Blog: African retail has a governance problem

Corporate governance remains the Achilles heel of many African retail chains, threatening their long-term growth prospects

 

While corporate governance failings are obviously not confined to Africa, recent years have seen a plethora of scandals and mis-steps that have destabilised some of the retail industry’s most prominent names and threatened to undermine the brand equity of others.

Fraud and money laundering at the heart of Nakumatt’s downfall

Kenyan player Nakumatt is one of the more notorious examples of governance failure in African retail. Once the largest player in East Africa, with around 150 stores in four countries, it has now been reduced to a rump of seven stores and is struggling to survive. Its downfall was ostensibly caused by an over-reliance on short-term loans to drive store growth, but evidence of widespread, perhaps even pervasive, fraud and money laundering is not hard to find. Some have even gone so far as to claim that Nakumatt was more of a pyramid scheme than a retailer.

Professionalising family businesses represents a major challenge

Naivas and Tuskys, the two players jostling to replace Nakumatt as the biggest name in Kenyan retail, have problems of their own. Both have been subjected to prolonged internecine conflict, as rival members of their respective founding families jostle for control. Moreover, at least some of them appear to view these businesses as something to extract as much rent as possible from in the short term, rather than as an asset to nuture for the long term.

Local media reports suggest that some family-owned retailers routinely extend “sweetheart” deals to some directors (usually family members) by extending credit guarantees to their other businesses. This is hardly a strategy conducive to the long-term health of any company. While Naivas and Tuskys have both made efforts over recent years to bring in outside managers in order to professionalise their operations, such moves have been fiercely resisted by some insiders.

There have even been rumours of a degree of cross-ownership between Nakumatt, Naivas, and Tuskys, as they all come from the same town (Nakuru) and many of the key players in each know one another. These allegations were given credence last year by Tuskys’ aborted attempt to rescue the ailing Nakumatt.

Cutting corners, and jepordising public health, to boost profits

Naivas and Tuskys have also been found wanting in some of their dealings with consumers. In July 2019, a Kenyan TV documentary revealed that both of these chains were selling red meat that had been treated with excessive levels of sodium metabisulphite. “Management expects sales even if the meat stays for three or five days. They want profits – that is why we lace the meat with the chemicals,” an anonymous supermarket worker told the documentary.

Spurred into action, government testing of samples taken from Naivas and Tuskys (among others) soon confirmed these findings. One sample of meat taken from a Tuskys store was found to contain 63,000 milligrammes of sodium metabisulfite per kilogramme (more than 12 times the legal limit). Within days, both retailers had suspended sales of red meat nationwide.

Botswanan retailer in danger of becoming the new Nakumatt

For the past year, Botswana-based Choppies has been embroiled in an accounting scandal that is likely to result in the closure of around half of its more than 200-strong store network – if it manages to survive at all. A rapid and over-ambitious expansion into neighbouring South Africa has faltered, with its stores in that country now classed as “impaired.”

As recently as early 2018, management claimed that its South African operations were within sight of breaking even, but an investigation initiated by the board earlier this year identified irregular accounting practices, leading to the suspension of CEO Ram Ottapathu (also Choppies’ largest shareholder), who had run the business for more than a quarter of a century (he was subsequently re-appointed by a shareholder vote at an EGM).

Choppies has long had close links with the ruling parties in its native Botswana and neighbouring Zimbabwe – even giving away shares to prominent individuals in both regimes. According to some of its Botswanan rivals, this gave Choppies carte blanche to play fast-and-loose with local regulations. But this cavalier attitude has ultimately come back to haunt Choppies and laid waste to its ambition to become a regional leader in grocery retail.

Shoprite share row shows that governance remains relatively robust in South Africa

The well publicised Steinhoff debacle notwithstanding, South Africa retailers are generally among the continent’s best run. But even they have had their issues. For Shoprite in particular, the outsized power exercised by some shareholders (in relation to the size of their ownership stake) remains a problem.

In general, super-voting shares (shares that carry more than one vote, also known as dual-class shares) are used to enable founders to maintain a guiding hand on the tiller of a business even if they no longer have a majority shareholding in it. The typical rationale behind this is that the founders have a unique insight into the operations of their company and its market and giving them more votes than is warranted by their diluted ownership stake will ultimately be to the benefit of all shareholders.

They are common enough in Silicon Valley (e.g. Facebook and Google), where this rationale has a certain logic. But the case for them is much weaker in more mature markets, such as retail.

In the case of Shoprite, the downside of super-voting shares (called “deferred” shares in this case) was laid bare when chairman Christo Wiese sought to swap his deferred shares in the retailer for ordinary shares worth R3.3 billion (USD227 million). This was a demand that some of Shoprite’s other shareholders baulked at and eventually succeeded in blocking, in spite of the fact that it had the backing of management. The other shareholders objected to the deal on the grounds that price due to be paid for the deferred shares was excessive, as they are due to expire either on the death of 78-year-old Wiese (they cannot be inherited from him) or if his stake in the retailer falls below 10%.

In this case, Shoprite’s corporate governance structures proved robust, but the fact that management pushed for this deal raises concerns that they were not acting in the best interests of all shareholders. Moreover, this controversy comes at a time when management cannot afford to be distracted, as they struggle to cope with both a weak domestic economy and difficult conditions in such key international markets as Angola and Nigeria.

Bad governance can deter investment and undermine competitiveness

Poor governance practices can make it difficult to attract outside investment. For example, in 2014, a proposed takeover of Naivas by Walmart subsidiary Massmart was scuppered by the former’s feuding family members, who could not agree how to divide the spoils.

Moreover, at a time when some of the biggest names in global retail, such as Carrefour and Walmart, are increasingly setting their sights on African markets, local players need to be in fighting shape or they may find themselves marginalised.

 

Damian Shore

Senior Analyst, Sagaci Research

 

For a more detailed discussion of the pros and cons of super-voting shares, click here 
To read more about the downfall of Nakumatt, download our free research note

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