What’s happening with the South African Companies in Kenya??

Despite the major successes seen by most South African companies doing businesses in other African countries, Kenya has however been able to keep the South African business heavyweights at arm’s length. In the past; The experiences of South African companies doing business in Kenya show that successes and challenges go hand-in-hand when doing business in Africa. The clash between local and South African firms reached its peak in the widely reported ‘beer wars’, in which South African Breweries eventually lost out to Kenya Breweries. South Africa’s Metro Cash and Carry outlet in Kenya closed business in March 2005 after eight years of failing to make a profit. The more than 120 stores Shoprite Checkers has in 15 African countries outside South Africa do business that accounts for only 12% of the group’s turnover. But while this chain has registered a company in Kenya, strong levels of competition from established local businesses in the country have reportedly prevented it from opening any stores there. Moreover, while MTN International’s returns from its operations in Africa overall entered the profit column in 2002, a full two years ahead of schedule, it did not succeed in Kenya. Why past failure? Kenya presents a number of logistical challenges that act as constraints on investor enthusiasm. Infrastructure; particularly the poor condition of roads, the inadequacy of the energy supply and the sluggish pace at which goods are processed through the main port, has been seen as the most troublesome obstacle to doing business in Kenya. The cost of electricity in Kenya is reportedly four times that of electricity in South Africa. The high cost of duties and a difficult administrative environment as far as businesses are concerned has also been seen to be a major problem. The greatest frustrations in the latter were excessive red tape, vague regulations that are open to varying interpretation thus high levels of corruption. Crime has escalated, although not to the same extent as in SA, and had become a cause for concern. Wrangling in the political arena and political uncertainty (both of which can affect regulatory arrangements) have been raised as areas that are troublesome, given that they hamper long-term planning and can alter the viability of investing in the country. While the involvement of South Africa’s business sector in the Kenyan economy is desirable, and may well assist the private sector to play a more significant role in the continent’s economic development, several instances of blatantly anti-South African sentiment have been reported. Kenyans resent what they perceive as the excessive volume of South African investment and have accused South African companies of being patronising, even arrogant, and of not wanting to work with local partners. Why Kenya despite past failure; Despite these setbacks, Kenya remains an attractive investment destination for many South African companies because of the saturation in their local market; strategic positioning for further expansion into Africa; well-established industrial base and high level of skills. Especially from an education, skills and labour point of view, the country is regarded as the ‘natural entry point’ to the markets of its landlocked neighbours. Business investors are also attracted by the availability of educated and enterprising people in Kenya and the fact that Kenya had never been through a socialist phase and therefore is not anti-capitalist, but markedly business-friendly. Additionally, Kenya’s topographical beauty and climate are factors that have great commercial potential, particularly to investors in the agriculture and tourism sectors. What’s happening now? As Brand South Africa was breaking down the figures for representatives of SA businesses in Kenya, their companies were changing tack and were quietly shaking up the corporate world in Kenya with buyouts. Unlike the failure of SABMiller when it took on Kenya Breweries in the 1990s and flopped, the quiet buyouts give South African firms a Kenyan face. In the last 24 months, South African brands have absorbed several top Kenyan companies. According to the South Africa Inc. project, the goal is to access the East African market through Kenya. Some of the companies are Gateway Insurance bought out by Pan African Insurance, Access Kenya bought by Dimension Data, Cannon Assurance bought by Metropolitan, and Haco Industries bought by Tiger Brands. Old Mutual recently acquired a stake in Faulu Kenya for about Sh3.6 billion. During the purchase, the Sunday Nation learnt that Mr George Adams Maina as chairman of the Faulu Microfinance Bank divestiture committee negotiated a sweet deal for his company Micsha Capital to acquire eight per cent of Faulu shares. Old Mutual got 67 per cent of the shareholding. The particulars of the deal contained in emails and documents reveal that Old Mutual will finance him up to Sh300 million. The deal was conditioned on delivery of completion documents relating to the Faulu and Old Mutual transaction. Whereas the deal is structured as a loan, the repayment is based on annual repayment from the receipt of dividends from Faulu Kenya profits, meaning Mr Maina will not have to pay anything. Old Mutual has also moved to take over UAP Insurance in a deal awaiting regulatory approval. Apart from insurance companies and financial institutions, South African brands are competing in shopping malls. Sunday Nation has learnt that Liberty Group through their asset management arm Stanlib is negotiating the purchase of Greenspan Mall in Nairobi’s Dornholm Estate. Game, a subsidiary of South African retailer Massmart, opened recently at the new Garden City Mall on Thika Road. The retail giant faces competition from established retailers like Nakumatt, Tuskys, Uchumi and Naivas. Curious; Old Mutual survived in a market that was unfavourable to other South African companies and investments for all those years. Why? The favourite model Most companies now prefer to use that model: buying existing ventures instead of starting up from scratch, although Game’s entry is a Greenfield investment. Massmart had tried to buy family-owned Naivas supermarkets before making the decision to go it alone. In the brewing industry, 26% of Kenya Wines and Alcohol Limited were sold to Distell Group in 2013. MTN Business acquired UUNet Kenya while Altech increased its share in Kenya Data Networks, both internet firms. Naspers has a ubiquitous presence with Multichoice Africa’s brands DSTV and GoTV. Greenfield players In manufacturing, Tiger Brands currently has a 51% stake in Haco industries and also bought Rafiki Mills and Magic Oven Bakeries. In banking, Old Mutual, which has been in Kenya for more than a century, launched an aggressive acquisition campaign where it acquired, among others, the hugely successful Kenyan micro lender Faulu Kenya. Stanbic Bank bought CFC Bank, giving birth to the CFC Stanbic Holding and Liberty Kenya Holdings. There are still companies using the Greenfield investment strategy. In Kenya’s lucrative real estate sector, property services provider Broll entered the market in 2013. Seafood diner Ocean Basket also opened an outlet to take advantage of Kenya’s growing middle class consumer culture. The American brand Kentucky Fried Chicken (KFC) made its entry into Kenya through South African franchise holder Simon Schaffer. Other franchises such as Mr Price, Steers, and Debonair Pizza have had mixed success in the Kenyan market. Are you for the SA-KE relation? Opinion about the impact of the buyouts on the Kenyan economy and Brand Kenya is divided between those who see is as a threat to the Kenyan (local) economy and those who perceive it with optimism to our young, growing economy. According to the 2014 Economic Survey, South Africa exported KES70.7billion worth of goods to Kenya while the latter only managed KES3.277billion in 2013. The problem, it has seemed, is that South Africa is yet to dismantle the high tariff barriers it instituted during the apartheid era. This is particularly true for countries like Kenya outside South Africa’s key trading blocs. Tea, Kenya’s most successful export to the world attracts a four-rands-per-kg tariff to access the South African market. Soda ash attracts a 12% levy, making the market prohibitively expensive for Kenyan exporters. The battle to access the South African market has however accelerated this year, with diplomatic tiffs over visa regulations and trade agreements sparking a flurry of bilateral activity to resolve them. Right now, South Africa’s huge market remains tantalisingly out of reach for Kenyan exporters and investors. Kenya’s market, on the other hand, is still a working experiment for South African companies and a solid market for exporters. This seems to be the better offer, Kenya has access to especially with China in a tailspin, it is likely to pull back on investment into the region. N-WAY; Nonetheless, there may also be room for improvement in the way South African enterprises operate in Kenya. They need to make a greater effort to understand and accommodate local sensitivities, and take cognisance of local customs and business practices. There is little strong research-based evidence on which to draw firm conclusions as evidence is often patchy, contradictory and over-reliant on anecdote and reported ‘perceptions’. My opinion would be that the South Africans have found out that starting a business in Kenya has its own challenges as our market is totally a different and free market unlike most SA companies which were built during apartheid days when they were insulated from competition by tariffs and strong trade unions.