Uchumi Supermarket :History Repeating Itself.

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.

Uchumi had previously made serious losses which were blamed on mismanagement. In  2003, it posted a loss of Sh254 million, while the subsequent year saw the firm lose Sh699 million.  In 2005, it announced a  Sh1.2 billion loss! All along, auditors from PriceWaterhouseCoopers had given the chain store a clean bill of health.

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,

“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”

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.

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.