Upon visiting a supermarket in Kenya, Chinese national Lei Cheng took note of the overpricing of goods that he was familiar with as imports from his home country.
Mr. Cheng flew back home, had discussions with suppliers, and came up with the simple business model behind China Square: to not sell basic items at a premium.
“In the first two weeks in business, our sales turnover was Sh20 million. Nowadays, on a bad day we sell goods worth Sh10 million,” said Mr. Cheng.
China Square’s success sparked displeasure from small-scale traders and Trade Cabinet Secretary Moses Kuria, who stated on Twitter that “we (Kenya’s government) welcome Chinese investors to Kenya as manufacturers, not traders.”
Read: China’s Infiltration In Kenya’s Business Market
CS Kuria continued to stress this point by announcing via a tweet on Saturday evening that he would “assist China Square owner Mr. Cheng to set up a manufacturing plant in Kenya” and work on a distribution partnership with small-scale traders.
On Sunday, China Square Limited announced that it will indefinitely close business as the Kenya China Chamber of Commerce, on the same day, stressed that Chinese traders are not in Kenya to compete with Kenyan traders, but to contribute to Kenya’s growth and development by creating jobs and paying taxes.
The politics surrounding the saga indicate the Kenya Kwanza government’s insistence on promoting manufacturing in Kenya rather than the importation of goods for retail trading. Moreover, the business fundamentals of the situation indicate an opportunity.
In Kenya, formal retailers, mostly supermarkets, tend to focus more on premium pricing, relying on steady demand from middle and upper-class consumers. As a result, 77% of consumer goods in Kenya are bought from over 250,000 small stores ‘Dukas’.
Read: Kenyan Avocados Sold At The Largest Fruit Market In East China
Since some specialty goods cannot be offered by these small stores, they’re only available in these supermarkets and are seen by many, including Mr. Cheng, as overpriced.
Low-cost supermarket retail has the potential for significant profits as it breaks this premium-focused model by bringing “kiosk” prices to supermarkets, attracting low-income earners. This sacrificing of margins (marking up products less) leads to improved earnings by boosting volume.
American low-cost retail outlet Costco is the 5th largest retail company in the world by Market Capitalisation and is well known in the US market for its low prices. Similar to China Square, it achieves this in part by keeping mark-ups extremely low with an average mark-up of 11%; much lower than competitors’ mark-ups i.e. 24% for Walmart and 35% for Home Depot and Lowe’s – these are the 2nd, 3rd and 6th largest retail companies worldwide by market cap.
As the Kenya government urges Mr. Cheng’s firm to make the shift to manufacturing, the success of China Square indicates that low-cost retail in Kenya can extend beyond small stores, and is a viable model for supermarkets in the country.
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