CHAPTER ONE
Introduction and Background to the study
A strategy is a pattern or plan that integrates an organizations major goal, policies and
action sequences into a cohesive whole (Porter, 1980). Strategic management is therefore
concerned with deciding on a strategy and planning how the strategy is to be put into effect
through strategic analysis, strategic choice, strategic implementation and control (Johnson &
Scholes, 1993). The strategic management process allows an organization to take advantage
of key environmental opportunities to minimize the impact of external threats, to capitalize
upon internal strengths and overcome weakness. A large number of research studies have
concluded that organization’s that have adopted strategic management are likely to be more
profitable and successful than those that do not (Fred, 1996)
In Kenya the private sector has over the years considerably contributed to the
country’s economic growth. It has contributed more than 80% of the Gross Domestic Product
(GDP). According to the Central Bureau of Statistics (CBS) (2004), the service sector
contributed 52% of the GDP, industries 16% and agriculture 29%. There have been reports
that most of these organizations have been posting high profits in their financial reports for
the past few years. There is no doubt that blue chip companies are considered successful or
top performers. These companies include East African Breweries (EABL) Kenya Airways,
Nation Media Group (NMG) Safaricom Limited and Barclays bank Kenya among others.
These companies consequently have applied various strategies that other companies
have failed to apply. These strategies have encompassed change. The forces of change are
frequently the result of some external forces such as increased competition, new legislation or
customer expectations (Senior, 1997). All these changes have contributed to increased
competition, performance and overall increase of their respective share prices. This has been
as a result of investing in technology, employees, re-engineering, restructuring and utilization
1
of other resources in their operations in order to be competitive. Consequently in the new
competitive Kenyan environment, inefficient and uncompetitive firms cannot survive hence
changes and new dynamics in the way organizations are managed and run are inevitable in
order to ensure that organizations maintain a sustainable competitive edge.
The involvement of employees also in strategy formulation improves the employee’s
understanding of the productivity-reward relationships in every strategic plan and thus
heightens their motivation. It also reduces resistance among employees since they will be
more pleased with their own decisions. Group interaction between project managers and
other lower employees also generates better decisions and variety of strategies during
management processes (Robinson & Pearce, 1991).
The strategic management processes whether in multinational companies is
conceptually the same as in purely domestic companies that do business within the national
boundaries in which they are located (Fred, 1996).
History of the Retail Chain Industry
The advent of modern retail (i.e., chain stores) started in the late 1870s, long before
the supermarket format emerged as large self-service stores in the 1930s. Supermarkets
started in the United States in the 1920s and 1930s and became dominant in the late 1950s.
The traditional food retail system that dominated the country before supermarkets looked in
essence the same as India’s traditional retail system today; however, supermarkets have about
80 percent of presence in the United States as compared to any other country globally-nearly
32,000 in number (Reardon & Gulati, 2006).
Sam Walton the founder of Wal-Mart is an example of a man who used
entrepreneurial spirit in a situation of opportunity. He started in 1950 with a tiny five-and-
dime store in a rural Arkansas village, with a population of 3,000. It was one of the most
2
underdeveloped regions of the United States, bypassed by the boom development of the past
100 years. Walton started by building a chain of “kirana” (concept of stores developed in
India called “five and dime” or “five and ten cent” they bought non food goods in volume
and sold at a discount) stores in the surrounding towns and then states, and by 1962 he had
decided to open a small supermarket called Wal-Mart. He hit on an idea to buy directly from
suppliers and cut costs by building a distribution center network. While other chains had
started in big cities in boom zones, Walton focused his effort on villages and small towns,
considered an impossible strategy at the time. Walton opened large-format discount store (big
supermarket with cheap nonfood items and dry foods) in the 1970s. In the late 1990s, he
added small-format neighborhood stores. Wal-Mart grew from two “kirana” employees in
1950 to 1,500 in 1970, 21,000 in1980, 200,000 in 1987, and 1,140,000 in 1999. By 2002,
Wal-Mart had become the largest private employer in the world, with 2 million employees.
The company’s annual revenue totaled $350 billion in 2006 (Reardon & Gulati, 2006).
Developments in the Retail Chain Sector
Several trends characterized the development of chain stores over the past century in
the United States, with similar trends seen in the United Kingdom and France. The trend was
from nonfood chains to dry-food chains to full-line chains offering fresh foods. Supermarkets
did not sell much fresh produce until the 1960s because it was considered impossible to move
beyond the American tradition of buying in wet markets and tiny fruit shops. The trend was
from clerk service to self-service. The format trend was from the traditional system described
earlier to chain nonfood shops, to chain grocery shops, to small supermarkets and food
sections in department stores, to medium and large supermarkets in towns, to hypermarkets in
the suburbs, to convenience stores and neighborhood stores in dense inner-city areas and
small towns. The trend was from large cities and economic boom areas to second and third-
3
tier cities and second-tier areas and to suburban areas developed in the 1950s (Reardon &
Gulati, 2006).
According to Capps (1997), individual chains and the overall supermarket sector
underwent massive growth over seven decades, and that growth cycle eclipsed an earlier
cycle of growth in self-service chain grocery stores. Chain stores mimicking and then
improving on the credit system that the small traditional shops had used for customers by
developing credit cards, loyalty cards, and banking services. They also took on other services,
such as health clinics and banks for poor consumers. Chain stores modernized their
procurement systems. Woolworths and A&P had historically focused on cutting costs through
bulk buying, self-service, and efficiencies in inventory handling. As competition increased
the importance of modern logistics and cost cutting intensified. From the 1990s onwards,
these strategies took center stage.
It is important to keep in mind that the United States has a history of the strongest and
longest anti-supermarket regulatory history of any country in the world. Wrigley and Lowe
(2002) concluded that the body of stiff regulations and competition laws enacted in the
United States resulted in a significantly slower spread of supermarkets and national-level
concentration from the 1930s to the 1980s than the United Kingdom experienced.
This reversed first in the 1950s and again in the 1980s. However, the result over the
decades is similar to what happened in the United Kingdom (which had far laxer regulation
of supermarkets). This suggests that underlying economic and social forces moved the
modern retail sector toward dominance and concentration over time, whereas regulations
mainly affected the transitional path. Wrigley and Lowe (2002) continue that, the trends in
the spread of supermarkets in developing countries and the evolution of their procurement
systems bear many similarities to the recent experience of the United States; Western Europe
and Japan had broadly similar experiences in the rise of supermarkets. This suggests that the
4
economic logic of the retail transformation is shared across regions, starting from a
surprisingly similar shared tradition of traditional retail systems.
Supermarkets in Developing Countries
Reardon et al., (2004) argue that supermarkets are no longer places where only rich
people shop; over the past ten years or so, they have spread from the wealthy suburbs of
major cities to poorer areas and much smaller towns. This has happened in response to a
number of forces, many of them interconnected: rising incomes (also associated with higher
ownership of consumer durables like fridges and cars which facilitate supermarket shopping),
urbanization, more female participation in the labour force (increased opportunity cost of
time) and the desire to emulate Western culture, spurred on by the globalization of the media
and advertising (linked in turn to the globalization of food manufacturing and the promotion
of its products as well as of fast foods and soft drinks).
There has also been a movement in most developing countries towards liberalization
of trade and investment which has brought the global supermarket chains onto the scene,
together with economies of scale, purchasing power of the consumer and supply chain
management skills (Reardon et al., 2004). The process of ‘supermarketisation’ is rapidly
gaining ground. The process began in Latin America in the early 1990s and by 2000
supermarkets delivered 50-60% of retail food sales in countries in the region (Reardon et al.,
2004). The take-off in South-East Asia began 5-7 years later and is registering faster growth.
A third wave has taken place in East-Central Europe, and Africa is rapidly following suit, led
by South Africa which has seen a ‘spectacular’ rise since 1994 (Reardon & Swinnen, 2004).
Kenya and others are following, and the process is hastened by the multinational aspirations
of the South African supermarket chain Shoprite. Finally, the process is taking place in low-
income Mediterranean countries such as Morocco and Tunisia (Codron et al., 2004).
5
The implication is that this is an ongoing, even accelerating, process that will soon see
supermarkets as the dominant food suppliers around the world. Developing countries have a
tradition of establishing policies promoting the development of supermarkets (Codron et al.,
2004). In the 1960s and 1970s in Latin America, Malaysia, and Hong Kong, among other
countries, governments were keen to promote the tiny supermarket sectors in the name of
food sector modernization. Promotion programs were based on the previously described
perception of the traditional retail sector as weak and inefficient, a drag on increasing overall
competitiveness and efficiency. Most of these promotion programs neither were artificial and
not yet consonant with overall economic transformation nor fed by private sector investment;
thus, few succeeded (Reardon et al., 2004).
In the 1990s and 2000s, many governments directly supported supermarket
development as part of modernization policies, although at the same time those governments
had policies limiting or regulating supermarkets and supporting traditional retailers (Goldman
et al. 1999). An example is tax exoneration to supermarkets setting up in municipalities in
Russia (Dries & Reardon 2005) or South Korea (Lee & Reardon 2005). Some governments
have even directly invested in modern retail explicitly to modernize the food distribution
sector as well as generate revenue for government. For example, in China the semipublic
chains operate as profit-oriented enterprises and compete with private firms. The main
difference between the retail transformations in developing countries and in the United States
and Western European is the extreme speed with which it is occurring in developing
countries (Traill, 2006).
Supermarkets in Kenya
The Kenyan retail industry is largely under developed. It is characterized by few
supermarkets, retail shop outlets and thousands of kiosks spread all over the country. The
6
inadequate managerial skills and inaccessibility of capital by entrepreneurs are additional
features that define the Kenyan retail market. Except for the few supermarkets in the retail
industry, other retail outlets are largely owned and managed by individual households. Unlike
other retail outlets, supermarkets dispense a certain level of managerial skills. They employ
qualified professionals, keep proper books of accounts and are tax compliant. Most of the
supermarkets are located within the capital centre Nairobi and its environs. The location
enables them to stock other household goods such as household appliances clothing and
furniture (Business Post Dec/Jan, 2007).
It is estimated that the Kenyan retail industry comprises of 120,000 retail outlets. 25
percent are supermarkets and 75 percent constitute individual unit retail outlets. Uchumi
supermarkets owns an estimated 5 percent of the overall retail market and 20 percent of the
supermarket share (Uchumi Information Memorandum, 2005). However this position
continuously keeps changing due to entrant and exit of more players in the market. With
Uchumi having experienced financial crisis, the structure of the market may have further
changed. The main players in the supermarket share are Uchumi, Nakumatt holdings, Tuskys
(formerly Tusker Mattresses) Ukwala supermarkets alongside other independent
supermarkets. Traditionally Uchumi had played a dominant position.
Compared with other East African countries i.e. Uganda and Tanzania, Kenya is the
only industry that does not have a single foreign investor. Shoprite and pick “N” pay both
from South Africa are already in Uganda. Tesco a British based supermarket never
materialized on its rollout programme in the Kenyan market. Analysts have observed that
consolidation of retail market in Kenya as the main challenge that has discouraged new
players from rolling out their businesses in the Kenyan market. However, high cost of doing
business, punitive tax regimes, red tape and bureaucratic practices before a firm could rollout
its business are further to blame for uncompetitive market ( http://www.doingbusiness.org ).
7
Retail development has benefited from the fact that in recent years, the Kenyan
government has made considerable headway in terms of making the business environment in
Kenya more attractive for investors. According to a World Bank survey (Doing Business for
2008), which calculates the relative ease of doing business in 178 countries, Kenya was
ranked in 72nd place, 10 positions higher than the previous year. Whilst ease of credit has
significantly improved the business environment for investors, other factors such as an
improved infrastructure, reduced corruption and political stability have all fuelled growth
across the sectors.
In fact, Kenya's modern grocery retail sales are forecast to more than double by the
end of the 2008 trading period thanks to the government's continued effort to improve the
country's business environment (World Bank Report, 2007). Even though the retail sector is
dominated by traditional retail channels and independent supermarkets in the countryside, the
development of modern grocery chains has taken root in urban areas. Domestic players such
as Nakumatt are beginning to open stores in smaller towns outside the capital city Nairobi.
Whilst Nakumatt and Tuskys are playing a leading role in Kenya's burgeoning retail market,
Uchumi Supermarkets, currently positioned in fourth place in Kenya, have had a history of
financial problems. The company's problems have derived from general mismanagement and
corruption issues, and Uchumi was expected to either die a natural death or be sold to another
retailer when its former managing director, John Smith, announced its closure in June 2006
(Uchumi Information Memorandum, 2005).
The government moved in quickly, after an attempt by South African retailer Shoprite
to acquire the chain, and drew up a rescue plan that saw Uchumi opening its doors again for
customers under new management. Under the current receiver manager, Jonathan Ciano,
Uchumi has seen most of its branches re-open for business. Although still faced with
financial problems, Ciano has insisted that the retailer is on a recovery path and recently
8
announced plans to open some more stores in Mombasa city when it recovers from its
financial woes. It is also worth noting that since its failure to acquire the Uchumi chain, there
has been no recent news of Shoprite's entry into Kenya (http://www.planetretail.net).
Apart from Uchumi, which closed and re-opened, other retailers have been forced to
make a silent exit from Kenya. Sky mart operated a supermarket chain in Nairobi and
Mombasa and recently made a retreat after trading for less than a year. Sky mart’s failure was
attributed to high levels of competition and the poor location of its stores. Meanwhile
Metcash, the wholesale group operating under the Metro Cash & Carry and Lucky 7
supermarket franchise banner, was also forced to make an exit in 2005. The format alienated
many Kenyan consumers because Metcash refused to move away from selling in bulk (http://
www.bdaily.africa.com).
Local retailers have not been spared either. The family-run Nova supermarket chain
was acquired by Naivasha Self Service (in fifth position in the ranking) and as a result of the
acquisition, the stores have become more profitable. Nevertheless as competition in the
market stiffens, it is likely that more retailers will be forced out of business. In December
1975, Uchumi was incorporated under the Companies Act (cap 486). The main objective of
creating Uchumi was to have an enterprise for equitable distribution of essential
commodities, affordable prices whilst creating an outlet for the then fledgling local
manufacturers. This noble idea marked the beginning of Uchumi Supermarkets limited and
on 17th December 1976, Uchumi shareholders- Industrial Commercial and Development
Corporation (ICDC), Kenya Wine Agencies Limited (KWAL) and Kenya National Trading
Corporation (KNTC) - all Government owned parastatals entered into a management contract
with Standa SPA of Italy. Standa, a leading supermarket group with a presence in Europe and
vast retail experience was given the task to manage and train Kenyan personnel who would
eventually take over the running of the organization. The first three branches were opened in
9
Ricevi informazioni sui nostri servizi, sulle offerte e non perdere news e consigli su università e lavoro.
