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Massmart’s poised for showdown with union over downsizing

By Xolisa Phillip, in Johannesburg
Posted on Friday, 17 January 2020 12:14

A woman pulls a trolley with children at Makro Store Riversands of South African retailer Massmart in Midrand, South Africa. REUTERS/Siphiwe Sibeko

Massmart is embarking on a store downsizing process that could affect nearly 1,500 jobs and result in 34 DionWired and Masscash outlets being shut down.

The retailer announced the move this week in a short note to the market.

In contrast, Massmart has ambitious plans to expand its store footprint in Kenya and Zambia, starting in 2019 through to 2021. But the picture is not so rosy in South Africa, where the Johannesburg Stock Exchange-listed company’s share price has been a poor performer and been on a downward spiral over the past five years. Massmart shares are trading at almost 65% lower than they did five years ago.

Ramaphoria comes to an end

Massmart’s announcement comes in the same week as the release of the FNB/BER Consumer Confidence Index, which showed South African consumer confidence is at a two-year low.

“Consumer confidence remained at its lowest level since the fourth quarter of 2017. The confidence gains since [President Cyril] Ramaphosa’s election have now been completely reversed and South Africa’s grim economic reality has become apparent to consumers,” according to the FNB/BER report.

Listed telecoms operator Telkom is also in talks with unions to cut as many as 3,000 jobs from its workforce as it battles a competitive and changing market landscape.

Weak economy bad for retail

Wilhelm Hertzog, an analyst and portfolio manager at Cape Town-based Rozendal Partners, told The Africa Report “the tough operating environment has been the primary contributor to the woes Massmart has experienced of late”.

These problems in South Africa were most apparent in Massmart’s general merchandise and electronic goods brands DionWired and Game. DionWired and Game primarily stock high-ticket items that consumers cut back on in difficult times.

For most retail watchers, South Africa is a mature market, challenged by low GDP growth. These two factors combined have squeezed retailers’ margins.

Union resistance

The South African Commercial, Catering and Allied Workers Union (SACCAWU) has vowed to resist Massmart’s planned store closures. SACCAWU said it would mobilise to draw up a plan of action against the jobs cuts from any store being shut down.

Such fighting talk from SACCAWU means new Massmart CEO Mitch Slape is poised for his first big test since taking the helm in September 2019.

Slape, a US retail veteran and turnaround specialist, is in South Africa at the behest of Walmart, Massmart’s controlling shareholder. He has been tasked with reversing Massmart’s fortunes in the country.

Risks to Massmart

In addition to Game and DionWired, the Massmart stable includes wholesale and retail brands such as Makro, Builders, Jumbo, Cambridge Food and Rhino Cash and Carry.

In the rest of the continent, Massmart has operations in Lesotho, Swaziland, Botswana, Namibia, Mozambique, Zambia, Kenya, Tanzania, Uganda, Nigeria and Ghana.

Massmart’s 2018 annual report showed:

  • a 22.9% (R1bn, $69.4m) decline in headline earnings before restructuring costs;
  • and a 31.7% (R901m) drop in headline earnings.

In the 2018 report, Massmart noted: “The dampened South African consumer sentiment is unlikely to improve unless there is positive momentum in some key macroeconomic factors including: economic growth, the rand exchange rate, business and consumer confidence, interest rates [and] unemployment.”

The retailer identified the volatility of the group’s Africa operations and the rise in the cost of goods and operating expenses as key risks.

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