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Suppliers in a catch-22 setting over payments

A once vibrant retail sector is turning into a shadow of its past as supermarket shelves are bereft on supplies. This has stifled the value chain for two years causing a significant dip in performance which according to the Kenya National Bureau of Statistics (KNBS) dropped 2.9 percentage points last year.

The downside of this reduced activity, attributed to low capitalisation, is its negative knock on suppliers and producers. Most suppliers are currently operating under par and in fear of delayed payments which sometimes extend up to 120 days.

While suppliers’ estimate they are currently owed more than Sh40 billion, retailers estimate that at any given time, they should owe suppliers between Sh30 billion and Sh35 billion. But suppliers are concerned that some supermarkets are growing on suppliers’ cash hence the inability to pay.

“Most supermarkets do not honour verbal or written agreements,” said Association of Suppliers of Kenya (ASK) Chairman Kimani Rugendo. The suppliers say while late payment is a key factor to the empty shelves, suppliers are now caught in the mix because they must borrow as they wait for payments which are not forthcoming, making products uncompetitive due to borrowing costs.

Suppliers such as Tharaka Honey, Kapari Ltd, Seal Diamond Limited, Acinon Ltd and Eastern Gas Distributors are some of the players hardest hit by delayed payments. Some reportedly stopped production or laid off workers, while some were forced to take more loans to remain in business as others risked the auctioneer’s hammer.

The suppliers’ association estimates that by December 31 last year, five leading supermarket chains accounted for 92 per cent of the total debt owed for more than 60 days. A major retailer rated by suppliers and manufacturers as one of the best paying for supplies agrees that cash flow limitations is the key factor contributing to late payment in the sector and subsequent cash crunch.

“This is a pointer to poor cash flow management and excessive overheads plus unnecessary expenses during setting up stage of new branches,” says the retailer. The cash flow challenges pointed out to the branch network expansion, where a retailer is able to open a new outlet with credit on account of goodwill rather than capacity to pay.

But the retailers also point out that pilferage, delays in processing invoices for frequently supplied and high volume supplies, damaged goods as other major concerns leading to delayed payments.

However, the construction sector which is leveraging on a model which uses supermarkets as the anchor clients is also a contributor to the cash crunch according to people familiar with the sector.

“This ambitious investment also played a role in holding cash by some supermarket chains,” said Wycliff Mukulu during a forum to discuss the issue of delayed payments last week. Some retailers have initiated measures to resolve delayed payments, including encouraging suppliers and manufacturers to adopt the culture of Joint Business Plans to create win-win solutions across the trade value chain.

For instance, Uchumi has tried to address late payment by opening escrow accounts from where the suppliers are paid for their deliveries on time. Others have entered financing solutions with banks, where suppliers and manufacturers are listed so as to ensure they are paid in accordance with the agreed trade terms.

Going forward though, while the sector is attracting major international retailers, Rich Management CEO Aly-Khan Satchu warns that the brick and mortar retail model is going to be disrupted to a great extent going by the fact that 30 per cent of retail sales in the United Kingdom are now conducted online.

“Given that Kenya is in many respects a laboratory experiment with respect to the 21st century information and that smartphones are now ubiquitous, it is as plain as day that we are not far behind,” he says. The second instalment of this four-part series continues tomorrow.

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