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State stops Tuskys directors pay, new branches in Sh1.2bn debt row

Tuskys will now need approval from the Competition Authority of Kenya before it can pay bonuses to directors, open more branches or start new lines of business in conditions aimed at preserving cash to pay its suppliers.

According to the regulator, the supermarket chain’s debt has risen to Sh1.2 billion, raising questions about the retailer’s ability to pay.

CAK now wants Tuskys to focus on settling its current obligations, with the company’s default resulting in cash flow challenges for suppliers and consumers missing essential goods on the retailer’s shelves.

The latest directive arises from a finding that most Kenyan supermarkets rely heavily on debt for expansion, a model that leaves banks and suppliers with major losses when the retailers run into financial headwinds.

Tuskys has also been stopped from declaring or paying bonuses, fees or other discretionary compensation to its directors who are mostly relatives in the family-owned retail chain.

“Tusker Mattresses Limited from the date of this order must obtain written concurrence of the authority as a pre-condition for expansion,” CAK wrote to the company in a letter seen by the Business Daily. “The Authority imposes a prohibition from declaring or paying bonuses, fees and other discretionary compensation to directors.”

Struggling retailers

CAK’s move marks an unprecedented interference in a supermarket’s management and offers insight into the kind of regulatory actions struggling retailers can expect in the future.

Such interventions were previously confined to the banking sector where the Central Bank of Kenya (CBK) has powers to force management changes and facilitate the sale of lenders in distress, among other actions.

The stance taken by CAK means that Tuskys will now prioritise the interests of suppliers ahead of other parties such as shareholders and employees. This mirrors the pre-eminence of depositors’ rights when a bank collapses. CAK, for instance, has ordered Tuskys to settle all the Sh1.2 billion supplier debts by July 16.

“The Authority has issued Prudential and Reporting Orders to one retailer (Tuskys) who, after several requests and extensions, failed to present a payment plan or evidence of negotiations with the affected suppliers,” Wang’ombe Kariuki, the CAK Director-General told the Business Daily yesterday.

“Out of the 25 retailers, only four retailers were found to have delayed payments exceeding 90 days. Three of the four retailers presented payment plans and have continuously reduced their debt portfolio.”

Failure to pay suppliers means the company will remain in the regulator’s crosshairs, limiting its expansion and management flexibility at a time when its rivals are eager to grow, having raised new debt and equity capital.

Buyer Power Department

Tuskys becomes the first major retailer to face the scrutiny of CAK’s Buyer Power Department, which was created after former supermarket giant Nakumatt Holdings went under with Sh18.5 billion of supplier debt.

Nakumatt’s total liabilities amounted to Sh35.8 billion, including bank loans (Sh6.9 billion) and commercial paper (Sh4.7 billion).

Buyer power means the ability of a purchaser to extract more favourable terms from a supplier on whom it can also impose significant opportunity costs by, for example, delaying payments.

Farmers and manufacturers of various goods have found themselves in a catch-22 situation where they have to tolerate onerous terms set by retailers or walk away and lose access to the key distribution networks.

Supermarkets, for instance, have become the favourite shopping destination for the middle class and have nearly wiped out corner shops in major towns.

Most suppliers stuck with Nakumatt and Uchumi even as they accumulated the massive debt, most of which could not be recovered from the retailers’ negligible assets.

For weeks now, shoppers have complained of missing essential goods on the retailer’s shelves in a signal that some suppliers are severing ties with the company.

For Tuskys, the regulatory actions have made urgent the need to raise funds from lenders or shareholders to maintain its footing in the highly competitive supermarket business where it is facing off with better-funded rivals.

One of Tuskys’ top rivals is Naivas, which recently moved to raise more than Sh1.5 billion from the International Finance Corporation (IFC) and other investors. The other one is Carrefour, a franchise owned by Dubai-based conglomerate Majid Al Futtaim, which says it has access to funding to the tune of $3.4 billion (Sh362 billion).

Wide-ranging investigation

Besides imposing conditions on Tuskys operations, CAK has also launched a wide-ranging investigation into the retailer to establish the circumstances that led to the default.

The company, for instance, has been ordered to furnish the regulator with its monthly bank statements for the past year for all bank accounts relating to its retail business by Friday.

The CAK started looking into Tuskys’ operations in April after reports emerged that it was not paying suppliers on time as provided for in their respective contracts.

Besides the Sh884.3 million supplier debt confirmed by Tuskys, the regulator also discovered that the retailer owed an additional Sh400.9 million through an independent investigation.

Besides bank accounts, the investigations into Tuskys’ affairs will include a review of its audited financial statements and those of its subsidiaries for the last three years.

The company has also been asked to provide the regulator with its management accounts for the last six months.

This story was first published in the Business Daily