Massmart profit dragged down by Game stores

Massmart, the South African food and general goods retailer controlled by Wal-Mart stores, missed profit estimates as its Game chain of shops struggled to sell household goods.

Net income rose to R1.28-billion in the 53 weeks ended December 29, from R972.3-million a year earlier, Johannesburg-based Massmart said in a statement on Thursday.That was lower than the R1.32-billion average of 10 analyst estimates compiled by Bloomberg. On a comparable 52-week period, profit climbed 21% to R1.18-billion.

"Game sells durables to middle-income consumers and that's a pretty tough environment," chief operating officer Guy Hayward said in a presentation in Johannesburg. "In South Africa, retailers are discounting to get volumes, so that results in margin pressure."

South African retailers have been struggling over the past year as high unemployment and inflation hurt consumer spending, with lower-income to middle-income earners particularly vulnerable. Retail-sales growth slowed to 3.5% in December, compared with 4.4% the previous month. South Africa's Reserve Bank raised borrowing costs in January for the first time since 2008.

Food expansion
Massmart plans to offset lower sales of items such as computers and fridges by expanding its food and clothing offering, chief executive Grant Pattison said during a conference call. The company is also developing its online range, he said.

Sales climbed 9.5% for the eight weeks through February 23. The company is "encouraged" by the growth, which was "a much stronger start to the financial year than we anticipated," Pattison said.

The stock climbed 1.6% to R113.84 as of 1.30pm in Johannesburg, paring its decline this year to 12%.

Massmart plans to increase floor space by 6.2% in fiscal 2014, it said. The company will build on the opening of a small-format food store in Lagos two months ago, with four more planned for the Nigerian city this fiscal year and 10 in total, Pattison said.

Massmart's food expansion in South Africa's rural areas may be challenged by Shoprite, Africa's largest grocer, Alec Abraham, an analyst at Afrifocus Securities, said by email. "Shoprite is throwing the hammer down in expansion and Massmart will struggle to challenge their competitive advantage in that space," he said.

Shoprite said this week it plans to open 74 supermarkets by June, bringing its total in Africa to 1 085 stores by the end of its financial year. – Bloomberg

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