Struggling supermarket chain Tuskys has dropped the bid to lease its brand through a franchise after losing most of its stores due to non-payment of debt to landlords and suppliers.
The retailer had received approval from the Competition Authority of Kenya (CAK) to allow various independent retailers to trade using its brand at a fee following delays in closing a Sh2.1 billion financial deal with a mystery offshore investor.
People familiar with the franchise deal say it has collapsed as the retailer struggles to remain afloat amid mounting bank and supplier debts.
Franchising was to allow the retailer to keep its brand alive besides generating fees from the partnerships.
It also offered the cash-strapped Tuskys – whose branches have been whittled down from more than 60 to less than seven — an opportunity to bounce back in the future should it get deep-pocketed investors.
The move followed a limited franchise strategy by rival Uchumi Supermarkets, which also fell on hard times.
Tuskys has rejected a creditors’ court petition requiring it to reveal the offshore investor seeking to rescue it more than a year after the supermarket chain announced a financing deal.
“Feedback from the supermarket indicated that Tuskys had dropped the franchise deal,” said a source, who asked not to be identified on a topic they are not authorized to discuss publicly
The CAK had agreed to exempt the franchise agreement from regulations banning restrictive trade practices by companies in the same industry.
Tuskys was betting that its brand would be strong enough to attract business partners that will stock stores, and pay employees and rent.
The retailer has been losing employees, customers and suppliers as its cash flow problem worsened amid stock-outs that have left it with empty shelves and led to the closure of dozens of outlets.
At its peak, the retailer was an acquisition target for global giants seeking a foothold in East Africa such as Walmart.
The investor intending to provide Tuskys with the Sh2 billion loan seeks to secure the debt using all of the supermarket operator’s shares, putting the ownership of the existing shareholders at risk in the event of default.
The unnamed investor, based in the tax-haven Cayman Islands, was ready to disburse the funds but sought Tuskys’ shareholders’ approval of the deal, including committing the shares.
A successful franchise strategy was expected to keep the retailer’s brand alive, buying it time to raise the funds needed to rebuild its nationwide network.
Tuskys had the option to buy out the franchisees in the future and take back full ownership of the business.
The franchising model faces several challenges in Kenya’s retail market, including enforcing standards such as customer experience, types and variety of goods.
The biggest and most successful supermarkets are owned, operated and centrally coordinated by the same entities.
Such an ownership structure also brings advantages like sharing of costs, including marketing and logistics.
Tuskys, which was at one time the country’s largest by sales and branches after the collapse of Nakumatt Holdings has closed many of its stores across the country, including in major towns like Mombasa and Kisumu.
The outlets closed by the company include Digo Road in Mombasa, Mtwapa in Kilifi and Tom Mboya Branch in Nairobi’s central business district.
Tuskys’ decline started with defaults on suppliers’ debt, a matter that was brought to the attention of the CAK in April last year. The regulator intervened, requiring the retailer to pay the overdue debt, among other directives.
Rivals have taken advantage of its shrinkage to take up space at the branches previously occupied. Naivas, for instance, recently signed a lease agreement with Greenspan Mall owner, Ilam Fahari I-Reit.
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