The entry of a global supermarket chain into the Kenyan market was until last week, a question of when, not if.

The country seemed to have ticked all the right boxes for a global retailer seeking a share of East Africa market.

News that South African retail chain Massmart had offered to buy a 51 per cent stake in Kenyan supermarket chain Naivas did not come as a surprise.

However, the deal could be delayed as one of the members of the family that owns Naivas has gone to court to stop the sale on grounds that he owns a share in the Kenyan retailer, which if the deal succeeds he would lose.

The case mirrors an ongoing legal battle involving five brothers who own Tuskys Supermarkets.

The battle for the control of the Tuskys and Naivas businesses empires reads like an episode from the famous feud between the Ambani brothers, Mukesh and Anil — the two wealthiest men in India — who ended up splitting the massive Reliance Industries empire built by their father Dhirubhai Ambani.

The five Tuskys brothers are entangled in a court battle which the fourth-born, Yusuf Mugweru Kamau is accusing his elder brother Stephen Mukuha Kamau, the managing director of Tuskys, of mismanaging the retail chain.

READ: Tuskys feud deepens as mediation fails

The five took over Tuskys from their father Joram Kamau, who died in 2002.

Mr Kamau’s brother is the pioneer of Naivas.

Whatever the outcome of the Naivas case, the interest from Massmart underscores the growing attraction of the Kenyan market for foreign retailers.

Kenya’s largest retailer, Nakumatt, has said it is in discussions with an international strategic investor to sell a 25 per cent stake.

Ukwala, the country’s fifth largest retailer, is said to be up for sale too, or at least some of its outlets. Deacons, the Kenyan clothes retailer, said on Thursday it is scouting for strategic investors as it moves to cut dependence on franchises.

“We are in the process of engaging potential strategic investors who will bring a portfolio of brands to the table. Such strategic support should enable the company to offer a broader product range in its on-going expansion programme.” said Peter Gichuru Njoka chairman of the Deacons board, in a statement last week.

Analysts say the growing interests could trigger a wave of consolidation in the market, as other players seek to court global retailers in a bid to shield themselves from the heightened rivalry expected in the market in coming months.

Rivals in the region

Tuskys and Uchumi have been major rivals of Nakumatt both locally and in Uganda, where all of them have branches.

South African retailer Shoprite has three stores in Uganda and two in Tanzania, while Massmart has one each in Uganda and Tanzania operating under the brand name Game.

East Africa is the most under-represented area for the South African retail giants, which have a strong presence in Central, Southern and West Africa.

Uganda and Tanzania’s outlets only account for five out of Shoprite’s 193 stores in Africa (excluding South Africa), while Massmart’s only account for two of the 27 stores on the continent.

While the entry of bigger brands is an advantage to consumers in terms of increased brand variety as well as product pricing, local retailers are likely to find it harder to compete with the new players given their strong competitive advantage.

Though most local retail stores have their own direct procurement systems and buying centres, none of them can match the kind of systems that global chains have.

For example, Massmart —which is 51 per cent owned by Wal-Mart the world’s biggest retailer — has established relationships with international suppliers like electronics companies, from whom the retailer purchases a significant fraction of its stock. 

The country’s high urbanisation rate, estimated at 10 per cent per year, also serves to attract multinationals who anticipate that the movement and growth of urban centres will convert into a bigger market.

The UN estimates that 30 per cent of Kenyans currently live in urban areas, with the figure projected to jump to 40 per cent in the next decade.

More urban dwellers means a bigger market for retailers, as it is expected that more people will shift from depending on subsistence farming to packaged brands.

“The growth path of retailers in East Africa has the effect of eventually bringing lower income rural consumers into the retail outlets as well, driving up retail growth rates significantly,” said the World Bank in a 2012 report on integration in Africa.

The relatively low supermarket penetration coupled with rapid urbanisation has made the region an attractive destination for multinationals.

Appeal to multinationals

In 2011, Deloitte and Planet Retail identified Kenya as among the 10 countries likely to appeal to multinational stores in the medium term.

Other African countries on the list were Algeria, Kenya, Morocco, Nigeria and South Africa.

READ: Africa now firmly on the radar of giant Western retail chains

“All have fast-growing economies, young and growing populations, and fragmented retail sectors,” Deloitte and Planet Retail said in their report.

Currently, about 78 per cent of Kenyans use informal retail shops, and out of the 20 per cent who use formal retailers, only 30 per cent are frequent users of supermarkets.

Despite the attractiveness of the Kenyan market, foreign retailers have struggled to break into it partly because of stiff competition from local brands.

READ: SA retail chains find it hard to enter Kenya

Foreign retailers such as the South African’s Metro Cash & Carry and Lucky 7 exited Kenya’s market in 2005 after brief operations.

“The limited success of foreign companies in Kenya’s retail segment has been attributed to strong competition, insufficient and expensive suitable locations, and inadequate market entry strategies among others,” reads the World Bank report.

Local analysts say space is a huge challenge especially for retailers like Uchumi, which prefers to lease rather than own the space on which its stores sit.

“Inadequate lease space is a challenge, which at times locks out retailers from setting shop in prime areas,” said Kuria Kamau, an analyst at Kestrel Capital

In 2012, real estate firm Knight Frank placed Nairobi and Mombasa as among the top property markets in the world.

The Knight Frank Prime Global Cities Index for the second quarter of 2012 showed that between June 2011 and June 2012, Nairobi’s high-end property market recorded a 21.8 per cent price growth, the highest by an African city. The increase in costs translated into higher rents, affecting companies like retailers.

Navigating rough waters

Seeking foreign investors would help companies navigate some of the rough waters that they are in.

For example, Deacons buys the right to sell particular brands in Kenyan market, but of late franchise owners have been pushing the company to enter into joint ventures, which have the effect of reducing Deacon’s earnings while boosting those of the franchise owners.

Earlier in the year, Deacons completed a joint venture agreement with Woolworths South Africa after the latter threatened to buy back its Woolworths franchise.

READ: Woolworths to cut prices in bid to gain market share

The franchise accounts for approximately 34 per cent of Deacon’s sales. The company continues to face challenges from franchise owners.

Out of the nine brands it operates, Deacons has franchised seven and owns two of them.

“In a meeting with management a month ago, management indicated that one of its key brands, Mr Price [currently contributing approximately 60 per cent of revenues] runs the risk of the franchisor wanting to enter into a joint venture agreement,” said analyst at Standard Investment bank.

Seeking a strategic investor with cloth brands, analysts saying, the company will shield itself from such occurrences.