Wal-Mart (Massmart) expansion into Africa

April 25, 2013 |
Wal Mart Massmart expansion into Africa Wal Mart (Massmart) expansion into AfricaAs Wal-Mart Stores plotted an African entry strategy, buying Massmart Holdings two years ago was just the right vehicle. With 377 stores across the continent and a strong position in South Africa, Massmart offered the Americans a firm foothold in a fast-growing region.
Today, Walmart is reconsidering the strength of Massmart’s biggest store brand, Game, if not the wisdom of spending $1.8 billion (R16.5bn at yesterday’s exchange rate) for 51 percent of the company in 2011. As the world’s largest retailer expands in Africa, Massmart may drop the Game brand in favour of Walmart for stores outside of South Africa, because many Africans are put off by what they perceive as South Africa’s swagger.

“In Nigeria, people want to believe they are the gateway to Africa, in Kenya they want to believe they are the gateway, so an American brand is often more welcomed than a South African one,” Massmart chief executive Grant Pattison said in an interview yesterday. “You can put it down to regional competition, but we will look at using the Walmart name, or a name local to that country.”

Massmart, with stores in 12 countries, first moved outside its home market in 1993 when it opened a store under the Game brand in Botswana. The company now operates 14 Games, 13 CBW stores selling food, liquor and cosmetics wholesale, and one outlet of its Builders Warehouse hardware retail chain on the continent outside of South Africa.

The economy of sub-Saharan Africa will expand 5.3 percent this year, higher than the 3.6 percent expected worldwide, the International Monetary Fund has estimated.

Nigeria is forecast to grow 6.8 percent this year, its National Bureau of Statistics says. By 2030, Africa’s 18 biggest cities will have combined spending power of $1.3 trillion, consultant McKinsey estimates.

“Africa doesn’t want to feel like it’s being colonised by South Africa,” Momentum Asset Management portfolio manager Wayne McCurrie said. “There is definitely an allure in developing markets for American brands.”

Some analysts question the wisdom of abandoning the Game brand, which is known outside of South Africa for offering a wide range of goods. Other South African companies such as Shoprite and MTN had successfully expanded northward, Sasfin Securities director David Shapiro said. “Choosing the Walmart name over its own Massmart brands may be risky,” Shapiro said.

Walmart has not had a smooth ride as it has grown outside the US. Last year the company began investigating allegations that executives in Mexico paid more than $24 million in bribes to accelerate expansion there, and it is also probing operations in Brazil, India and China.

Walmart said last month that it expected to continue incurring costs related to its investigations of possible bribery in its international operations.

In the US, customers and workers say the company is struggling to keep shelves full. That has coincided with a decline in the retailer’s US workforce even as Walmart has added hundreds of new stores.

Pattison says Walmart offers Massmart advantages that extend far beyond its name. In Africa, the company is looking to Walmart’s UK supermarket chain, Asda, as it seeks to increase its produce offerings.

With little experience in produce, Massmart has tapped Asda’s know-how in ensuring a steady supply of fruits and vegetables and keeping them from spoiling, Pattison said. “As we expand our fresh line, we are learning from Asda.”

Massmart’s sales in the financial year to June last year rose 15.6 percent to R61.2bn, from 12 percent growth in the year before. Net income jumped 40 percent to R1.17bn last year. Sales in South Africa make up 92 percent of revenue.

Since September 23, 2010, the last day before the Walmart deal was made public, Massmart’s shares have advanced 46 percent, against 79 percent gains for rival Shoprite and 69 percent for the FTSE/JSE Africa general retail index. Pick n Pay Stores has declined 5.2 percent in the period.

Massmart says it is planning several new stores in countries where it is already present. And it is setting up Game outlets in Angola and Kenya, new markets for Massmart. Profit at Game stores outside South Africa was growing faster than sales, Pattison said. Walmart declined to comment.

Massmart’s drive north comes as retail sales in its home market are sluggish. The slowdown in consumer spending in South Africa will crimp profits for store owners.

Expansion in Africa could be slowed by a lack of infrastructure and difficulties in securing property, Pattison added. Those hurdles, as well as problems with corruption, a reliable legal system, and currency stability in some countries had to be assessed when planning stores, he said.

“Modern retail can be successful [in places where] you can sign a lease, you can be profitable and competitive without taking a bribe, and the country has a relatively stable currency,” he said. – Bloomberg

Source: IOL Business/ Bloomberg – Apr 22nd, 09:32

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