands.
The loss of Mr Price, which targets the lower end of the market, is likely to hurt Deacons’ earnings because it currently accounts for about half of the retailer’s sales with the exclusion of Woolworth’s proceeds, according to Standard Investment Bank.
“Management indicated that one of its key brands Mr Price runs the risk of the franchisor wanting to enter into a joint venture agreement,” added the Investment Bank in a research note on Thursday.
South Africa fashion retailers have historically preferred trading under the franchise model in the continent. But they are shifting from this model as they seek more control in their race to reduce reliance on their home market.
South Africa’s Woolworths opted to launch direct operations in more African countries and in Kenya it established a firm called Woolworth’s Kenya Proprietary Limited where it owns a 51 per cent stake with the remaining share held by Deacons.
Deacons reserved the right to manage the venture despite its minority stake. Woolworths used to account for 49 per cent of Deacons sales before it was hived off from the Kenyan firm, which is associated with former President Mwai Kibaki and was founded 50 years ago.
Mr Price Group, which is listed on the Johannesburg Stock Exchange, has 962 southern Africa stores and 29 franchise stores in Africa including Kenya, Nigeria and Ghana dealing in clothing, footwear, sportswear, sporting goods, and home-wares.
It made sales worth Sh300 million (ZAR 30 million) from the Kenyan operations, where it has nine stores, of Sh130 billion the group posted in the year to March.
The group in its annual report for the year ended March 2013 said that it would continue to strengthen the franchises but is “testing of alternative operational models to enable growth, despite existing retail infrastructure challenges”.
The tinkering with its model comes as more South African fashion houses look to setting shop in Kenya.
Actis, a private equity fund, has said that Edgars and Foschini are some of the retailers that have booked space in its Sh12.6 billion real estate development on the Nairobi’s Thika Superhighway that is billed as the largest mall in East and Central Africa at 50,000 square metres.
Both firms are looking to spread reach outside southern Africa with Kenya acting as their launch pad for eastern Africa. Kenya has witnessed multi-billion shilling shopping malls spring up as real estate investors and retailers seek to tap into a growing middle class with growing disposable incomes and a limited choice of leisure activities.
Deacons said in a statement yesterday that it had opened talks with strategic investors to boost its products offering.
It has introduced European fashion brand Zara and plans to launch Hong Kong’s Bossini brand by the end of this year in the race to reverse the Sh38 million loss it posted last year.
“We are in the process of engaging potential strategic investors who will bring a portfolio of brands to the table,” said Deacons chairman Peter Gichuru Njoka.
The fashion store has nine brands including seven franchises — Truworths, Adidas, Identity, Mr Price, Babyshop and Sheet Street — and own products like 4u2 and Angelo.