Massmart ready to sacrifice margins for market share

Retailer Walmart’s South African unit Massmart is ready to push down prices and sacrifice margins in pursuit of a bigger market share.

Walmart took a 51% stake in Massmart in June this year in a $2.4-billion deal, giving it a substantial presence in Africa.

The world’s biggest retailer is now expanding Massmart’s grocery chain, a move that pits the Arkansas-based retailer against South Africa’s dominant food retailers such as Shoprite, Pick n Pay and Spar.

“There’s no sustainable, strategic business model that is just going to run on low gross margin but what is certainly true is, as we open new stores we will sacrifice margins to attract new customers,” Massmart’s chief executive officer Grant Pattison said in a results conference call on Thursday.

Massmart, which suffered a 25% drop in full-year profit, achieved a gross profit margin of 18.3% in the year to end-June, slightly higher than 18% a year earlier as weak prices in its smaller grocery unit weigh.

South African retailers are also gearing up to take on Walmart. Shoprite said this week it would spend R3-billion to expand and upgrade its supply chains and open 74 new stores.

But Shoprite, Africa’s biggest food merchant, said it would not purposefully cut its record 5.5% gross profit margin to defend its market share.

Pattison said the company, which sells everything from food to televisions, would open 27 new stores, mostly in South Africa in the 12 months to end-June next year.

Massmart, which plans to invest R20-billion over five years to expand its food retail unit, said capital expenditure would total R1.6-billion by June next year from R1.1-billion, a move that could push up its borrowings.

Guy Hayward, Massmart’s chief financial officer, said the company, which has set a gearing ratio ceiling at 30%, was willing take on more debt to fund expansion plans.

“Frankly, if growth prospects are rich enough and require us to have a higher gearing, we will do that,” Hayward said, adding the current gearing ratio was at around 20%.

Weak prices hit earnings
Massmart suffered a 25% drop to 407.5 cents in full-year headline earnings per share, hit by costs related to its $2.4-billion deal with Walmart and price markdowns.

Headline EPS is the main profit measure in South Africa that strips out certain one-off items.

Massmart said the costs related to the Walmart transaction totalled R2-billion. The costs included a R100-million fund to help develop local suppliers the two companies agreed to set up in order to secure regulatory approval for the transaction.

But unions and three government departments, led by the Economic Development Department, have said the fund is not big enough. The government departments have separately launched appeals seeking to attach weightier conditions on the deal.

Massmart said it was confident about its legal position.

“Our legal teams are preparing responses to the interveners’ submissions and are confident about our strong legal position,” the company said as it reported its full-year results.

Massmart said sales increased 11.6% to R53-billion, helped by new stores. Comparable store sales rose 5.2% with product deflation of 1.3%.

The company said it has plans in place to deliver a solid performance in the 2012 fiscal year.

Shares in Massmart, which are up about 2% so far this year, were little changed at R151 as of 8.39am GMT, lagging behind a 1.24% rise in JSE’s Top-40 blue-chip index. — Reuters

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Tiisetso Motsoeneng
Tiisetso Motsoeneng works from Johannesburg. Deputy Editor: Business Day in Johannesburg, home to Africa’s deepest capital market. Tiisetso Motsoeneng has over 285 followers on Twitter.

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