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03 Jun 2011 14:49
Walmart Stores hopes that food and conversation can win over shoppers and companies in sub-Saharan Africa as soon as the ink dries on its deal to buy Massmart.
Walmart’s rocky mission to buy Massmart Holdings went from a full-out acquisition unveiled in September to Walmart switching its stance two months later to buy a 51% stake in the South African retailer. A government tribunal granted approval earlier this week, paving the way for Walmart’s purchase to close by the end of June.
Walmart wants to use its merchandising and logistics expertise to grow Massmart’s sales, particularly in fresh food, where Massmart is not yet a big player.
At the same time, it must calm the critics who worry that Walmart’s presence will stifle local retailers and suppliers.
“Our actions will end up determining what our reputation is,” Walmart international chief executive Doug McMillon told Reuters on Thursday.
Massmart will give the world’s largest retailer a foothold in 14 more countries, nearly doubling its tally to 29.
Walmart has been bringing its strategy to other countries since the early 1990s, and has made missteps along the way. It pulled out of Germany and Korea, and decided to leave Russia late last year after a few years of research there proved fruitless.
Walmart continues to look at expanding, but as Cathy Smith, Walmart’s international chief financial officer put it, the company does not want to be a “flag planter” and has a list of criteria that must be met for it to enter a market. Those include a growing middle class and a market moving from an informal retail environment to a more formal one.
It makes sense for United States (US) companies to expand if they have done their homework. For Walmart, international growth is crucial because sales at its US discount chain have declined for two years.
“Over the past year we’ve had more and more retailers announce plans to either expand internationally or begin to analyse their options internationally, and we think a lot of this is in response to the continuing sluggish US economy and the need that most retailers have to deliver growth to their shareholders,” said John Long, retail strategist at Kurt Salmon.
Walmart declined to discuss specific opportunities, and said that for now it will be busy improving business at Massmart and in countries where it already operates.
McMillon is focusing on improving profitability. The international business is most profitable where it has been the longest, in countries such as Canada, Mexico and the United Kingdom.
“Without slowing down the growth rate, we would like to become more profitable in China and Brazil. As we’ve continued to invest there, and the businesses mature, it’s logical that shareholders should expect a higher return,” McMillon said.
In Africa, Walmart has been talking with local companies, trying to explain that it wants to work with them. It plans to quickly expand the limited assortment of food Massmart sells in some of its formats, which should rely on a high percentage of local procurement.
Walmart typically buys 85% to 90% of items locally, with a higher rate when stores sell more food, McMillon said.
“I expect sub-Saharan Africa to be the same way,” he said.
Sometimes it makes more economic sense to use Walmart geographic reach to offer lower prices. In Japan, for example, Walmart ships in bottled water from Canada to avoid the higher prices charged locally.—Reuters
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