South Africa: How Massmart lost ground on retail lead

Walmart, which now holds 52.78% of Massmart’s shares, in October received shareholder buy-in for a proposal to purchase the balance of the group’s remaining issued share capital. This will enable Walmart to assume full control of Massmart and delist the retailer from the Johannesburg Stock Exchange.

Benguela Global Fund Managers chief investment officer Zwelakhe Mnguni says Massmart squandered its lead because the company lacked diversity and did not optimise its stores to keep up with evolving market dynamics.

In addition, says Mnguni, Massmart was unable to meet changing consumer needs and made a blunder by not having an e-commerce strategy.

“The delisting is a tactical move,” Mnguni tells The Africa Report. “They are trying to fix the problems, away from the surveillance of the markets.”

“They’ve got a lot to do –  they need to get their product range [and] their e-commerce strategy sorted out. If they do it on the side, there is no pressure to report numbers and communicate to the market,” Mnguni explains.

Market shifts

Senior equity analyst at Sasfin Wealth Alec Abraham says, for him, the key issue is that Massmart was slow to react to key market shifts from the days that it was successful.

Those changes, according to Abraham, include a sharp decline in retail volume growth and a general merchandise bias, which rendered Massmart vulnerable to online disruption.

“A delisting takes the pressure off management of reporting to the market regularly, when the recovery process may not deliver the short-term results market participants are seeking,” Abraham says.

Casparus Treunicht, a portfolio manager at Gryphon, draws attention to the fact that the South African government initially “had something to say about how Walmart was not to run Massmart,” when the former bought the latter in 2010.

With the delisting, “Walmart used a loophole to get 100% of the business,” says Treunicht, adding, “now they can do with it what they always wanted.”

The delisting will enable “Walmart to plan things in the dark,” says Treunicht. That veil of secrecy afforded by the delisting ought to keep competitors, such as Takealot, HiFi Corp, and the Hypermarkets, on their toes, wondering about Walmart’s next move.

Unequal union

• In 2010, US retailer Walmart moved to acquire a 51% stake in Massmart, then considered a domestic success story well-positioned as a gateway to the rest of the continent. In 2011, South Africa’s competition authorities attached conditions to the tie-up transaction.
• A decade down the line, Massmart has been plagued by ongoing underperformance and developed financial dependence on its American parent. As recently as 2020, Walmart provided Massmart with a R4bn facility to shore up liquidity.
• In response, Massmart embarked on a strategy that involves stabilising operations through the implementation of a turnaround plan;  focusing on core activities; and investing in the accelerated growth of e-commerce.
• That was followed by a cost-cutting campaign and a pullback from some rest of Africa operations. The flagship Game brand is one of the focal points of the market retreat, with 14 stores in East and West Africa, and another 15 outlets in South Africa, earmarked for closure.

Massmart also divested from Cambridge, Rhino, and Massfresh, selling the businesses for R1.3bn ($75m). The company says the divestments are part of its portfolio clean-up and efforts to focus on core operations.

Abraham points out that in South Africa, Massmart is not unique in store closures.

Although reasons differ depending on retailers, Abraham believes the motivation for Massmart could be matching store estate to the addressable market.

Asset performance

Mnguni says Massmart’s growth in prior years could be attributed to South Africa’s economic boom in the mid-2000s, which resulted in more people attaining middle-class status.

The improved economic fortunes of many came with newly acquired purchasing power.

Game became a destination where the new middle class could buy white goods, but Massmart could not keep up with expanding consumer tastes. Over time, the missteps piled up and Massmart lost market share.

Mnguni says the decline has been acute in the productivity of Massmart’s assets.

In 2017, for every R1 of assets, Massmart made R2.93 in revenue, according to Mnguni’s analysis. In 2021, for every R1 of assets, Massmart generated R1.92 in revenue.

“It’s a 30%-35% drop in the productivity of their infrastructure if I could call it that. That speaks to what are they getting for what they have on the ground in terms of people and stores,” Mnguni said.

He added: “In this game, your margins are paper thin. If you lose revenue productivity, you start to get into a difficult situation.”

“They had a head start. It’s a case study on diversity, changing customer needs and trends, and on constant optimisation of store operations.”

Online channel

At the group’s interim results presentation for the first half of 2022 in August, CEO Mitchell Slape reflected that: “Much work remains in order to get Game to be the retail company that we know it can be.”

According to Slape, the execution of Massmart’s turnaround pillars is reaching a point of conclusion and management will put their focus on growing the business. “This is particularly in the e-commerce space … –  70% of [capital expenditure] is going towards e-commerce.”

“We are ramping up our e-commerce investment to better serve customers and more strongly establish our presence in this fast-growing, and increasingly competitive, channel,” Slape said during the presentation.

They had a head start. It’s a case study on diversity, changing customer needs and trends, and on constant optimisation of store operations.

Slape also revealed that, during the period under review, Massmart “revitalised and improved the quality of our websites and apps [applications], and worked hard to further develop our on-demand capabilities”.

Slape was appointed in 2019 to fix the business. He is scheduled to step down as CEO in January 2023 when Jonathan Molapo will take over.

No guarantee of getting it right

Mnguni says, despite recent developments in the business and management changes, there is no guarantee Massmart will get it right. “They are so far behind – even Walmart’s e-commerce [offering] is not superior. I would be cautious.”

Abraham says whilst a compelling online offering is no panacea, it is a necessary tool to compete in a market where peers have such a capability. “Without the online ‘ticket,’ there’s no chance of winning the ‘retail lottery’.”

On the management over the years, Abraham says post-Mark Lamberti and particularly after Walmart’s entry, he has been disappointed by the failure to position the group appropriately in line with changing consumer and retail dynamics. That is despite having the backing of the world’s largest retailer.

New normal

With the delisting, Treunicht is of the view “Walmart always wanted 100%, and this was the only way.”

Treunicht also warns against underestimating Walmart’s capabilities. “They are active in plenty of emerging markets, and I am sure they are putting things in place for a new future.”