Massmart reality bites Walmart’s African aspirations
The US giant's high-profile acquisition promised so much but has delivered very little
More than seven years after Walmart’s $2.5bn acquisition of Massmart, the merger between the world’s largest company by revenue and Africa’s second-largest distributor of consumer goods is yet to set the South African retail sector alight.
Walmart’s high-profile acquisition of a 51% interest in Massmart – whose products straddle general merchandise, liquor, home improvement and wholesale food markets – heralded the US group’s foray into Africa. It was part of a broader strategy to get into high-growth markets.
With such growth aspirations in mind, Massmart, a high-volume, low-margin business, was a logical target for Walmart.
“When we think about the opportunities to invest in sub-Saharan Africa, it really comes down to growth. We see an opportunity to take our mission and apply it in this part of the world and create growth opportunities for our business,” Walmart CEO Doug McMillon said in January 2011.Indeed, since the deal was consummated in June 2011, Massmart, the owner of the Game, DionWired, Makro and Cambridge brands, has increased the number of its stores from 288 to 424, as of January this year.
It has presence in several sub-Saharan Africa countries through its four operating divisions, Massdiscounters, Masswarehouse, Massbuild and Masscash. But, overall, the transaction that promised so much has delivered very little.
It is difficult to overlook that Walmart bought the majority shareholding in Massmart at R148 a share. As of Friday, Massmart’s share price has slipped 14.35% since the implementation of the transaction on June 20, 2011. The shares were up 2.63% on Friday at R113.66.
“It has been disappointing,” says Ian Cruickshanks, chief economist at the Institute of Race Relations, of Massmart’s performance over the seven-year period.
Cruickshanks says Walmart may have been over-optimistic about the deal and underestimated the difficulties that South African retailers face.“We are still very much an emerging economy. They must be prepared for the long run. But they have done a lot recently to reduce costs,” he says.
In the year ended December 2017, Massmart’s costs fell by 1.3% and expenses as a percentage of sales were 16.4%.
In light of the constrained consumer environment which is stifling sales, Massmart has no choice but to prioritise cost savings.
Analyst Chris Gilmour has been scathing about what he says is Massmart’s lousy performance since the 2011 milestone deal. In that period, Massmart’s share price has lagged the general retailer’s index which has grown by 77.98%, as of Friday.Gilmour says Massmart is taking strain from deflation in durable goods. “Circumstances have not gone their way,” he says.
Massmart says the deflation in domestic appliances and electronics has not stimulated customer spending because hard-pressed lower- and middle-income consumers prioritise spending on food.
In the South African market – which accounts for 91.6% of Massmart’s total sales – food and liquor make up 56% of sales, with durables responsible for the rest.
Growth into the food market is a sore point for Massmart because the group feels hard done by what it calls anti-competitive lease exclusivity leases that rivals in the grocery retail market – Pick n Pay, Spar and Shoprite have stores at malls where Massmart wants to roll out its Game FoodCo stores.
Massmart took its concerns to the Competition Commission in 2014. The Competition Tribunal dismissed Massmart’s complaint earlier this year, frustrating the retailer’s plans to sell fresh fruit and vegetables, meat, dairy and bakery products at more shopping malls.