Formalizing businesses to take advantage of the changing retail industry

Recent high-octane talk about Kenyans supplying potatoes to the local KFC franchise has been fueled by understandable emotions. After all, Irish potatoes, as they are commonly called, and which are the main ingredient in the preparation of what we locally call chips, are a widely grown crop.

More importantly, this debate has shed light on the extent to which Kenyan businesses, particularly those in the manufacturing sector, must adapt to formal standards to compete in the country’s rapidly changing retail sector.

Kenya’s retail sector is said to be the second most developed in Africa, with big players such as supermarkets occupying 30-40% of the trade, providing a great opportunity for local small and medium-sized businesses to benefit from its growth.

This is largely due to population growth, urbanization and, to some extent, the process of decentralization which has led to an increase in urban incomes over the past five years.

According to the Oxford Business Group, Kenya’s urban population is expected to cross the 14 million mark by 2020, signaling a huge market for growth-minded producers.

It’s no surprise, then, that global and local retail brands have recently gone on a camping spree in several urban areas across the country. The result of these developments, which are driven by formal retailers who have set their own standards by which they want to be known, is that local suppliers must then align and make the necessary investments.

Either way, KPMG research shows that not only are more people buying from formal retailers, but their basket value is also increasing year on year, with recent figures showing an annual rate of 67% . This shows that as income increases, consumers purchase more items from formal retailers.

The fact that e-commerce has taken root in most Kenyan cities is a key factor to consider.

Online shopping has become very normalized for both formal and informal businesses. Most consumption, however, occurs through formal retailer channels.

While the Covid-19 pandemic is credited with fueling this rise in e-commerce, Kenya was already well on its way to embracing the lifestyle as early as 2015.

The reality of the world we live in is that there are no more geographic barriers to reaching retail markets.

However, the responsibility lies with those who are willing and ambitious enough to connect to the formal retail sector, to improve their quality through investments in relevant technology, equipment, personnel and processes.

In some cases, they will need help from government agencies. Sector regulators can also step in where a significant amount of movement is needed, such as subsidies and the institution of favorable external tariffs.

The first step is to recognize that the consumer deserves better. Globally and even locally, consumers have become very aware of the sources and quality of the products they consume.

The deciding factor for formal retailers is that they must be able to trace the source of each item or batch back to a particular producer. Suppliers must therefore work to reach this level. The opportunities are there, but that means they need to adopt stronger formal business practices.

If it can be done successfully for the export market, then we believe it is possible and should be done for the national and regional markets.

Industry players realized early on that a partnership approach would serve all players well. This means that even if the suppliers improve their quality internally, the retailers would give them a helping hand to grow and meet the needs and standards of their consumers.

On the global stage, we’ve seen Walmart, for example, engage its design teams to work with artisan suppliers to create designs that would appeal to Walmart customers while remaining true to the creative spirit of artisans.

Here in Kenya, major retailers are making concerted efforts to develop joint marketing plans with suppliers that will enable them to record higher turnover.

All of these efforts demonstrate the desire for formalization and the recognition that this is what will work for everyone.