Bright outlook for Kenya's retail sector

Buoyed by years of robust GDP growth, a rising middle class, increased purchasing power and shifting consumer habits that have helped to drive the development of new shopping malls and e-commerce activities, Kenya’s retail market is poised for considerable expansion in the coming years. Although informal spaces and local chains remain the dominant market forces, a rising number of high-end shopping centres and international chains demonstrate the considerable potential for foreign investment in the retail sector.

However, the government’s recent move to increase excise taxes on vehicles and foodstuffs, coupled with the depreciation of the currency and a more-modest-than-expected growth forecast for 2015, could impact future expansion in the near term. Despite this, demand remains comparatively high and the sector is expected to see both investment and overall activity continue on an upwards trajectory well into 2016.

Solid Fundamentals

Kenya’s retail market has shown considerable expansion in recent years, driven largely by solid macroeconomic fundamentals including an average annual GDP growth rate of 5.6% from 2009 to 2014; an increasingly large middle class that comprised an estimated 45% of the population in 2011 and soaring consumer purchasing power, with GDP per capita in current US dollars rising 128% over the previous decade from $621.28 in 2005 to $1415.66 in 2014.

While dedicated retail properties and formal retailers are on the rise, the market remains dominated by the traditional, informal sector where 70% of Kenyans do their daily shopping, according to consumer research firm Nielsen. An estimated 22% of traditional stores in Kenya are dukas, or small local shops, followed by table-top kiosks, market stalls, cosmetic outlets, telecom kiosks and pharmacies. The ubiquitous informal segment significant channel for reaching consumers over the medium term, with Nielsen reporting that 95% of Kenyan shoppers frequent dukas, 92% shop at kiosks and 89% shop at supermarkets.

“Our figures indicate that formal retail penetration in Kenya is at almost 18%, demonstrating that there is more than 80% of space, with an optimum value of almost 60%, that is still waiting to be exploited,” Alfred Nganga, a retail specialist with Ogilvy & Mather Kenya, told OBG. “It’s a little saturated at the top-end premium retail segment, but only in the supermarket category. Opportunities lie within the high street shop and concept store segments,” he added.

Supermarkets

Kenya’s domestic formal supermarket segment, which includes a number of formidable local firms that maintain an important regional presence, most notably Nakumatt, Tuskys, Naivas and Uchumi, has expanded significantly since 2012. Several small retailers including Mulleys & Sons, GreenMart, QuickMart, Maathai Supermarket, EastMatt and CleanShelf are in the midst of ongoing expansions, while a new international entrant – Botswana’s Choppies – announced plans for a $10m acquisition of 10 Ukwala Supermarket outlets in May of 2015.

Although the supermarket segment remains dominated by larger local players, Choppies is the third international retailer to join the Kenyan market in recent years. In September 2014, France’s Carrefour announced plans to enter the market with two new stores at The Hub Karen and the Two Rivers mall development. Meanwhile, South Africa’s Massmart, which is 51% owned by the American retail giant Walmart, failed in its bid to acquire the family-owned Naivas chain in April 2014 and subsequently opted to open a flagship Game store in Nairobi in May 2015, which sells groceries, electronics and other assorted goods. A $7m investment, Game has sensibly partnered with a number of local suppliers in a bid to cater to local consumer preferences.

“If you have a mall with a fine mix of what Kenyans appreciate in terms of local banks, supermarkets, and restaurants, it has a strong chance of attracting the interest of the international players,” Nganga told OBG. “An establishment like Westgate Mall, for example, has a complement of local and international brands. This allows it to move to the next level, with the international brands capitalising on footfall,” he added. Expansion among the large domestic players is also ongoing. Nakumatt, for example, which records average annual sales of $600m, announced in August 2014 that it was considering selling a 20% stake to investors to assist in financing a $50m expansion plan that was first announced in 2013.

Shopping Mall Surge

Demand for formal retail space is also extremely high. In a February 2015 report on retail distribution channels, Nielsen listed Kenya as sub-Saharan Africa’s second-largest formalised retail economy after South Africa and ahead of Cameroon, Ghana and Nigeria. According to the survey, shifting consumer trends have driven growth in the formal retail segment, with 30% of Kenyans now shopping in formal outlets compared to 4% in Ghana, and 2% in Cameroon and Nigeria. The rise in formal outlets is in part a result of increased availability in terms of dedicated retail property. Kenya’s largest and most prominent shopping centres are presently concentrated in Nairobi and include the 46,451-sq-metre Sarit Centre, the 32,516-sq-metre Westgate Mall and the 23,783-sq-metre Junction Mall.

While the September 2013 terrorist attacks on the Westgate Mall – which re-opened in July 2015 – left at least 67 dead and stoked concerns that investors might shy away from the country, a number of key stakeholders argue that the new security measures put in place in the years since have made the sector a much safer bet. “We, like many others, did a huge security review following the Westgate attacks and learned some important lessons from the event. We’ve implemented additional intelligence-led security measures and we have gone more technological. The mirror under the car doesn’t do too much, so we’ve invested in CCTV, number plate and facial recognition, and undercover operatives,” Mike Kingshott, director of development company Aspire, told OBG.

Optimise

Evidence of growing confidence in the mall sector can be seen in the number of new properties currently coming online such as the Garden City mall, which had a soft launch in May 2015. Financed by London-based private equity firm Actis and developed by Aspire, the first phase of the $250m Garden City includes 33,000 sq m of retail space, residential units and parking, it is located along the recently completed Thika highway, which connects Nairobi to the northeastern suburb of Thika. As with many of the new mall developments, Garden City is hoping to capitalise on the rising preference for mixed-use developments in a bid to attract and capture more customer footfall. “It’s the same across Europe, North America and the Middle East – we’re all looking for extended ‘dwell times’, which means, for example, shoppers engaging in food, beverage and leisure activities, all of which drive footfall. If there is more on offer, you’ll spend more time and more disposable income, and you’ll leave with half a basket more,” Kingshott told OBG.

In addition to the Garden City project, Two Rivers is slated to open in Nairobi’s diplomatic zone in March 2016. Facilities on offer include retail, residential, office, leisure and hospitality spread across 62,000 sq metres of gross leasable area (GLA). The KSh25.2bn ($277.2m) development was financed by AVIC, ICDC and Cooperative Bank and will stand as the largest shopping mall in East Africa on completion. According to developers 43% of GLA has been leased by international retailers, and the mall is expected to attract upwards of 40,000 visitors daily once it is fully opened.

Meanwhile, The Hub Karen, a KSh4bn ($44m) mixed-use development, is set to open soon in the upscale suburb of Karen, with the globally recognised Carrefour brand as an anchor tenant. The first phase will offer 35,000 sq metres of GLA and the second phase, scheduled for completion in 2018, will include new retail space, a 1000-sq-metre conference facility and a 150-bed hotel.

Second Cities

Considerable opportunity for expansion exists outside of Nairobi, especially following the devolution process, which has led to increased incomes in the counties outside the capital and consequently also to a huge rise in investor interest in retail centres in these areas.

While the traditional alternative economic powerhouses of Mombasa, Eldoret and Kisumu have received much attention, developers are increasingly looking to other counties to capitalise on rising incomes and consumerist tendencies there. “I think there is still space for more malls, especially outside of Nairobi, but expansion will be led by quality. If you have high-quality design and quality retailers the demand will be there, but the mall has to give Kenyan consumers the same experience they see internationally,” Kingshott told OBG.

E-Commerce

Outside of the new shopping centres, e-commerce represents the most high-potential growth channel in the retail sector. According to the Communications Authority of Kenya, the number of internet users in the country rose to 29.6m during the second quarter of 2015 as a result of rapid uptake of new mobile data services (see Telecoms & IT chapter).

According to the authority, Kenya’s e-commerce segment is worth KSh4.3bn ($47.30m), while a June 2015 survey of Kenyan consumers, published by Consumer Insight, found that only 7% of respondents had shopped online, leaving considerable room for expansion – something that a number of online outlets, such as Jumia and OLX, are hoping to capitalise on. “Kenya is an interesting market for e-commerce compared to the likes of Europe or the US because only about 35% of retail in the country is formal. As has been seen in other industries, we expect Kenya to leapfrog in the retail sector, with malls becoming more like showrooms and many retail purchases being made online.” Peter Ndiang’ui, country manager at OLX, told OBG. “Online marketplaces, even though targeted to consumer-to-consumer trades, are already playing the role of online-to-offline transactions where micro-businesses and informal retailers that cannot afford the more expensive shopping mall footprint use the platform to distribute their fragmented inventories,” he added.

Automobiles

Rising GDP and consumer purchasing power is also driving growth in the automobile segments and although the market continues to be dominated mainly by used imports, the rising demand for luxury and new vehicles, coupled with intensifying government efforts to promote and encourage local manufacturing, could see new vehicle sales begin to increase considerably over the coming years. According to the Kenya National Bureau of Statistics’ “Economic Survey 2015,” demand for commercial vehicles and luxury cars pushed total new and used motor vehicle registrations in Kenya up to 102,606 units in 2014, a 9% increase over 2013. Commercial panel van and pick-up truck registrations rose by 28% in 2014 to hit 12,658 units, while sales of new heavy trucks rose 11.6% to reach 10,681 units.

New Vehicles 

Although used vehicles currently comprise an estimated 80% of the retail market, the Kenya Motor Industry Association expects that more new vehicles will be sold in 2015, after a record sale of 17,499 units was reached in 2014. Some 15,101 units were sold from Q1 to Q3 in 2015, well above the 13,060 units sold during the same period in 2014. “Most demand for new vehicles comes from the commercial and industrial segments, whereas the passenger segment continues to be dominated by second-hand imports,” Rita Kavashe, managing director and export director for General Motors East Africa, told OBG.

The new-vehicle market is currently dominated by General Motors, Toyota Kenya, Cooper Motor, Simba Colt and DT Dobie, while the country’s automobile assembly cluster includes a mix of players such as General Motors East Africa, Kenya Vehicle Manufacturers (which assembles Nissan, Mazda, Land Rover, Mercedes and Iveco vehicles) and the Association of Vehicle Assemblers (which assembles Nissan Urbans and Land Rover 110 models).

The country’s first ever locally made vehicle, the Mobius, also hit the market in October 2014. Designed by Nairobi-based start-up company Mobius Motors and costing KSh950,000 ($10,450), it is the lowest-priced new vehicle in the country. Mobius aims to provide small transport businesses and rural communities across Kenya with reliable and affordable transport suited to their markets. The company announced in 2013 that it hoped to see production hit 300 units in 2014.

Taxes

One of the biggest hurdles ahead for retailers is the country’s new Excise Bill, introduced in June 2015, which is expected to add KSh25bn ($275m) to government coffers.

Under the bill, taxes on products such as beer, cigarettes, used cars, juices and bottled water will all increase. A new KSh200,000 ($2200) excise tax has been introduced for all vehicles over three years old, while vehicles under three years old will be charged KSh150,000 ($1650). This tax replaces an existing 20% tax based on vehicle value, which was charged alongside Customs duties and value added tax (VAT). A motorcycle excise tax of KSh10,000 ($110) was also introduced and is expected to hit the nation’s burgeoning motorcycle taxi, or boda-boda, industry hard.

In addition to vehicle taxes, the 2015 Excise Bill will raise the tax on beer from KSh70 ($0.77) per litre to KSh100 ($1.10) per litre, despite previous changes to the VAT regime that were identified by the Kenya National Bureau of Statistics in its 2015 “Economic Survey” as the major cause of beer production falling by nearly a third since 2013 (see Industry analysis). Juices will also see a new tax of KSh10 ($0.11) per litre, up from current rates of 7% of the ex-factory selling price, as will bottled water and other non-alcoholic beverages.

Import Pressure

The new vehicle taxes have followed an announcement by Tanzania, Rwanda, Burundi and Uganda in June 2015 of their rejection of the Kenyan government’s proposed 25% export duty on all vehicles shipped to Kenya, which could spell another serious setback for both local manufacturers and local dealers.

“80% of the cars sold in Kenya are second-hand. There is still relatively limited control over imports, with the average age of imported cars around eight years old. Regulating the age and type of cars that can be brought into the country would not only boost the local auto sector, but would also help combat the traffic situation in the country,” Adil Popat, CEO of Simba Colt Motors, told OBG.

Currency Depreciation

Retailers are also facing significant challenges from the currency depreciation and downwards trends in GDP growth, which fell below the government target of 7% in 2014 to rest at 5.3%, negatively impacting consumer and investor confidence. Between August 2014 and August 2015 the shilling lost 22% of its value against the US dollar, affecting in particular those retailers offering international products and brands.“Retailers are struggling because a lot of them buy in dollars, which means that they have to pass those costs onto the customer or swallow the costs themselves. This situation will have an impact either on affordability or profit margins,” Kingshott told OBG.

Outlook

The retail industry has shown no sign of losing momentum, with rising demand among an increasingly wealthy consumer class expected to maintain sector resilience in the face of any near-term economic slowdown. While retailers do face some substantial challenges from currency depreciation and taxes, positive growth will continue to present stakeholders with a wide array of retail opportunities, most notably in second-city shopping centres, formal supermarkets and in e-commerce, and investment should continue to enjoy healthy growth trends and rise in 2016.