Private labels killing Kenya’s supermarkets
There is turmoil in the retail industry in Kenya. Supermarket chains are reporting a drop in revenues, closing some branches in Kenya, closing operations in other East African countries, retrenching workers, and even selling off their branches to other local or international supermarkets. While these supermarkets blame the harsh economic times Kenya is currently going through for their predicament, or the non-existent growing middle class in Kenya, the reasons might extend beyond the economy. The adoption of private labels (or own branding, store branding) strategy might also be killing the industry.
Nakumatt, Tuskys, Uchumi, and Naivas supermarkets have all embraced private labels where they package and sell their own brands in their stores. The supermarket chains package and brand virtually all household goods from home baking flour to salt to toiletries to pastries. While this is an old practice globally, it is a very recent one in Kenya. Tusky’s was the first to start this branding then Nakumatt followed in 2013 with “Nakumatt Blue Label” – investing Sh. 200 million in the first year. Uchumi is planning to launch another version dubbed “Red Label” targeting the ‘kadogo economy’.
“In our branding, we are looking to include all the basic 500 household goods, starting with the 30-40 products that almost everyone includes in their shopping basket every month, like flour, sugar and milk,” said Atul Shah, the managing director at Nakumatt Holdings in an interview with The East African while launching their private label.
Indeed, this strategy helped Nakumatt generate about Sh. 2b in sales from in-house packaging by the end of 2013, making about 5 percent of their total revenues that year. In 2014, 65 percent of Uchumi’s revenues were generated by sales from their own brands of milk, sugar, salt and flour. These items accounted for 40% of their inventories at the time.
Despite the good intentions of supermarkets to benefit from higher margins, this private label strategy might have been counter-productive in the long run. Private labels are normally cheaper on the shelves as compared to other home brands. Price-sensitive consumers are therefore attracted to them. This drives up sales. However, most consumers’ choice of what to purchase is not driven by price but by brand.
Brand loyalty vs. Private Labels
According to a study by McKinsey’s Consumer Insight, 44 percent of Sub-Saharan Africans consider well-known brands as always having better quality. In fact, the report showed that 59 of them are brand loyal. Thus, while the revenues for private labels shot up initially, it seems that the consumers went back to purchasing their brands. However, given that the supermarkets had already invested a lot in their own brands, they had to position their brands better than the competing brands and reduce the brand presence of the competitors.
With time, brand loyal customers might have noticed that their favourite brands were missing from the shelves as supermarkets stocked less of them. This might have pushed them to go look for those brands elsewhere – other local supermarkets or local shops. A large inventory of non-moving goods meant that the cash flows were affected. Indeed, stories emerged two years ago that Nakumatt, Naivas and Tuskys owed suppliers Sh. 8b suggesting cash flow problems in the industry.
It is also possible that apart from the high debts owed to suppliers, the supermarkets also started charging suppliers more to have their products on the shelves. This is not far-fetched. Carrefour, a French supermarket chain, demanded while entering the Kenyan market that suppliers pay a non-refundable fee of Sh. 1.4m to do business with it.
Restrictive rules benefitting private labels
According to a Business Daily story, it also demanded, “that traders commit to paying monthly rebates (over and above supply profits), an extra discount on the second month of operation as well as a fee when they stock new products.” It is, therefore, possible that even the local supermarket chains with their own brands put up some restrictive measures to keep off competition from the other competing brands in order to keep their own brands retailing in their stores at much lower prices than the competition.
This brand loyalty is not just an Africa curse. An article appearing in The Sydney Morning Herald in June 2016 reported that supermarket chains such as Woolworths were struggling with private label brands against Aldi, a local Australian brand. The Australian Food & Grocery Council chief Mr Gary Dawson was quoted as saying, “At the end of the day consumers want to buy their favourite brands and they understandably get annoyed when those brands disappear and are replaced by private label.”
Perhaps it is time for the supermarket chains to go back to their basic business model: take goods from suppliers on credit terms (usually 30 to 90 days), sell the goods within the period, make reasonable margins, and pay up the suppliers as they keep the supply chain flowing. Investing in private labels seems not to be bearing the envisaged fruits. It may be time to discard this strategy and go back to the original tried and tested model until they can figure out how to address brand loyalty issues.