Subsidiary Massmart is expanding slowly in South Africa, even as
consumer class grows
By Alexandra Wexler
JOHANNESBURG -- After some costly stumbles on its march into
developing markets, Wal-Mart Stores Inc. has adopted a different
strategy for Africa: taking it easy.
When the U.S. retail behemoth bought a $2.4 billion majority
stake in South African retailer Massmart Holdings Ltd. in 2011, it
trumpeted the potential of the continent's burgeoning consumer
class. At the time, Massmart had 26 stores outside its home market;
in the five years since, it has added only 13 of its signature
large destination-type outlets. In that same span, by contrast,
rival Shoprite Holdings Ltd. has opened 182 of its mostly smaller,
grocery-centric stores outside South Africa, for a total of
375.
Some analysts and investors wonder whether Massmart's slow
expansion means Wal-Mart is losing interest in its African venture.
But Guy Hayward, who took over as Massmart's chief executive in
June 2014, says the modest pace is part of "a very deliberate
strategy" and not a sign of weakness.
"If being sort of Steady Eddie is described as a criticism, I'm
happy to be criticized," said Mr. Hayward, a South African native
who joined Massmart in 2000.
In August, Massmart announced plans to open five new stores in
Africa beyond its home market through 2017, while Shoprite set out
to add 46 stores outside South Africa in the 12 months to June
2017. Mr. Hayward notes that its outlets -- most of which bear its
Game and Builders Warehouse brands -- average about 3.5 times the
sales of a typical Shoprite store.
Some retailers who rushed into African markets have paid a steep
price. Woolworths Holdings Ltd., an upmarket retailer of groceries
and clothing in South Africa, closed its three Nigerian stores in
late 2013, citing high rents, a lack of shopping malls and intense
bureaucracy. In 2011, Pick n Pay Stores Ltd. entered Mozambique and
Mauritius, but exited both markets two years later, citing
unprofitability and differences with its respective
franchisees.
More broadly, recent sharp fluctuations in African currencies --
a result of the commodities crisis -- have jolted businesses
including retailers, especially because loans in many African
countries are dollar-denominated. And inflation, a malady in
various economies on the continent, has cut into the buying power
of middle-class consumers.
Wal-Mart's slow but deliberate approach to Africa diverges from
past strategies in developing markets, where aggressive expansions
hit hurdles.
Last year, Wal-Mart closed 115 outlets in Latin America, leaving
its store count in the region at roughly 4,000. In China, the
company has slowed store growth, and in June sold its Yihaodian
website for a stake in local online retailer JD.com Inc.
A five-year U.S. investigation into possible foreign bribery has
dogged Wal-Mart in Mexico; and the probe, which is related to store
openings, has also pointed to possible misconduct in Brazil and in
India. Wal-Mart, which didn't respond to requests for comment on
its African strategy, has said it is cooperating fully in the
various investigations. But the company's efforts to improve
compliance have slowed expansion in some markets, according to a
former employee familiar with the situation.
Massmart's Mr. Hayward concedes that the chain's approach in
Africa is partly born of necessity. Sketchy land registries, sudden
changes to local laws and property owners holding out for a bonanza
are only a few of the hindrances to doing business.
"The rule of thumb is probably about three years from first
meeting a developer on a dusty piece of land to opening the
stores," the 51-year-old CEO said. "This is their
once-in-a-lifetime payday and valuations are crazy."
Massmart was burned a few years ago in Zambia when the
government overhauled its regulations on debt financing,
undercutting plans to open several stores in the country. "All the
papers we signed collapsed with that," Mr. Hayward said.
Despite these holdups, the retailer's go-slow strategy for the
continent may be bearing fruit. Massmart's overall sales for the
six months to June 26 grew 8.7% from a year earlier to 42.3 billion
South African rand ($3.14 billion), while sales outside of South
Africa jumped 23%, good for nearly a 10th of the total.
Still, in a sales update last month, the company reported a
continued decline in non-South African sales growth during the year
to Dec. 25. Massmart is scheduled to report its full-year earnings
on Feb. 23.
The plodding pace of store openings raises questions about
Wal-Mart's commitment to its African adventure. Indeed, the last
time the company mentioned Massmart in a quarterly earnings call
was 2014, when Mr. Hayward's appointment as CEO was noted.
"Wal-Mart bought them for their African strategy, [but] the rate
of expansion, the rate of growth continues to baffle everyone,"
said Unathi Loos, an analyst at Investec Asset Management in Cape
Town. "As South African investors, the biggest concern is that one
of these days, Wal-Mart will say, 'We're out of here.'"
In 2015, Massmart opened a mall-based store under its Game brand
in Nairobi, Kenya -- the company's most recent foray into a new
market. "It's doing OK -- the shopping center itself is battling a
little bit," Mr. Hayward said of the outlet's first year of
operation.
Massmart's supply chain and marketing remain largely independent
of Wal-Mart. But Mr. Hayward says Massmart is pursuing initiatives
where its parent company can lend expertise, such as online
shopping and "click and collect" capabilities in a part of the
world where such activity is still uncommon.
"Wal-Mart leaves us alone. They're not over my shoulder, there
aren't daily phone calls, there's no pressure to grow for its own
sake," Mr. Hayward said. "They view the Massmart-in-Africa story as
a decadeslong story."
--Sarah Nassauer contributed to this article.
Write to Alexandra Wexler at alexandra.wexler@wsj.com
(END) Dow Jones Newswires
February 06, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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