Battle for Market Share: Why China Square Won, Nyakima Traders Lost

By Geoffrey Sirumba – April 13, 2023

A few months ago, the country was treated to a high-drama spectacle. Reason? There was an unexpected foreign entrant into the retail business who apparently disrupted the market with their low prices. In response to that, local entities petitioned the government to shut down the new kid on the block. However, it turned out to be a much more complex diplomatic issue than many informal traders realized. Amidst the raging debate, one thing was clear: Kenya is a free enterprise economy, and any law-abiding resident can explore locally available business opportunities. Instead of fighting competition through unwarranted market protection mechanisms, why not up our competitiveness? As a matter of fact, a shrewd businessperson should constantly look for new opportunities. But before establishing your dream business, you first need to thoroughly understand industry dynamics and fundamentals.

In this special edition, I will show you why China Square won while Nyakima traders lost the battle for market share. Consider the retail industry. Competition levels are usually brutal and cut-throat. Indeed, only the strong and the smart will survive. Kenya's retail industry is a significant contributor to the country's economy, accounting for about 11% of Kenya's GDP.

Porter’s Five Forces Model can be used to explain what has happened to Kenya’s retail sector by analysing the threat posed by the entrant of a new play (China Square), the competitive landscape, the bargaining power of buyers, the bargaining power of suppliers, and the threat caused by substitute products. This analysis will help Kenyan retailers estimate the risk posed by emerging players and potential areas for growth and competitive advantage.

1. Threat posed by new entrant
This force considers how easy or difficult it is for competitors to enter the market. The easier it is for an upcoming competitor to gain entry, the greater the risk of an established business’s market share being depleted. Barriers to entry include absolute cost advantages, access to inputs, economies of scale, and strong brand identity. Retail is a very profitable space considering that a significant proportion of all commodities sold in Kenya are imported, with the major player being China. Starting a retail business in Kenya is very simple and encouraged by the government. If you have capital, you just need to register as per the regulations, and you will soon be open to trade. International players pose a main risk of dumping. But the authorities have been on constant alert lately, although you can't rule out systemic corruption.

2. Introduction of cheaper substitute products
When you visit China Square, you will notice that in almost all product categories sold, they have introduced new product lines that were previously non-existent in our Kenyan market. By having a physical location, they can provide warranties for new products, reducing switching barriers.

3. Bargaining power of customers
In today’s world, customers are no longer loyal. They move to where they are appreciated and valued. In addition, one major advantage of the new entrant is that they are based under one roof, a strategy that was last seen as a pioneer after Nakumatt. They have combined almost all the fast-moving consumer products you would need to traverse five major streets. Consequently, they have attracted the ever-elusive middle class who would rather die than struggle through the hustle of wading mud juggling matatus, brokers and travelling from one corner of Luthuli to Nyamakima. Additionally, the location has ample parking for its clients.

4. Bargaining power of suppliers
Another advantage is that China Square is well-resourced and has strong relationships with Chinese exporters compared to their Kenyan counterparts. This means that they could get sourced goods at a cheaper rate and transfer the pricing advantage to the end customer. With that kind of relationship, they can plan inventory and enjoy trade credit from their countrymen. Given the tough economic times, customers are price sensitive and always looking for bargain deals. Most of the affected traders are small players who do not have the financial muscle to influence Chinese factories.

Despite what seems like a lost cause, all is not lost for Kenyan businesses. But to stay afloat, they will need to reinvent themselves to remain relevant and profitable. There are four business strategies: cost, quality, distribution, technology, and intellectual property (IP). All business strategies are broken down into these five, or combinations of them. As a general principle, focusing your business on one area is the easiest way to execute. Here is what you can do:

I. Low-cost results in low prices. This is the easiest way to gain a competitive edge and differentiation. At a low cost, one does not need a superior product. In fact, an inferior product will often outsell a superior one if it is priced fairly. All one needs is a dedicated focus on reducing costs. Considering the sizes and processes involved in sourcing goods and the amended tax regime whereby consolidation terms have been changed, only major players will be able to take the fight to Chinese doors.

II. A quality strategy is only more difficult than a cost strategy. That is because it is too internally focused. Like low cost, it is a one-vector issue focused solely on internal execution. But the quality strategy is more difficult because it requires sophisticated tactical execution in manufacturing, marketing, and supplier partnering. It is extremely difficult to execute at all costs.

III. By building a distribution network, businesses build strength. This strategy appears simple on the surface, but it is not. Businesses with distribution strategies build nationally through counties by getting to where their customers are Instead of competing exclusively for Nairobi customers. Your business broadens its customer base. Nearly all successful retail companies in Kenya have perfected this tactic.

IV. E-commerce combines technology and distribution. Together, they can produce an unstoppable product. It is generally the most profitable strategic move because it prevents margin stacking. Currently, e-commerce is the main disruptor in this space, with Jumia leading in that space. Alternative distribution mechanisms are the fastest-growing growth frontier. With technology, a business can customize their relationship with their customers, and extend credit services such as buy now pay later.

Geoffrey Sirumba is a regular guest contributor to our sharp insights. A ruble rouser, he’s an entrepreneur in the shared economy space and a marketing consultant based in Nairobi.