/ 6 September 2012

Walmart not making massive dent

Massmart's Foodco is still dwarfed by Shoprite in terms of food sales - Shoprite’s were R64.5-billion whereas Massmart’s were roughly R9-billion over the same period.
Massmart will be closing down many Game, Makro, DionWired and Builders Warehouse stores across South Africa.

Shortly after Walmart's purchase of local retailer Massmart was announced, Shoprite chief executive Whitey ­Basson famously declared that if there was "blood on the floor" his company would have no choice but to ­retaliate.

He was responding to the competition that Walmart, the world's largest retailer with a globally integrated supply chain, represented to the local sector.

But more than a year later and government attempts to stop the deal notwithstanding, analysts point out that no blood has been spilled yet and it will take more time than the initial hype suggested to feel Walmart's muscle locally.

Initial expectations that Walmart would rapidly shake up the local food-retail oligopoly have been "hopelessly optimistic", Nedbank Capital retail analyst Syd Vianello told the Mail & Guardian.

Inroads into the South African market have been limited to events such as the arrival of Walmart private-label alkaline batteries and the trial of promotions in line with Walmart's every-day-low-price strategy.

But this does not mean it will not eventually happen, according to Vianello –  it is just a question of time.

Stanlib retail analyst Theresa Heath said market commentators and analysts were "a little hysterical" over the price cutting the Walmart-Massmart entity had threatened.

Levels of pricing
"If you listen to management, the idea is to take costs out of the supply chain to ensure that they can sustain levels of pricing for longer, convincing consumers that they are getting a good price on a day-to-day basis."

Massmart says in its recent interim results that it believes the entrance of Walmart has shaken things up, but notes that, since the merger, it has prioritised integration before it does anything significant.

Chief executive Grant Pattison, at a results presentation in Cape Town, referred to the Walmart-type extended price promotions, which he said had collectively saved consumers R260-million, as a sign of things to come. This concept will now be rolled into each of the business formats, moving towards Walmart's every-day-low-price strategy.

Massmart posted sales of R61.2-billion and operating profit of R2.1-billion, excluding the Walmart ­transaction costs.

There had been some "muscle flexing to begin with" and a certain amount of uncertainty from competitors about how to react should prices drop, said Heath, but the retail pricing environment had been reasonably rational.

Overall, retailers have experienced decent sales growth and gross profit margins remain relatively stable and there has been some expansion, according to Heath.

"Stable gross profit margins don't imply a price war," she said.

Highly competitive
In the food environment, retailers maintain that the market is highly competitive not as a result of Walmart's entry, but rather that  consumers are allocating their spending carefully.

Examining the company in recent months, it is difficult to differentiate between what Massmart would have done and what the company has done under Walmart.

According to Heath, it is worth pointing out that Massmart is not crying out to be bought or to be run better. "Walmart adds another layer of expertise, opportunity and potential funding to an already well-run company," she said.

Despite the might of its parent, Massmart has to make inroads in the local space before it can begin to compare with the likes of homegrown retail giant Shoprite.

In the same week that Massmart released its interim results, Shoprite released its results, disclosing sales of R82.7-billion and an operating profit of R4.7-billion. The company has maintained its store-expansion momentum, opening 90 new stores against Massmart's 40.

However, Heath said it was crude to compare the two entities because they are in different phases of growth. Massmart is laying the foundation for growth whereas Shoprite's is "some way down that track".

Massmart has spent R1.6-billion in total capital expenditure to support its growth plans, whereas Shoprite spent just more than R3-billion.

A two-horse race
Shoprite's South African food sales were R64.5-billion, whereas Massmart's were roughly R9-billion, Heath said, illustrating competition on a different scale.

Heath stressed, however, that this was not "a two-horse race". Massmart is targeting any market share it can get and so is Shoprite.

"Ultimately, the independent retailers are most vulnerable, because they don't have the buying scale that their larger competitors have," she said.

The companies compete directly in the low-end retail space through their USave and Cambridge brands, which belong to Shoprite and Massmart respectively.

Because this is the segment of the market showing growth, there is arguably space for both players as well as others, such as Pick n Pay's Boxer stores, to take share away from informal or independent trade, or compete with each other, according to Heath.

In addition, Shoprite is a few years along in re-engineering its food distribution network, whereas Massmart is just embarking on such a programme.

Pattison alluded to this, saying  distribution costs and the efficiency of the supply chain are increasingly a key driver of competition between retailers.

Playing catch-up
"It's the reason Shoprite is doing so well, because they got this all done in the early 2000s and everyone else is playing catch-up," he said.

Vianello said that Massmart's market-share growth would not come easily in a fiercely competitive space. As well as Shoprite, retailers such as Spar have also continued to roll out stores, whereas Pick n Pay is getting to grips with the much-needed overhaul of the distribution side of the business and its turnaround strategy.

Massmart has been gaining a foothold, particularly in the fresh food retail space, through acquisitions. Now, according to Vianello, there is little left for it to buy, save for targeting franchises.

The country's largest retail franchisers, Pick n Pay and Spar, have pre-emptive rights on all their franchise operations and Spar has gone as far as offering to match any offers Massmart makes for these businesses.

As with most business sectors, growth on the African continent is a major focal point for retailers.

Shoprite has 156 stores in 16 countries, but sales from outside South Africa make up only 11% of overall sales. Angola is the largest contributor to sales outside South Africa, according to Shoprite.

Still small
The company has a further 21 Angolan opportunities confirmed, another nine confirmed in Nigeria and has opened a distribution centre in Angola.

In the case of Massmart, business outside South Africa is still small.

Its parent, though enthusiastic, is still relatively cautious about launching into Africa. Although it is clearly a focus area for the company, Massmart has experienced some foreign exchange discomfort, thanks to a 50% currency devaluation in Malawi, and closed up shop in Mauritius.

But tantalising opportunities remain. As Heath pointed out, property developers are keen to partner with retailers going into African countries and "opening up the store pipeline to a certain extent, providing more opportunities for store growth".

Massmart has gone into the continent with general merchandiser Game whereas Shoprite has focused on food.

"Arguably, given how low formal retail penetration in the rest of Africa is, there are opportunities for both," Heath said.