Uchumi current restructuring strategy looks like déjà vu.The company did not learn anything from its past mistakes.
From 2006, when the company dramatically went into
receivership, the tune has been the same. The company would embark on an expansion
strategy that is fueled by debt and greed then the strategy would come crumbling
down.
Before the 2006 collapse the company had embarked on a
growth strategy that locked cash in property investments that starved the
company of much needed cash to remain afloat. The retail chain was put under
receivership in June 2006 over a debt of Sh2.2 billion owed to banks, suppliers
and former employees.
A Permanent Secretary , testifying in court in 2011,
said Uchumi collapse was led by an
ambitious expansion programme, weak management, coupled with poor resource
policy and unsuitable financing. Terri Davidson testifying in court also said
Uchumi incurred losses of Sh306 million in the 2004 financial year and Sh954
million in 2005 saying the rights issue was done, to among other reasons, pay
overdue creditors, refurbish the firm’s old stores and conduct an aggressive
marketing campaign. Despite a substantial cash injection the institution was too heavily indebted to survive.
“Shares of the company were dropping everyday while strategic partners were literally running away,”
In 2008 a recovery plan was initiated, and the then receiver
manager of the company was able to clear loans owed to PTA Bank and Kenya
Commercial Bank as well as turn around the business, he improved management of stock ,profitability and
cash flow. He was at the time viewed as a corporate hero especially when the company
was able to relist in 2011 at the NSE.
According to the new CEO, Uchumi turnaround was a farce. The
financial position was not as healthy as the previous CEO led us to believe.The
company was bleeding to a tune of Ksh. 200million a month, Suppliers debts were
rising , some had even stopped supplying the retail chain, the books were
cooked to reflect a healthy company and the managers including the previous CEO were involved in
fraudulent activities that resulted in the loss of millions of shillings raised
to capitalize the company.
The biggest problem Uchumi has continually faced has been its
flawed procurement system and poor inventory management which has been marred
by corruption and insider dealings.Quoting an article that was published In 2007 Ciano had identified the same challenges while restructuring Uchumi,
It is really shocking to see that Ciano ended up presiding over the same rot he had cleaned and brought the company back to its knees where he had found it.“The inventory, which is monitored weekly, ensures that any slow moving stock is shipped to other shops or returned to the warehouse as a means of cutting down costs. In addition, the supermarket has walked away from exclusivity in procurement, which was a major contributing factor to its downfall. It was alleged that some suppliers, who were also part of management, supplied goods at exorbitant prices yet the supermarket still had to sell them at the market price, ultimately incurring major losses”
In all Uchumi’s restructuring the retail investors always
gets the short end of the stick. When the company issues the right issues the
management has always hidden the true picture of the company and all turnaround
strategies ends up with equity dilution that only favors the suppliers, the
government and financiers.
As Julius Kipng’etich tries to resuscitate Uchumi, he should
be very careful not to repeat the mistakes of his predecessor, although his
plan seems a complete copy of what Ciano did in his first days at the helm.
Again, the
shareholders are looking forward to another dilution of their shares if the negotiations with
the suppliers to turn their debts into equity are fruitful.lets hope this cycle will be broken.
