Rising consumption levels are driving growth and regional expansion

A rarity for many African markets, home-grown businesses form a significant proportion of Kenya’s modern retail sector. With consumption levels rising, a number of outlets are using growth in the domestic market as a platform for regional expansion. Competition is tight and the informal market continues to play a big role, but the sector is dynamic.

Accelerating the sector’s growth now requires the formulation of a retail development policy within the ambit of Vision 2030, the national development strategy. This would also provide recognition of the sector as a key economic driver. According to the Kenya Economic Survey 2014, the leading industries in terms of contribution to GDP are wholesale and retail trade and repairs, at 10.2%; manufacturing (8.9%); and transport and communication (9.1%).

In three years the value of Kenya’s retail and wholesale trade grew by 50%, from KSh233bn ($2.7bn) in 2009 to KSh350bn ($4bn) in 2012. The sector’s GDP contribution has not fallen below 10% since 2010, and is proving resilient. While rates declined in 2013, partly as a result of the terrorist incident at Nairobi’s Westgate Mall, the sector saw steady growth in the years prior. Growth fell to 7.5% in 2013 from 9.1% in 2012; its GDP share also fell slightly over the same period, from 10.5% to 10.2%.

Penetration of formal retail establishments remains low, estimated at 15-20% of the sector, and the market is highly fractured, particularly outside of the main urban centres, but devolution should encourage the expansion of modern retail space. Major formal retailers currently have a combined network of less than 300 stores countrywide.

Economic Enabler

Development of Kenya’s retail and wholesale sector is included in the Second Medium-Term Development Plan 2013-17 and Vision 2030, which prescribes institutional reforms to lower transaction costs and strengthen domestic trade. Growth in the sector has been more robust than anticipated. Under the initial Vision 2030 targets, retail was slated to contribute an additional KSh50bn ($570m) to GDP by 2012; it in fact reached KSh117bn ($1.33bn) between 2009 and 2012 alone.

Structure

The success of Kenya’s retail market may be ascribed to a relatively liberal market environment in which there are few laws regulating the industry. There are no restrictions on foreign investment in retailing, nor on the repatriation of profits or capital. Import restrictions are also few, although finished products are subject to 25% duty.

Due to the fractured nature of the formal market, there is no industry body, although registration of an association and a council for shopping centre owners is reportedly under way. Given the concentration of formal retail in urban areas, Kenya’s 4.3% rate of urbanisation – which exceeds both the African and global averages – is encouraging. However, with national poverty rates currently at 45-50% low-income households remain the majority.

Growing Middle Class

As with much of Africa, the expansion of the middle class is proving a key driver for the domestic retail market. The African Development Bank estimates that 17% of Kenyans belong to the middle class and are able to spend $ 2-20 per day. The World Bank estimates that just 2% qualify as members of a global middle class, able to spend $10-20 per day. The National Bureau of Statistics defines middle-income households as those earning between $260 and $1330 per month.

GNI grew by 21% between 2002 and 2012, to $592, and consumer spending per capita rose by 13% between 2007 and 2011 to $632. However, after the rebasing of the country’s economy that took place in late 2014, GNI per capita stood at $1160, above the World Bank’s $1036 middle-income threshold.

Destinations

Kenya’s modern retail environment is defined by a recent profusion of shopping centres and malls, particularly in urban centres. Mombasa and Nairobi were scheduled to see seven retail centres totalling around 150,000 sq metres between 2012 and 2014, according to real estate consultancy Knight Frank, along with three in Eldoret.

Retail property is expanding, delivering profitable rental yields of 10.5% in 2013. Outperforming both residential and commercial investments at 9.5% and 6%, respectively, investors are bullish on the potential of the sector, which is currently outperforming the sub-Saharan African average yield, South African property management firm Broll, which entered the market in 2013, has reported.

Rental yields are down slightly on the 11-12% average seen in 2012, according to Knight Frank, but rentals are still performing well in prime locations. The higher the demand for formal retail space, the more property developers will invest in this sector.

Moving Out 

Due to zoning restrictions, a shortage of appropriately sized plots and infrastructure requirements, new retail and mixed-use developments are migrating to the capital’s outlying areas. Just 4% of Nairobi’s land – 2780 ha – is currently assigned to commercial purposes.

Outlying areas are tapping into wider availability of land, a growing trend in planned mixed-use residential, retail and commercial communities, and improvements to national transport infrastructure. This is giving rise to real estate projects – including retail space – along emerging commuter belts, and reversing the lead of semi-formal and informal retail outlets, including roadside kiosks, in outer areas.

Completed in 2013, Thika Highway is host to two leading developments, the 130,000-sq-metre Garden City and the 47,000-sq-metre Two Rivers projects. Financed by UK-based private equity firm Actis, the 13-ha Garden City Mall, with 50,000 sq metres of retail, is predicted to have a catchment of 1m people. Two Rivers is positioning itself as a regional destination with three- and five-star hotels.

In The City 

Inner city retailers and mall developers are also investing in expanded facilities, where catchment areas remain much more localised. Opened in 1983 as the first mall in Kenya, the 23, 200-sq-metre Sarit Centre is moving to develop the remaining 2.8 ha of its 4.5-ha site.

The centre is breaking ground on its third development phase in 2014. This will be followed by the fourth and fifth phases to 2020, which will cumulatively double its retail footprint.

In 2014 Greenhills Investment, owner of the Tribe Hotel and Village Market shopping precinct, unveiled a KSh5bn ($57m) expansion project to develop a 187-room hotel, restaurant, retail outlets and conference centre. The fifth and final development phase of the Village Market, which opened in 1995, is being financed by Equity Bank, and will enable the mall to meet demand for accommodation and retail space in northern Nairobi.

Redevelopment, modernisation and expansion have continued across Kenya’s retail industry despite the 2013 terror attack on the Westgate Mall. The absence of major delays in executing property developers’ plans and the availability of financing despite the attacks are substantial indicators of the confidence placed in the sector’s potential.

In a trend that is mirrored in emerging markets throughout Africa and the Middle East, hypermarkets are generally sought-after anchor tenants. Nitin Shah, the chief operating officer of the Sarit Centre, told OBG, “Entertainment facilities have not proven to be suitable anchor tenants in Kenya, in part due to consumers’ security concerns when returning home at night. As a result of Kenya’s expanding middle classes and lifestyle changes, hypermarkets and food outlets have instead emerged as significant contributors of footfall in malls.” The appeal of food courts is reflected in rents of $30-35 per sq metre in 2012, while anchors were paying $7-9 per sq metre, and line shops $22-31 per sq metre.

Consumer Power

Reflecting Kenya’s large youth population, retail trends are orientated toward young professionals: extended opening hours, food courts, packaged ready-to-eat takeaway meals and in-house cafes have proved popular. Formal and higher end apparel stores have also prospered relative to those brands with more casual trends.

“The growth of the middle-income demographic has been visible in terms of consumer expectations,” Paul Muraya, merchandise manager for retailer and domestic shoe manufacturer Bata, told OBG. “Our high-end shoe range now begins at around $40, for which there was no market a decade ago, and to meet the demand from consumers now familiar with international brands we are bringing high-end foreign products directly into our stores.”

Foreign Interest

International franchises and brands have been steadily entering the market. In 2011 KFC returned to Kenya, along with Subway and Dominos Pizza. Walmart, IKEA and Zara – along with South Africa-based Massmart, Edcon, Game, Foschini and Edgars – are all resident or have announced plans to move in. Kenya-based retail chain Nakumatt, which has a strong presence throughout the region, has also brought in both Clarks and Revlon.

Kenya-based Deacons is the leading apparel retailer, owning the franchises for South African brands Woolworths, Mr Price and Truworths, alongside other international brands, such as Babyshop. Not all have been successful, however: unable to gain a foothold, cinema company Nu Metro, fast food giant Nandos, Supreme Furniture and publisher Media24 have all exited the market in recent years.

Large supermarkets, department stores and big-box retail are coveted as anchor tenants for retail properties, but they also represent a very competitive segment, with an estimated combined annual turnover of KSh100bn-200bn ($1.14bn-2.28bn). The sector is dominated by six chains, Nakumatt, Tuskys, Uchumi, Naivas, Ukwala and Chandarana. Tier-two and independent retailers Eastmatt, Tumaini, Jaharis, Selfridges and Rikana also have significant roles, though they largely operate in satellite and secondary urban centres. With a turnover of KSh57bn ($644m), Nakumatt has the largest network; its 42 outlets serve around 200,000 customers per day in Kenya.

With the market congested by local and family owned players, efforts from foreign retailers to move in have proved problematic. For example, Walmart subsidiary Massmart failed in a 2014 bid to acquire a controlling share of Naivas. Walmart has since decided to enter independently under the Massmart name in the Garden City development.

Closer To Home

Local retailers also carry some heft, however, and have a sizeable base of operations throughout East Africa. Nakumatt, Tuskys and Uchumi are already regional players, with operations in Uganda, Rwanda and Tanzania. Nakumatt is now exploring expansion in Burundi, Zambia, South Sudan, the Democratic Republic of Congo, Nigeria, Botswana and Malawi, and Uchumi is looking at Rwanda.

The expansion is driven by thin margins in home markets and growing potential elsewhere. Kestrel Securities documented a profit margin of 3.6% for Uchumi, 1.3% for Tuskys, and 0.8% for Nakumatt and Naivas in 2011. Nakumatt is now seeking equity investments to fund this expansion and international firms may find opportunities in joint ventures or share purchases in the event of a public listing.

Irrespective of the segment, new entrants are certain to come up against Kenya’s big-box retailers, which run much higher proportions of clothing, hardware and general merchandise in their product mix. Convenience and grocery retailing remains integral, but non-essential retail options are more popular as disposable incomes rise. Another factor in the sector’s resurgence is that in the 1990s, many Kenyans shopped abroad due to a lack of local supermarkets and related retail stores, but this is changing with the establishment of major brand stores locally. With an emphasis on one-stop shopping and tapping into destination retail trends, non-food inventory constitutes around 35%, compared to 10% in South Africa, according to research by Citigroup.

Following global trends, retailers are also producing their own branded products and are marketing smaller sizes to tap the lower-middle income demographic. Uchumi’s brands of milk, sugar, salt and flour generate around 65% of its annual income. Nakumat has also planned to roll out a KSh200m ($2.3m) “Blue Label” brand both in Kenya and abroad.

Informal No More

The expansion of modern retail outlets is having an impact not only on the high street but also the informal sector. Industry observers expect the formal sector’s penetration to plateau at 45-50% in the short- to medium-term, given the dynamics and demographics of Kenya’s rural population, who exhibit a strong preference for informal markets. “We are seeing a notable increase in retail developments and interest in the sector across Kenya’s secondary urban centres,” Peter Moll, public affairs coordinator at the Sarit Centre, told OBG. “However, in tertiary and rural areas it would appear that modern retail concepts are poorly understood, despite significant interest from developers.”

Among other factors, growth of the formal sector will be reliant on it gaining access to affordable financing options. Credit for the retail sector is still relatively expensive at present.

The informal sector accounts for almost 90% of grocery sales, but is not a stable market, especially as consumption growth is fragile in rural areas and can be dependent on seasonal agricultural fortunes. The number of kiosks has shrunk by around 29% since 2008, with superstores up by 34% over the same period. This has cut into the market share of small and medium-sized businesses most prominently.

Cashless

Growing online, mobile retail trends and cashless payments are accelerating the shift to formal retail. Between 2001 and 2012, the value of card transactions in Kenya increased by 75% to KSh1.01trn ($11.5bn), according to the Central Bank of Kenya, and mobile transactions grew by 32% to KSh1.54trn ($17.6bn). Around 73% of Kenyans now conduct transactions on their phones through four mobile payment platforms, M-Pesa, Pesapal, KopoKopo and MPAYER (see Banking chapter). MPesa holds the majority of the mobile money market, and sees the equivalent of one-third of Kenya’s GDP pass through its system.

McKinsey has estimated that online retail could add $300bn to the continental African economy by 2025, and Kenya has already seen a profusion of online retailers, including n-soko.com, olx.co.ke and cheki.co.ke, as well as Germany-based Rocket Internet’s Jumia, which has a presence in several African markets. Muraya told OBG, “We have seen dramatic growth in online retail. We expect to see 15-20% year-on-year growth in 2014 alone.”

Outlook

The growing middle class is undeniably a catalyst in Kenya’s fast-evolving retail environment. However, the traction experienced by modern retail concepts across the board points to a mature customer base whose potential has previously lain untapped. This is the basis of continued growth.

A proliferation of modern mall developments is anticipated in primary and secondary urban centres, gradually reducing the informal sector’s hold on the market. In the near term, formal retail remains lucrative but overpopulated. This is leading domestic enterprises to expand abroad, while international firms are seeking fitting market entry platforms.

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The Report: Kenya 2014

Industry & Retail chapter from The Report: Kenya 2014

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