Indeed, ‘blamed’ is a too strong word for Chris Kirubi, but it is directionally correct. Touted as one of Kenya’s wealthiest men, Mr. Kirubi should be blamed for Uchumi’s lack of success over the years.
By creating a toxic culture characterized by theft, insubordination, and reinforcing a dynamic that basically set up underperformers at Uchumi to prevail.
His entry into Uchumi as a major shareholder in the turn of the 21st century was considered a breakthrough- his millions were to propel the company to success. The entry was engineered by the Industrial and Commercial Development Corporation (ICDC) on December 13th, 2001, which proposed Kirubi to be Uchumi’s Board chairman. He was also to be its CEO.
Mr. Kirubi was an influential shareholder at ICDC, given that he was among the shareholders that bought the government’s stake at the corporation.
ICDC is a government parastatal, whose primary objective is to facilitate the investment by Kenyans in the economy of the country, while simultaneously providing financing to Kenyan businesses and manufacturers
Having known that Uchumi was a promising venture, Kirubi used his influence to acquire slightly over 5% of the firm’s shares in 2005, the highest for a single individual. The primary objective of Uchumi was to create outlets for the equitable distribution of commodities and to create retail outlets for Kenyan manufacturers.
After Kirubi’s takeover, a series of poor strategic choices, Uchumi closed down, albeit temporarily, and was placed in receivership during June 2006 after 30 years of business. It was simultaneously de-listed from the NSE.
At the time, its closure was described by market commentators as “one of the greatest corporate disasters in independent Kenya history”.
Uchumi’s workplace culture and operations reflected the vision of Kirubi, who insisted on an expansionist strategy to create a large supermarket chain with outlets spread across East Africa.
At first, the expansion strategy improved the gross profit of the retailer from Kes 1.1224 billion in 2001 to Kes. 1.373 billion in 2002. However, these profits were consumed by increasing the costs of operations.
Blinders in strategic frames
Strategic frames are mindsets, mental models that shape how executives see the marketplace. These frames provide answers to important strategic questions like: How do we create value for shareholders? What industry are we in? Which customers are crucial? and so on.
The strategic frames for Kirubi focused his eyes on winning new markets in a booming economy, thanks to the promising economic principles of the new Kibaki administration.
But while frames help executives to see, they can blind them. By focusing his mind repeatedly on expansion strategies, the frames seduced Kirubi’s mind into believing that expanding Uchumi is the only thing that matters.
He did not consider operational improvements that would allow the retailer to increase its revenues from existing stores faster than its expenses.
In effect, Uchumi’s operating profit in the 2002/2003 FY decreased from Kes. 118.5 million to Kes. 83.2 million.
By 2004, the retailer was in a mess. The high costs of the expansion strategy were funded by short term loans totaling Kes. 3.6 billion as of 2004. Kirubi’s team of executives repeatedly dismissed declines in profits as temporary fluctuations rather than as indicators that some of the new branches were performing poorly.
To make matters worse, the retailer’s wholly-owned subsidiary, Kasarani Mall Ltd was given a loan of Kes. 109 million from Uchumi’s coffers to fund the purchase of 20 acres from Solio Construction, a company owned by former president Daniel Moi and his trusted ally Joshua Kulei. It later turned out the land was a government properly allocated to the military.
In other words, Kes.109 million was lost just like that.
The death of Uchumi was finally sealed when Kirubi made another strategic flaw: raise capital through a rights issue. A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date. This increased Uchumi’s shareholders from 8,000 to 12,000, most of them small scale investors.
In the meantime, ICDC and Mr. Kirubi sold their Uchumi shares during the rights issue.
The whole process raised Kes. 1.2 billion that was used to finance strategic decisions of loss-making branches in Tanzania and Uganda.
In a seemingly suspicious deal to raise more funds, Uchumi sold one of its prime assets, the skyscraper that hosted the Uchumi Aga Khan Walk in Nairobi, to London-based company Allgate Ltd for a paltry Kes. 147 million. Interestingly, Allgate leased the building back to Uchumi for a monthly rent of Kes. 1.7 million, further increasing the operating costs.
While the company was still embarking on an expansionist agenda, suppliers had not been paid nearly Kes 2 billion and creditors (PTA and KCB banks) nearly Kes. 900 million.
After some investors got wind of the fishy dealings behind closed doors, Mr. Kirubi was forced to resign, handing over to a new CEO, Mr. John Masterten-Smith.
The first strategic action by Mr. Masterten-Smith was to cease Uchumi’s operations to allow for an audit. It emerged that theft by managers was rampant, and this corruption was aided by poor record-keeping.
Kirubi did not act fast to stop his managers from looting because of the close and personal relationship he had with them. Kirubi’s vision of a mega-retailer that dominates markets across East Africa attracted some of the most talented managers and employees in Kenya.
Imposing the necessary discipline, however, ran counter to Uchumi’s culture, and Kirubi found himself frustrated whenever he tried to exert more control.
The managers violated workplace policies and standards by cooking accounting books and inventory details. For instance, the audit showed that at one time, Uchumi imported greeting cards worth Kes.70 million, yet their sales were not recorded in the accounting books.
After Mr. Masterten-Smith suspended Uchumi’s operations, lenders KCB and PTA banks placed Uchumi under receivership, while the NSE suspended trading of Uchumi shares.
The suspension of trade in NSE threatened the livelihoods of 12,000 small scale investors that believed in Kirubi’s tales. During this time, the then Minister for Trade and Industrialization Dr. Mukhisa Kituyi was worried about the state of unemployment and economic mess that would be caused by Uchumi’s closure and convinced president Kibaki to bail out the retailer.
In the following years, Mr. Chris Kirubi, together with former MD Kennedy Thairu, former directors Francis Oyugi, Joseph Munene, Kezzy Muniu, Nigel Pavitt, and Isaac Awuond was charged with an attempt to defraud Uchumi. Others were Amin Manji and Shamash Manji, then acting MD Lloyd Masika, Stephen Waruhiu, Allgate MD Atul Shah, and Deepak Shah. The case dragged in court until 2011 when the 13 were freed.
The administrators handpicked Jonathan Ciano to spearhead the retailer in the new era.
Mr. Ciano tried his best to revive Uchumi, but a toxic workplace culture initiated by Kirubi still prevailed. A 2014 rights issue that raised Kes. 900 million was mired in controversy.
Mr. Ciano was accused of embezzlement given that even after the capital injection from the rights issue, the retailer could not afford to pay suppliers and was still making losses.
The board instructed an audit to be conducted and it emerged that Mr. Ciano kept two sets of books to conceal the losses Uchumi was making. For example, instead of recording losses of Kes 1.9 billion it had made in 2014, the books showed only Kes. 501 million. Further, Ciano signed a Kes. 1.6 billion deal with rentCo East Africa to buy some assets from Uchumi, then lease back to the retailer at exorbitant prices.
Nepotism had also crept into the retailer; Ciano’s wife was among Uchumi’s top suppliers. This negates the accounting principles of the Institute of Certified Public Accountants of Kenya, in which, interestingly, Mr. Ciano was a board member until 2016.
Values change into doubts
A company’s values are a set of deeply held beliefs that unify and inspire its people. Values define how employees see both themselves and their employers. Kirubi, for example, exemplified visionary traits and a deep commitment to an expansionist strategy. He was, and still, is addicted to growth.
His problem during his time at Uchumi was that he lacked a clear understanding of how his old formulas for success would hinder him in managing an ever-expanding company. Even after the company easily raised funds from shareholders, it could resist the impulse to rush forward. The destructive obsession with high growth pervades virtually all capitalist economies. Kirubi ignored the capital requirements of new stores and focused solely on growth in earnings. This ultimately led to bad decisions.
The new CEO, after Kirubi, Mr. Ciano’s, actions saved Uchumi from bankruptcy, but a culture of corruption leaves the company poorly positioned for future growth. Fortunately, investors and creditors still believe in the company. Last month, creditors agreed to take a Sh3.2 billion loss and convert the rest of their debts to equity as a solution to saving Uchumi yet again.