Uchumi will not use rights cash to fund new branches

Corporate News

Shoppers at Uchumi Supermarkets in Nairobi. The supermarket chain has changed tack in its expansion strategy after $26m cash injection ended in $2.88m loss. PHOTO | FILE |  NATION MEDIA GROUP

By ALLAN OLINGO

In Summary

• An investor note from Dyer & Blair Investment Bank notes that the retailer has consistently lagged behind the competition in identifying prime locations as well as in generating income.

Uchumi Supermarkets’ expansion strategy has come under intense scrutiny following its Ksh262.3 million ($2.88 million) interim loss despite a cash injection of more than $26 million over two years.

The giant retail chain, which is Kenya’s oldest, blamed the loss for the six months ended December 31, 2014 on high operational costs, increasing competition and falling sales. Over a corresponding period in the previous year, it had recorded Ksh106.9 million ($1.17 million) net profit.

“This is due to committed rental escalations and the impact of rent for newly opened branches that have yet to mature, coupled with higher staff costs,” Uchumi chief executive officer Jonathan Ciano said in a telephone interview.

“The adverse effects of insecurity, among other things, contributed to dampening of the general propensity to spend.”

READ: Uchumi set to open new branch after rights issue

ALSO READ: Uchumi plans 13 new outlets across East Africa in 2015

An investor note from Dyer & Blair Investment Bank however questions the strategy, noting that the retailer has consistently lagged behind the competition in identifying prime locations as well as in generating income.

“Though an increase in the number of stores is a good direction to follow, we believe Uchumi will need to increase income generated per store in order to realise the full value of its expanding network,” the note reads. “Slow turnaround and breakeven times for newly opened stores remain a huge risk, driven mainly by stiff competition.”

Uchumi’s expansion drive last year resulted in an 11.70 per cent rise in operating expenses, to $19.3 million, over the $17.3 million spent in the previous period. Cumulatively, the retailer opened 24 branches, translating into higher staff costs and an increase in operating costs.

Operating expenses shot up by a tenth, driven mainly by higher finance costs, salaries and rent and a 15-month delay in its rights issue that led to working capital challenges.

Proceeds of the rights issue, which sought to raise $9.6 million late last year, were to go into expansion but this seems to have changed.

Chief finance officer Chadwick Okumu however says that in 2015 Uchumi has a strategy to manage the rising finance and operation costs.

“We have decided not to use the funds from the rights issue to fund growth and instead the board embraced asset leasing,” Mr Okumu said.

“This means that any new branch that Uchumi will open will not use funds from operations. If you win the tender to supply bakery equipment, Uchumi will not buy but will instead be renting the asset.”