Photo: Delwyn Verasamy
Twenty-two years on the Johannesburg Stock Exchange (JSE) is a good run but that is also where the road ends for Massmart as the group will be delisting on 22 November.
Massmart’s delisting follows a R6.4 billion offer from Walmart, its parent company, for the 47% stake it does not already own.
Founded in 1990, Massmart has been a prominent feature in the South African retail space and so a world where it is fully under Walmart is unfathomable.
But, away from the public eye, experts and Massmart themselves said delisting from the JSE would allow the group to recalibrate and put into effect its turnaround strategy.
History
Massmart basically started as Makro, according to veteran retail analyst Syd Vianello. However, Makro was a wholly owned subsidiary of Wooltru (old Woolworths and Truworths). Wooltru was broken up and Woolworths went on its own and so did Truworths and that’s how Massmart came into existence and was listed in 2000.
The deal maker and shot caller at the time was Mark Lamberti, who served as Massmart’s chief executive between 1998 and 2007. During this time Lamberti managed to grow annual sales from R360-million to R47-billion while employees increased from 2,000 to 25,000, the Daily Maverick reported.
When it was newly listed Massmart only owned Makro, but in 1998 acquired Game, which was initially under Pepkor.
The next acquisition on Lamberti’s list was Builders Warehouse in 2003.
“[Builders Warehouse] turned out to be the best acquisition [Lamberti] ever made. He bought an incredible business and it is the most successful division in the group besides Makro,” Vianello said.
In the 2021 annual results, Builders’ total sales of R14.9 billion represents an increase of 7.1% compared to 2020 while Makro total sales of R28.3 billion increased by 6.7%.
Vianello said there were mishaps along the way with some acquisitions that should have never happened, such as Dion Wired.
“There were a few mishaps but as a generalisation Massmart was successful at that point in time,” he said.
Lamberti’s successor was Grant Pattison who was at the helm from 2007 to 2014.
Vianello said that under Pattison, the business was being prepared to be sold. “They were doing all the right things to make it saleable and they found a buyer in Walmart.”
Walmart steps in
Walmart took a majority (51%) stake in Massmart in 2011, at the time Pattison was still the chief executive officer, for more than $2.5 billion (about R18 billion at the time).
“Walmart paid all that money and bought control. [They] probably wanted Massmart to be the biggest retailer in Africa and certainly in South Africa. Pattison was given lee-way by Walmart to make Massmart big and so he went on a buying spree and bought lots of duds. And in a way that was the beginning of the end. He also went on a massive expansion programme in Game and obviously that never worked,” Vianello said.
During Pattison’s time, Cambridge Food was bought in 2008 and Rhino Cash & Carry in 2012. Those brands would later be sold to Shoprite for R1.360 billion in May 2022.
Ron Klipin, portfolio manager at Cratos Asset Management, said that when Walmart came to South Africa they were looking for an African player and saw the continent as a market which was a major growth area, aided by a burgeoning middle class. “Africa was showing a lot of promise so they went on a major expansion trail which didn’t seem to work out at all.”
Klipin said that Walmart in America has a diverse range of products but the model doesn’t work in South Africa.
“They’ve tried to transplant the Walmart model in South Africa and it just did not work for them because we don’t have a market where customers go to Game to buy groceries and fresh, chilled and frozen products. They know the quality at Pick n Pay or Spar or Shoprite and to be honest the foods at Game were not up to standard,” Klipin said.
Outgoing chief executive Mitch Slape said Massmart would be able to make quicker decisions as a private entity and would also enjoy the advantage of having Walmart fully owning the group.
The underperformer
Massmart announced last year that it had identified 15 Game stores for possible sale in South Africa and that it identified a further eight stores for closure in various parts of the country.
It was reported that about 700 Game employees could lose their jobs following the closure of the eight stores.
Game’s total annual sales for 2021 decreased by 8.7% to R15.3 billion compared to the corresponding period in 2020.
Klipin said Game’s fall was a result of its venture into the fresh, chilled and frozen food categories.
“All the fresh, chilled and frozen foods were not the forte of Game, they didn’t understand that market,” Klipin said.
“The business model in terms of food was amongst the most challenging aspects , which had an adverse impact on the group’s profitability, despite efforts to turn this division around, the Walmart way.”
Klipin continued: “Mitch Slape came here and he was the guy who needed to fix Massmart. He did what he could but the Game business model was not great.”
In 2019, Walmart decided to send one of its own — Slape — to turn things around at Massmart but his tenure was marred by the pandemic and the July riots.
Vianello said that Walmart brought in Slape when the “damage had already been done” making a Game turnaround difficult.
“I would not be surprised that now, even behind closed doors, they don’t sell Game or close it. They might just contract it to the point where it is profitable. Walmart in America is making so much money that South Africa is like a pipsqueak, probably an irritation. But they are very proud people, they are not going to walk away,” Vianello said.
Separate listing?
Klipin said that Massmart delisting from the JSE does not matter because “in terms of being an investment it was pretty putrid”.
Since Walmart bought it, the stock has lost 80% of its value and currently sits at R61 per share with a market capitalisation of R13.5 billion.
“Builders Warehouse has been doing pretty well up to now despite very difficult conditions in terms of investment in building repairs. Those operations [Marko and Builder’s warehouse] are very well serviced so there are two jewels in the crown. I think on its own Marko and Builder’s Warehouse would be a great listing,” Klipin said.
Vianello disagreed, saying Walmart will not list anything, “it’s too much of a hassle”.
“If they get a really good offer, I can tell you now they’d sell it [Makro and Builders]. But there is no chance of listing it separately.”
He said Makro is a “keepable” business because it is profitable and easier to run given its limited number of stores.
There are only 22 Makro stores in South Africa, as per Massmart’s annual results.
Vianello said Builders Warehouse is not part of Walmart’s global business and so if an offer was made, Walmart would offload it. “I think they would keep Makro but the caveat is is it big enough in the global picture of Walmart? Is it worth keeping?”
Vianello added that Makro could be left with local management and they could use it as a training ground for local managers or they could send an American team and use Makro as their eyes and ears in Africa if they want to do something in Africa again. “And that’s why they will never relist it.”
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