Have you confirmed if your supermarket shopping list helps you stick to budget? Are you sure that the color, presentation and variety on those aisles don’t make you buy a little over your budget? The intent of the supermarket was always to make you buy in abundance.
These retail outlets are also important for the value chain in Kenya. They have the capacity to take production in bulk and, therefore, sell you quality items at fairer prices. This encourages entrepreneurs in Kenya to focus on value addition, because someone else takes the risk of convincing you and I to buy.
This arrangement has worked for some time in these parts of the world. We all know the feel-good story of how every major supermarket in Kenya started as a small business with moderate ambitions. They contributed in ensuring something close to a half of all your purchases is done in a formal outlet. And it’s not over. The remaining half presents opportunity for you and anyone to succeed in retail business.
But all that feel-good narrative ended. Where did it go wrong? We never hear any major supermarket in Kenya speak about ambitous plans to grow. On the contrary, what you will come across is news and notices of an “unprofitable branch” getting closed. Are you to blame for not buying more items? Is the economy to blame? Or is the supermarket concept a dying business?
What we are sure about is that foreign entrants have driven news of growth in the industry. But they appear to limit their focus, primarily, on the higher earning portion of the market. They are resilient because they acquire funds cheaply from their home countries, as your typical multinational company, but not resilient enough to deal with lower average purchases. We still prefer to buy our frequently purchased items, like vegetables, away from supermarkets.
Supermarket in Kenya
One thing you’ll find weird about supermarkets is how they stay open even with low foot traffic. It’s not uncommon to see your estate supermarket in Kenya open doors at 9am yet you’ll only shop in the evening when you come back from the CBD. It’s also weird how we all have to go to or through the CBD to get things done. Anyway, how do they afford that?
It turns out that they can’t. The operating costs of a supermarket are way too high. And there is only so much you can do to reduce them. Almost all the major supermarket chains have centralized operations and digitized what they can but it’s not enough. Arresting pilfering and internal theft may not make as big a dent as they hope for. There is a story of a supermarket in the Nairobi CBD making up to sh.360,000 every day but operating at a loss. Cost is a concern for new businesses, not ones enjoying 2,350 transactions in a day. The fact that supermarkets can’t put it under control is telling.
You may feel like it’s more an issue of revenue. After all, the example above amounts to an average transaction of sh.150. Remember average sales per customer? One commentator even scoffed at rising foot traffic as the “presence isn’t felt at the tills.” But even with greater average spending, the best of supermarkets in the world still enjoy less than 5% net profit margin. People in the supermarket business do not even focus on margins. Their attention is on the volume of sales or turnover. This is because with high enough income you can make decent living off the highest operating costs.
The focus on revenue always leads to a race to the bottom. We see it all the time in the latest hip business idea in Kenya. Everyone starts it, everyone forces prices down and then nobody makes any profit. Supermarkets in Kenya have already began eating themselves up in this manner. One analyst, Marceline Gatebi, predicts that this will cause a saturation point “sooner or later.”
She may be on the money. Supermarkets are based off edge-of-the-knife ideas like loss leader pricing – where you sell a bunch of stuff at a loss in the hope that this will lead buyers to the high margin stuff. Whether diversification moves like selling you freshly cooked meals and cutting your meat will make a big difference remains to be seen.
Another diversification move in private labels or in-house products has only forced suppliers to become competition for supermarket. It’s not effective to make bread, meet supermarket standards and fees to be a supplier and then compete against their own bread on their own shelf. Online sales channels have only empowered suppliers to make and sell to potentially bigger markets. They also do delivery.
The world’s biggest supermarket chain, with 11,000 outlets, decided to change its name. This is reflective of the position these businesses find themselves in. In Kenya, the previously informal retailers are organizing themselves better while retaining their competitive advantage. The fact that a small store can communicate online with its customers means they don’t have to incur feets of rent costs to avail variety. Even dukas are experimenting with franchising.
The supermarket in Kenya will have to adapt to new ways of selling to generate enough revenue and resize to stay on top of costs.0