From snacks to houses, consumers lead Kenya’s growth story

November 25, 2013 9:01 pm

From snacks to houses, consumers lead Kenya’s growth story

By Katrina Manson

There may be no better indication of the effort to snare Kenya’s wallet-conscious middle-class spenders than popcorn prices in the country’s leading supermarket chain. While imported popcorn, with glitzy photographs on cardboard packaging, costs 370 shillings ($4.24) for 300g, a simple “Blue Label” plastic package on the shelf beside it is 85 shillings ($0.98) for 500g.

Nakumatt supermarket launched Blue Label, its own-store brand, this year. Partly because the range includes indulgences such as popcorn and chilli lemon crisps as well as essentials including flour, sugar, pulses and household bleach, it treads a line between aspirational appeal and downright cheap.

Atul Shah, Nakumatt’s managing director, says of his customers: “We change their lifestyle,” sidestepping the word “cheap” in relation to his new brand.

Instead, he cites ambience, product variety and the euphemistic “value for money”. The label also appeals to nationalist sentiment by packaging only locally manufactured goods, and describes itself as delivering “trusted quality at real value” – all part of an appeal to the country’s savvy spenders.

Marketers have grown increasingly aware in recent years that Kenyan bargain hunters place as much emphasis on quality as pricing. When Kenyan mobile phone providers dropped their charges in an unsustainable price war three years ago, customers ultimately backed better service over free calls.

A 2012 report from McKinsey, the consultancy, says: “African consumers demand quality products and are brand-conscious, belying the view that the continent is a backwater where companies can sell second-rate merchandise. Urban African consumers have modern, sophisticated tastes.”

In Nakumatt’s case, it appears to be working: the chain sells to 120,000 people a day in Kenya and forecasts turnover of $650m this year from its 40-plus stores. It is extending its Blue Label range with more products in more stores.

Domestic consumption is at the heart of Kenya’s economic expansion. More than a third of loans this year have gone to private households. Purchases of refrigerators and televisions are increasing. There are enough mobile phone subscriptions to account for every adult in the country.

Nakumatt even sells cars in its supermarkets. In the absence of rising exports or a flourishing extractive sector, it is consumption that drives the economy.

“Private consumption continues to underpin aggregate demand and growth,” says a World Bank report this year. Following a “massive credit squeeze” in 2012, the rate of lending to the private sector has picked up, as bank lending conditions have slowly eased.

But it has not been a simple year. Election jitters, the extension of value added tax and the Westgate shopping mall massacre have suppressed demand. The hoped-for mass injection of foreign direct investment has failed to arrive in the wake of March elections.

Mr Shah says: “The cost of living was supposed to be going down after the new government was in place, but the introduction of VAT did not help the lower-income bracket and there was an effect. We felt a pinch. Definitely, there is a little squeeze [in spending per capita], but then the market is growing, so we don’t feel it.”

Plans for shop openings and more shopping malls suggest that, even if individual pockets are tighter, investors are banking on Mr Shah’s sense that more punters are joining the ranks of spenders.

Actis, a UK private equity company, is developing Garden City Mall, the largest shopping centre in east Africa. The $250m development on the Nairobi-Thika highway is due to open late in 2014. When the final phase is complete in 2017, the development will include office space, homes and parks as well as the mall, with Nakumatt among its anchor tenants.

Michael Turner, head of Actis east Africa, says: “We are eventually building a community at very middle-class Kenyan price points.” He says target buyers are double-income parents who can afford four-bedroom houses selling for about 20m shillings ($230,000).

As always, consumption is concentrated in the capital. The World Bank estimates 40 per cent of the country’s wage earnings come from Nairobi and Mombasa.

“Nairobi is a large driver of economic growth; the price of real estate in Nairobi is crazily high, fuelled by land prices,” says Mr Turner.

Consumption nationwide averages an annual $1,526 per capita; in Nairobi it reaches $2,827, according to McKinsey.

But there may be limits. Loan defaults have started to creep up. Kenya’s central bank said in its September credit survey, that it expected loan defaults on consumer loans to rise during the quarter ahead, “continuing the trend witnessed in the first three quarters of 2013”.

This is on top of a 17 per cent increase in non-performing loans in 2012, a third of which derive from personal household loans.

Spenders also feel hamstrung by rising prices. Kenya’s consumer federation predicts shoppers will change their habits in the wake of the Westgate attack, avoiding family outings and the leisure-style shopping that supported Westgate’s social status.

But retailers are fighting back. Westgate shop-owners are determined to reopen some stores within a few months, with full renovation expected within three years.

And, while formal retailing remains a novelty in sizeable African markets such as Algeria, Angola and Nigeria, Kenya has the most developed retail market on the continent after South Africa.

Popcorn is just the start.