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Current Emergent Causes of Financial Distress on Major Retail Businesses in Kenya: Case of Nakumatt

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Current emergent causes of financial distress on major retail businesses in Kenya: Case of Nakumatt.


ADM: 094584


MAY ,2019



Financial distress is a situation where a firm is unable to meet the financial obligations as they mature or does so with difficulties. Usually, brought about by insufficient cash flows, decline in market value, profit breaches and low growth in businesses (AKaplan, 2013). Business failure results in enormous economic consequences. In many cases, the failure is preceded by a period of uncertainty and the financial status of the company is often by financial distress (Blocher, 2016). A firm in financial distress usually falls in a tight cash situation in which it is difficult to pay the owed amounts on the due date If prolonged, this situation can force the owing entity into bankruptcy or forced liquidation. It is compounded by the fact that financial institutions refuse to lend to those in serious distress (Altman, 2013). When a firm is under financial distress, the situation frequently sharply reduces its market value, suppliers of goods and services usually insist on cash on delivery terms, and large customer may cancel their orders in anticipation of not getting deliveries on time (Almeida & Philippon, 2016).


The way different retail businesses decide on what decisions they make when undergoing a big change or growth greatly affects its outcome of success and thus cautions for observing risk and risk can be said to be the intentional interaction with uncertainty, and with this uncertainty they should exert a manner in which they deal with it to sustain their stability (Dionne, 2013).

Over the years, the retail industry in Kenya has experienced tremendous growth contributing as much as 10% to the country’s GDP Supermarkets have been the drivers of the retail industry in Kenya, encouraged by changing lifestyles, increased urbanization and growth in the middle class. Not only have these outlets invested in young and energetic workforce but have also distributed their services across the country, setting up modern malls in both urban and semi-urban centres. (Matagaro, 2018).

Financial distress has a probabilistic definition in nature, but several researchers have given different contextual definitions for financial distress. There isn’t an exact definition given for financial distress by any scholar, this is due to its complexity and variety of causes. This is true partly because of the variety of events befalling firms under financial distress. The list of events is almost endless, but some examples are: dividend reductions, plants closing down, losses, employee layoffs, management resignations, plummeting stock prices. But basically, in simple terms, financial distress is a situation where a firm’s operating cash flows are not sufficient to satisfy current obligations and the firm is forced to take corrective action, which seems to be the trend in the retail industry overtime especially in start-up ones which seems to start with vigour but end up having a corporate downfall due to financial distress. (Wruck, 1990).

Many retail firms in developing and transitional economies are in financial distress situation, due to low level of debt service coverage (Outecheva, 2007). Very low volume of liquidity and negative cash flow combined with high leverage leads for financial distress amongst many corporate firms. As soon as firms have reached a certain level of leverage but do not strategically conform to their business plans, financial distress can occur even in a booming economic environment. High levels of leverage in the firms and increasing volatility make equity value vulnerable, so that each possible decline in the enterprise value may rapidly impair equity (Hotchkiss, 2006).

While most companies rely on their financial performances as the main pillar to financial stability, it is important not to ignore managerial and operational signals. Many profitable businesses have found themselves in trouble due to rapid expansion like Uchumi and Nakumatt Supermarkets or the introduction of a formidable competitor like Jumia and Amazon. In each of these instances, the companies were successful before an operational event or unheeded signal led to financial problem and in some cases the subsequent failure of the company. In other countries, the business that were able to recognize earlier warning signs such as Zellers, Canadians Tire and The Bay have survived by differentiating themselves or changing and improving their business model (Zwaig & Picket, 2012).

Due to financial distress, managers, stockholders, lenders, and employees are always concerned about their firm’s financial health. The job security of managers and employees is not assured should their firms struggle financially. Stockholders’ equity position and lenders’ claims are also not guaranteed (Schwartz, 2014). The government, as a regulator in a competitive market, has concerns about the consequences of financial distress for firms, and it controls capital adequacy through the regulatory capital requirement. This shared interest among managers, employees, investors, and the government creates frequent inquiries and recurrent attempts to answer a relentless question about how to determine financial distress, or what reveals the credit risk of firms (Ming, 2016).

Managers of a distressed firm are often tempted to misappropriate entity’s assets and resources and at the same time become more and more risk averse (Lau, 2017). The immediate consequence of this situation is that short-term decisions and interests are given attention as opposed to long-term strategies that would sustain the business in the long run, as a result, investments in the quality of the products and support through acquisition of the appropriate assets take a back seat (Bender, 2013).

Further, accountability is not enhanced as the focus shifts to management of liquidity to avoid deepening the crisis. Ultimately, the affected firm fails to take advantage of potential investment opportunities that may reserve the distress situation. The state of 3 financial distress, therefore, leads to weakening of a financial system of the troubled firm and prejudices the rapport between the firm and various stakeholders. There is, therefore, a need to constantly review the financial status of the entity and evaluate whether there are indicators of financial distress so that the adverse effects are eliminated before the actual impact is felt thus the essence of this study to establish the determinants of financial distress in selected supermarket chains in Kenya as per current emergent factors (Altman, 2013).



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