Uchumi Failure

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uchumi failureFebruary 2009 Njuguna G. Amos. amnjuguna@usiu.ac.ke

Uchumi Supermarkets Limited

Uchumi Supermarket Limited (USL) was established as a wholly government-owned company from three existing stores in Nairobi in 19751. USL became a public company traded on the Nairobi Stock Exchange in 1992 when the Kenya government divested 48% of its shares. However, the Kenya government retained 52% of the stock that was held through three state corporations namely; ICDC Investment Company Limited, KWAL Holdings EA Limited and Industrial and Commercial Development Corporation. Each of the three companies was entitled to appoint a member to the USL board every year. This meant that the government continued to influence key decisions of USL even after it was listed at the Nairobi Stock Exchange.

USL as the market leader By June 2002, USL was the market leader with 25 branches in seven urban areas throughout the country (Nairobi, Mombasa, Nakuru, Eldoret, Meru, Karatina, Kisii)2. USL focused on customers from all walks of life and therefore had their stores structured and located differently. Some stores had huge parking grounds and were mainly located along the main highways in Nairobi. The main customers for these stores were those in the high and middle income classes. Smaller stores (5000 – 20000 sq. ft) were located in the residential areas of Nairobi and near the busy bus parks to serve the low income consumers.

USL was the first major chain in Kenya to introduce Fresh Fruits and Vegetable (FFV) items in 1997 in their stores (as part of an overall strategy of building up ‘fresh’ 1

www.uchumi.com

Neven, D., Reardon, T., Chege, J., Odera, M,. Weatherspoon, D., & Mwaurs, F,. 2005. Rapid Rise of Supermarkets in Kenya: Impact on the Fresh Fruits and Vegetables Supply System. Partnerships for Food Industry Development. Nichigan State University and Kenya Agricultural Research Institute.

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categories: dairy, meats, bread, FFV). Starting out with some trial sales, FFV sales averaged Ksh50m. per month in 20042.

The grand strategy A new chapter in the company’s history began in 2001 when USL embarked on an ambitious five-year expansion strategy. The strategy was meant to increase the shareholder’s returns and ensure that USL maintained its market leadership in the wider East African region (Kenya, Uganda and Tanzania). The strategy was anchored on four pillars namely; business growth through new branches, maximizing customer value, realigning operations through people and the installation of a satellite-based IT system linking all its stores to the head office3. Establishment of new branches was meant to ensure that USL fulfilled its pledge to customers that “there will be an Uchumi near you”, customer value maximization was to be achieved through competitive pricing and increasing the range of products offered, the people theme was to be realized through training and competitive rewards to employees while the technology theme was to be achieved through installation of a world-class IT system. The managing director presented the expansion proposal to the board which indicated that the expansion could be sufficiently funded by internally generated cash and consequently there was no need to approach shareholders or lenders to raise cash for the project. The board promptly approved the proposal.

Remarkable achievement was witnessed at first with eight new branches and two hypermarkets in Nairobi and Kampala having been opened by December 2002. This in effect doubled the total floor space4. The new distribution centre was finished by 2003 and the new IT system started in September 2003. However, a blend of volatile interest rates, decreasing consumer purchasing power and internal governance tumbles outpaced the sales growth leading to the first annual loss in the company’s history in 2003. The consequent reaction from worried investors led to the suspension of the

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Uchumi Supermarkets Limited....
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