Walmart’s entry likely to cut jobs at rivals

Published Feb 27, 2011

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Jobs are the burning issue for South Africans and not surprisingly, given that 35.8 percent of the working population does not have work.

So when US retail behemoth Walmart is about to set up shop in a country already unsuccessfully dealing with an unemployment crisis, it is inevitable that fears of further job losses will mount.

The alarm that has been raised over Wal-Mart Stores’ acquisition of a 51 percent stake in Massmart is over the possible consequences for suppliers and competitors, in particular, that they will be under intense pressure to cut costs in order to stay in the game. And of course labour is a significant cost for any business.

Brian Leroni, the corporate affairs executive at Massmart, said that if the Walmart transaction got final approval “we will potentially be able to grow floor space more quickly because we will have access to considerable skills and experience”, particularly with regard to Walmart’s fresh and cold chain expertise.

Access to a stronger balance sheet could also be a factor in terms of funding a faster rate of growth, added Leroni.

So if the deal goes ahead Massmart’s floor space next year and in 2013 could increase by 11 percent and 13 percent, respectively, and combined with an 8 percent increase this year 9 090 full-time equivalent positions could be created.

But what about the rest of the market?

Massmart’s influence with Walmart’s backing will increase substantially.

For food and grocery manufacturers Massmart is on average their fourth-largest customer, but will become their fastest-growing and perhaps their largest customer.

Yet there will be pressures on these suppliers to improve efficiency and cut costs.

At least one South African supplier, Origin Wine, which supplies to Walmart’s UK subsidiary Asda, has had to cut jobs due to a new packaging method that reduced the cost of exporting. Bernard Fontannaz of Origin Wine said the bulk export of wine that was bottled in the UK, and was growing due to the strong rand, resulted in 40 people losing their jobs.

But Nick Scrase, the managing director of Walmart division International Produce, said: “It cuts costs to bottle in the UK so we sell more wine.

Bryan Roberts, the director of retail insights at Kantar Retail, said in the US suppliers’ relationships with Walmart had a positive job effect as suppliers had grown along with Walmart.

But the effect on other retailers and people who work there may be pronounced.

A study by the Institute of Research on Labour and Employment at the University of California, Berkeley in 2007, says economic pressure from Walmart has been used as a rationale by competing retailers in the US to seek wage and benefit cuts.

It estimates that 10 new Walmart stores in a state reduced average retail wages by 2 percent. With an average of 76 stores per state this suggests a net nominal wage reduction of 15.2 percent for retail workers.

Recent research commissioned by Walmart showed that it saved US households on average $3 100 (R22 614) a year due to its drive for low prices.

Byron Xypertas, a labour consultant at Paradigm Leap, said a big bogeyman trampling on people’s rights in South Africa was not going to happen.

Walmart would be bound to comply with all South African laws, including labour laws, which offer far greater protection against dismissal than in the US.

Nevertheless, unions in South Africa have been at the forefront of highlighting the wider consequences of the takeover deal.

Ebrahim Patel, the Minister of Economic Development, is facilitating talks between unions and Walmart and Massmart to resolve these issues before the Competition Tribunal hearings next month on the deal.

Patel said the tribunal had to look at the effects of this transaction in the retail space.

It also had to apply itself to public interest considerations, such as what were the implications of this deal on other industries, suppliers, employment, small businesses and on the ability of local firms to compete in global markets.

“What we would be seeking to ensure is that there is strong local procurement, that the South African supply base is supported and that our capacity to create jobs locally is highlighted. This is what the conversation with Walmart is about,” said Patel.

Syd Vianello, an analyst at Nedbank Capital, said at Game there would be a consolidation, but any job losses from that would be offset by jobs created by the rollout of food offerings.

“On a net basis the Walmart acquisition of Massmart will create more jobs, because Walmart will want Massmart to grow faster than it had previously planned,” said Vianello. “But there could be job losses elsewhere in the market as a result of the deal.”

The unknown factor is to what extent Massmart will expand faster than the market, so the issue is not how many new jobs Massmart will create, but how many jobs could be lost at other retailers. “Unions should be looking at how many jobs will be destroyed in the sector. If Massmart grows faster than the market, which it will want to do, something has got to give,” added Vianello.

In particular, the impact would be at spaza shops and independent food retailers in low-income areas, where Massmart’s Cambridge stores are to be rolled out.

The deal would intensify competition, particularly at the bottom end of the market, and the weakest traders would take the most pain.

Vianello said Pick n Pay had distribution issues and was rushing ahead to resolve these. Developments at Metcash, where there was clearly a shift from wholesale to retail, were aimed partially at defending itself against Walmart.

“Pick n Pay and Metcash will have to act very quickly to get their businesses in better shape,” he said.

Vianello said job losses had already occurred at Massmart, with 800 posts shed last year due to the development of its regional distribution centre, which was aimed at boosting the efficient handling of stock to cut working capital.

Conditions so far have not been imposed by competition authorities on the deal. But that may come, given the recent tribunal ruling on MMI Holdings, which was created through the merger of Momentum and Metropolitan, that stipulated job protection for two years.

Yet in the case of Walmart’s acquisition of Massmart, authorities may have little scope to protect jobs, as job losses, if they materialise, will be at other retailers. - Samantha Enslin-Payne

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