Kenya’s retail sector must rethink their Business Model

Kenya’s retail sector continues to record positive growth with favorable future prospects underpinned by an expanding middle-class, an increasingly sophisticated Kenyan consumer, the construction of new shopping malls, continuing expansion of leading supermarket chains and entry of new players such as Game, Carrefour and Choppies.

Despite setbacks, such as the destruction of Westgate Nakumatt’s flagship store by terrorist in 2013, Uchumi’s continued struggles and the very recent cash crunch at Nakumatt, the retailing environment has remained positive.

Despite the strong performance, local retail chains may need to brace themselves for intense competition among themselves and also other global retail chain due to the attractiveness of the sector which is sustained by a growing middle class among other reasons. In the long run i believe the sector may need to re look at their business model else experience the Kodak Moment.

A strategy that big retailers such as Nakumatt, Tuskys and Naivas have adopted in the last few years has been quick physical growth through building of new branches from scratch. In the same vein retail chains are competing by ensuring they place themselves in every new mall that comes up.

Such growth strategy based on brick and mortar is unsustainable in the long run especially with the ever changing consumer sophistication and taste, technological changes, cash flow challenges and globalization.

Kenyan retail chains must adapt technology especially e-commerce or become irrelevant in the near future. Adoption of technology in the retail sector is not a Kenya specific challenge; most if not all brick-and-mortar chains globally have struggled in the making online sales. Success on the web is achievable, but it requires adapting strategies from other industries such as airlines and credit cards, which also operate in a more cut-throat, price-focused environment.

The top priority for local retail chains should be to capitalize on their biggest asset – customers who visit their stores and connect with their brand. The top goal should be to persuade in-store shoppers to also purchase from the retailer’s web site. This is supported by Kenya National Bureau of statistics (KNBS) which estimates daily internet access at 882,608.

When you think about it, internet retail today is similar to the airline market before frequent flyer programs were introduced. In those days, airline travel was a commodity – passengers selected flights primarily on convenience and price. Similarly, today there’s nothing overly compelling to sway where customers shop online, except for convenience, selection, and price. A website redesign, promises of better service, or even matching competition prices won’t be game-changers.

Frequent flyer programs transformed once-homogeneous airlines into differentiated entities – and similar loyalty programs can do the same for web retail. You will be amazed at how many regular travelers are to their preferred airlines. They take less convenient flights or pay more – all to gain reward points.

A loyalty program can convince shoppers who regularly frequent retail chain, for instance, to shop on their website. A rewards program has been overlooked as an incentive that can convince in-store shoppers to remain true on the web.

There’s room for creativity – similar to airlines, retailers should offer bronze, silver, and gold status (each level providing enhanced benefits) to provide additional incentives to concentrate purchases at one retailer. Borrowing from the credit card industry, all programs should also allow customers to redeem points on a variety of products, services, and experiences – this enhances the value of collecting points.

The beauty of loyalty programs is they are enhanced by a network of store locations. More locations provide more opportunities for customers to accumulate points. Making loyalty programs a key differentiator leverages a unique competitive advantage – physical stores – of brick-and-mortar chains.

The internet will revolutionize retail in Kenya. Although e-commerce seems like a new phenomenon, its basically a different manifestation of the traditional commodity market. The same time-tested tactics that have worked in similar situations will work for internet retail.