Nairobi, Kenya plans for multiple retail developments

The retail sector in Kenya is benefitting from rising middle-class purchasing power, robust macroeconomic growth and a surge of investment in high-end formal retail space, with a host of foreign retailers, brands and producers entering the market. Although well-entrenched local players remain dominant in the supermarket segment, the entrance of France’s Carrefour in 2016 marked an increase in competition between local and foreign outlets for new market share.

While new entrants face a number of hurdles, there are significant opportunities for investment in Kenyan retail remain, particularly in cities such as Naivasha, Nakuru, Eldoret and Kisumu, and local retailers are also expanding their footprint in neighbouring markets.

Fundamentals

The Kenyan retail sector’s robust recent growth has been underpinned by strong macroeconomic fundamentals, including 5.6% GDP growth in 2015, following average growth of around 6% between 2010 and 2014, according to the IMF. Kenyans’ incomes have also nearly tripled since the early 2000s, with the IMF reporting that GDP per capita at current prices rose from $549.16 in 2004 to $1428.80 in 2014. Spending power and consumption are also on the rise, and the Kenya National Bureau of Statistics (KNBS) reported in its most recent 2016 economic survey that employment in the modern retail sector rose by 5.2% in 2015 to 2.6m, including 2.48m salaried employees and 123,200 self-employed people. Total sector earnings, meanwhile, rose from KSh1.3trn ($12.7bn) in 2014 to KSh1.5trn ($14.6bn) in 2015, a 14.2% increase.

Inflation simultaneously eased, with the consumer price index declining from 6.9% in 2014 to 6.6% in 2015. This led to a 2.1% increase in real average earnings, from KSh368,979 ($3600) for 2014 to KSh376,577 ($3670) in 2015. The World Bank reported that domestic consumption was rising due to falling inflation, with household expenditure as a percentage of GDP increasing sharply during the 2000s, from 72.4% in 2005 to a peak of 81.5% in 2011. Consumption remains strong in the country, although household spending has moderated in recent years, dropping from 80.1% of GDP in 2012 to 77.6% by 2015, according to the World Bank.

While inflation stood around 6.3% at the end of 2016, it had rebounded to 10.3% by March 2017. This, combined with the prospect of further depreciation of the Kenyan shilling in 2017 – driven in part by continued interest rate normalisation by the US Federal Reserve – could see local purchasing power ease somewhat.

Middle Class Debate

A 2011 report by the African Development Bank (AfDB) found that the continent’s middle class accounted for roughly one-third of the population, a three-fold increase since the early 1980s. There is certainly visible evidence of this in Kenya and elsewhere, with discretionary spending for electronics, automobiles and white goods increasing. However, while the burgeoning middle class is driving retail growth on the continent, its size and significance has been the subject of debate in recent years, as evidenced by Nestlé’s 2015 decision to reduce its African workforce by 15%. Company officials attributed the move to stagnant growth within the African middle class, which was smaller in number than anticipated.

Indeed, the AfDB’s study included households that made $2 per day, which meant they were still very sensitive to price. In 2014 South Africa’s Standard Bank issued a report stating that poverty levels within 11 African economies surveyed, including Kenya, could be double official estimates. The impact of this on competition and market entry in the retail sector is significant – particularly in Kenya, where retail is dominated by family-owned businesses, and consumer preference is often determined by price and brand loyalty. Local companies continue to hold the majority share of the market as a result of strong brand heritage and history, with entrenched local operators often benefitting from prime real estate and established distribution networks.

Recent Growth

In spite of the uncertainty surrounding the exact size and economic weight of middle-class spenders, retail has expanded at a steady clip, outpacing growth of the broader economy. KNBS reports that the wholesale, retail and vehicle repair segment has recorded strong growth in recent years, with the sector’s value at current prices rising from KSh300.77bn ($2.9bn) in 2011 to KSh467.71bn ($4.6bn) by 2015, for an average annual growth rate of 11.8%.

Investment in the sector has also surged; KNBS’s “Foreign Investment Survey 2015” found that foreign direct investment (FDI) in the wholesale, retail and vehicle repair segment had shown a sharp increase. The report, which tracked FDI inflows to the country between 2012 and 2013, found that investment rose from KSh60.51bn ($590.4m) in 2012, comprising 16.1% of total FDI, to KSh71.79bn ($700.5m) in 2013, although its share of FDI stock fell to 15.8%.

Informal Sector

Although inbound investment in Kenyan retail is being driven by formal operators looking to rent or acquire space in shopping malls, hypermarkets and mixed-use developments, a 2015 Nielsen report found that 70% of Kenyans do their daily shopping at vendors within the informal sector, with Kenyans making 38 shopping trips each month on average. According to the study, informal convenience stores known as dukas comprise 22% of traditional stores in Kenya, followed by table-top kiosks and market stalls. Some 95% of Kenyan shoppers reported shopping at dukas, 92% at kiosks and 89% at supermarkets.

Foreign Entrants

Outside of informal retail, the country’s grocery and supermarket segment is dominated by local chains. Nakumatt has a network of 63 stores across East Africa; Tuskys has 55 branches in Kenya and seven in Uganda. Set up in 1975, Uchumi is one of the oldest retailers in the country, with 24 outlets in Kenya. Lastly, Naivas is a Nairobi-based market chain that operates 40 outlets domestically. The country’s significant retail potential has also attracted the attention of a number of foreign entrants in recent years, many of which have established operations. “New foreign entrants into the retail space are reducing the leverage of local retailers, but this should reduce payment periods to suppliers,” Darshan Chandaria, group CEO and director of Chandaria Industries, told OBG.

In 2016 the Botswana-based retailer Choppies announced plans to enter Kenya through the KSh1bn ($9.8m) acquisition of 10 branches of Ukwala supermarkets, a local market chain. Choppies was not the only player to attempt market entry in recent years. The South Africa-based Walmart subsidiary Massmart attempted to acquire the family-owned Naivas chain in the first half of 2014 without success, but by mid-2015 the major retailer opened a flagship Game store, a general merchandise and grocery shop. The $250m facility, located at the Garden City Mall in Nairobi’s Garden City Village, brought in funding from UK private equity firm Actis, UK development finance institution CDC and the International Finance Corporation. Walmart’s Game was followed by French multinational Carrefour, which opened its first outlet in Kenya in May 2016 through its franchise partner, the Dubai-based Majid Al Futtaim Group, inaugurating operations at a new shopping mall, The Hub, in Karen, a wealthy neighbourhood of Nairobi.

Shopping Malls

Nielsen named Kenya Africa’s second-largest formalised retail economy after South Africa in 2015, with a 30% penetration rate. In a February 2016 report published by real estate consultancy Knight Frank, Nairobi was identified as one of the top-five cities in sub-Saharan Africa for shopping centre developments, with 470,000 sq metres of new retail space in the pipeline, against 391,000 sq metres of existing space, dominated by well-known, high-end locations. These include, among others: The Junction, located in the Lavington district, which opened in 2004 and offers 26,000 sq metres of space; the first phase of the Garden City Mall, covering 33,000 sq metres and opened in Kasarina in 2015; and the 30,000-sq-mere Sarit Centre, which has been in operation since 1983.

Investors are flocking to new mixed-purpose developments offering retail, office and residential space within a single district, and close to key transport links. According to Knight Frank, developments that came on-line in 2016 include the 11,000-sq-metre Rosslyn Riviera on Kiambu Road, the 62,000-sq-metre Two Rivers Mall on Limuru Road and the 30,000-sq-metre The Hub in Karen. Other proposed shopping mall developments include the Waterfront Karen Mall, the General Motors Mall, Next Gen Mall, Bellevue Mall, South Fields Mall, Point Mall and Laxcon Mall.

Two Rivers

The largest of these, Two Rivers Mall, is a mixed-use development spanning 41 ha in Nairobi’s diplomatic blue zone. The project has been identified by the government as being in line with the macroeconomic Vision 2030 plan, meaning it will receive technical support from the state. In early 2016 Centrum Investment announced it had signed a deal with the Vision 2030 Delivery Secretariat for cooperation on compliance and support requests for any potential intervention under a public-private partnership. The project’s $250m first phase, developed by China’s AVIC International, will span a 22-ha site and include a 62,000-sq-metre shopping centre – East Africa’s largest – as well as two office towers offering over 18,600 sq metres of space and a 1500-vehicle parking bay.

Tipping Point

The pipeline of new retail property means retailers have no lack of options or locations, but does also point to a potential softening in rental prices. Data from Nairobi-based real estate firm Dunhill Consulting showed that rent for prime retail space remained at a relatively stable KSh5000 ($48.79) per sq metre per month in 2015, indicating that the market is beginning to cool. However, it is unlikely that 4.2m-person Nairobi will be fully saturated in terms of retail property for some time. Knight Frank estimates that the sector will reach saturation within the next six years, but has also reported that property developers are currently aiming to invest in grade-A shopping space.

Moving Abroad

With formal retail penetration on the rise and retail saturation presenting a potential long-term challenge, regional expansion offers new opportunities, as evidenced by Nakumatt’s February 2016 announcement that it will open five new stores outside of the country as part of an ongoing expansion drive that will see the retailer invest an estimated $4m in new operations. It plans to open two new outlets in Tanzania, two in Rwanda and one in Uganda, bringing its international portfolio to 20 stores: six existing locations in Tanzania, four in Rwanda and 10 in Uganda. The chain has been aggressively pursuing new opportunities both within East Africa and beyond. After acquiring three Shoprite outlets in Tanzania in 2013 and three stores from Kenyan retail chain Yako in 2015, its portfolio stood at 63 stores. Speaking to local media, the company’s managing director, Atul Shah, estimated that formal retail penetration in East African was less than 20%, suggesting significant scope for growth.

Outlook

Kenya’s retail market is expected to record a positive performance in 2017, driven by population growth, positive economic metrics and heightened marketing activities. With urbanisation indicating strong potential for expansion into smaller cities, and formal retail space in Nairobi approaching saturation, retailers will be looking to reorganise value chains.

 

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The Report: Kenya 2017

Industry & Retail chapter from The Report: Kenya 2017

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