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Wednesday, August 15, 2007

Uchumi Supermarkets In Trouble Again

Uchumi Supermarkets is in trouble again as its' bankers get increasingly jittery that its' recovery may never happen and I am really not surprised. I will re-publish the entire post I made here over a year ago on this subject complete with the date;

Saturday, July 22, 2006
Business Special: More Trouble Ahead For Uchumi

In all the hype being generated by the media and show of goodwill towards the Uchumi Supermarkets rescue efforts, alarm bells are beginning to ring loudly in my ears.

I really started to get nervous when I heard about the latest move by the new supermarket chain management to raise extra funds from shareholders. In the plan, shareholders will lend a minimum of Kshs 10,000 each to Uchumi. In fact the plan was to initially get a minimum of Kshs 100,000 from each shareholder. Shareholders quite rightly pointed out that this was too much for most of them.

What is going on here?

Uchumi has tried to raise funds before, in a bid to recover. It didn’t work. So what is so different this time?

This is not the time to raise money. It is time to be scrambling for a solution that will stop the “profuse bleeding” Uchumi is currently suffering.

My big worry is that, nothing has really changed at Uchumi to warrant such optimism. In fact personally I am very skeptical after reading the names of the management team put in place to rescue the retail giant. With all due respect to the persons named one of whom I know very well and is an excellent manager; the problem is that none of them have any track record of a turn around, let alone the turnaround of a retail giant of the size of Uchumi. Let us get something very clear here, the kind of trauma doctor who daily handles patients bleeding to death in an emergency room does not have the same skills as a GP working in some quiet, sleepy countryside clinic where he knows all his patients by name. Both are doctors but the situations are vastly different.

The people who have been appointed at Uchumi are good managers, but not “trauma” managers. They do not have what it takes to get the supermarket chain out of its’ current hole. In fact currently there is only one Kenyan I know who would have a fighting chance of accomplishing this mission. I have mentioned his name before here. Suresh Shah former MD of Uchumi. It would not surprise me in the least if he has already been approached and has probably declined. If this is true then you get my drift of how serious the situation at Uchumi really is.

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Scandals not withstanding, Nakumatt in their favored position and offering unfair competition to Uchumi, are still up and running. The marketplace situation that was theer when Uchumi initially “bled” to death is still there. In other words, the fatal wound has returned for more beating and blows.

The way to achieve supermarket sales is by cutting prices and margins to attract the critical mass and sheer sales volumes that brings in the profits in any supermarket or megastore model. Yet Uchumi cannot afford to do this just now because they need the biggest margins possible to start stemming the red ink on their balance sheet. In my opinion, they need a clever idea or ideas that will enable them to keep big margins and still attract enough clientele.

I have also enquired on the ground and have found that one of the basic rules of a successful turnaround is being ignored by the current team. And that there is hardly anything radically different that the new management team is doing except operating with a much smaller staff. The marketing strategy of appealing to the sheer patriotism of Kenyan shoppers will surprise me if it works and will probably set a precedent of sorts in the annals of marketing history in Kenya if it stays in the air long enough. What will most probably happened is that any numbers being driven to the supermarket will soon dwindle as the attention of the Kenyan public drifts to other forthcoming hot issues like the rapidly approaching general elections.

My fear is that all this money that is going to be sunk in by shareholders will be lost and future more deserving cases will lose out as people will always refer to the Uchumi debacle. What those gallant Uchumi shareholders are doing right now is throwing money in a bottomless pit (that’s what debt is) and nobody knows for sure how deep this particular hole really is.

What should have happened is that the Supermarket chain should have worked on using the available government funding and the goodwill (some of their landlords have waived rent for 6 months) while keeping a close eye on performance before going overboard and collecting such huge amounts of cash from shareholders whose blind faith in Uchumi’s recovery is premature. The time to raise more money would have been when there were clear indications that the “bleeding” had stopped.

Let us not forget that we had some excellent managers, some with international experience, previously running Uchumi. They were not able to turn the tide. So what magic will the new management team do following the exact same path and approach that the previous management did?

Instead of raising money from the unsuspecting public the new management team should be discussing and implementing new strategy.

A comment a young bright Kenyan student who scored “B” aggregate in her Form four made in my hearing shortly after Uchumi callpsed, is still ringing in my mind. She asked how does a company like Uchumi go bankrupt? What she meant was that how do you collect so much money and still lose money?

My fear is that many of the investors being rushed into helping raise more money for Uchumi are thinking in their minds; how can Uchumi fail to recover this time?

In other words, the problem with the supermarket business is that too many people assume that it is an easy business to run and harvest profits from. It is not, as has been proved here yet again. Despite massive public goodwill, Uchumi just isn't working.

My recommendation to save the situation before it is too late. Call back Suresh Shah and persuade him to take on the challenge (now as a pressing issue of national importance) and then give a free hand to do what is necessary to get Uchumi back into profits.

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