Massmart’s Game stores are taking a beating from the slowdown in consumer spending, as shopping patterns show a shift towards necessities such as food and clothing.
Massmart chief executive Guy Hayward said the consumer environment had dramatically hardened in the past few years, changing the way consumers were shopping.
“There is not much money going around, there is no job growth and wage increases are getting narrower and food inflation was higher,” he said.
Total group sales for the six months to June grew by 10.2 percent to R35.7 billion, while operating profits declined by 3.8 percent, which Hayward described as a “good reflection of what the company has gone through”.
The group said higher net interest paid from funding several property acquisitions and an adverse movement in foreign exchange had resulted in headline earnings decreasing by 25.5 percent. Adjusted for foreign exchange movements in both periods, headline earnings decreased 5.7 percent.
Game South Africa’s comparable sales only grew 0.4 percent, causing severe pressure on profitability. This resulted in Massdiscounters’ trading profit before interest and tax decreasing by 78.8 percent. The division also houses DionWired stores.
In a negative consumer cycle, people turned away from general merchandise and shopped for necessities, such as food and clothing, instead, Hayward said. He added that such an environment suited food retailers rather than general merchandisers.
“The gradually tightening interest rate cycle will make things more difficult for middle-income customers and possibly those in the upper-income brackets,” Hayward said.
However, he defended Game stores, saying these were still a valuable business with total sales for the half year totalling R8bn. He expected full-year sales, including Christmas, to total about R18bn.
He said people were still buying general merchandise, including luggage, tools and electrical appliances. In addition, about 20 percent of Game store sales were from food with 4.5 million customers a month still shopping at Game.
“Game sales… [were] good given the environment, and when one looks at the division’s listed competitors such as Hi-Fi Corp and Incredible Connection, which had a decline of about 10 percent in sales for the six months to December,” he said.
Massmart was also facing three legal actions filed by three dominant food retailers over a lease exclusivity clause, as the retailer was actively rolling out its Game Food stores in shopping centres.
Hayward said Massmart was prepared to defend these actions and had lodged a formal complaint with the Competition Commission.
He said the legal actions had not hampered Massmart’s plans to roll out Game Food stores yet. About 55 Game stores now offer both dry groceries and fresh food.
Massmart’s businesses servicing upper-end consumers – such as Builders Warehouse, DionWired, as well as Makro stores – delivered impressive double-growth digits.
Makro increased sales by 12.2 percent and comparable sales were up by 9.4 percent.
The Massbuild division lifted sales by 14.2 percent.
“You can tell from the sales growth [that] the upper-income earners are fine,” he said.
Dirk van Vlaanderen, an investment analyst at Kagiso Asset Management, said Massmart’s first-half results showed a solid performance from three out of four business units, with Massdiscounters (Game) still weighing heavily on group results. He added that group sales growth was good given the tough trading conditions.
“Massmart appears to be negotiating a difficult consumer environment fairly well in all divisions, excluding Massdiscounters and particularly Game South Africa where comparable sales only grew 0.4 percent for the first half,” he said.
Van Vlaanderen said profits before interest and tax margins in Massdiscounters fell to 0.3 percent from 1.7 percent for the same period last year and had fallen from around 5 percent since 2012.
“This highlights the challenges currently facing Massmart in this division. The strategy to put fresh food into Game remains a focus for the group, and the 20 percent comparable food sales growth reported in the period is encouraging but still not enough to shift the business into a positive trajectory at this stage,” he said.
A move away from the more cyclical general merchandise into food was strategically sound, but fresh food was a notoriously competitive, lower margin and difficult retail format to get right, Van Vlaanderen said.
Shares lost 1.87 percent to close at R131.88 yesterday.