Tiisetso Motsoeneng
WHEN Wal-Mart Stores spent $2.4 billion (R29bn) on a stake in Massmart five years ago, the world’s biggest retailer said it was buying a gateway to high-growth markets in sub-Saharan Africa.
Despite its powerful US backer, South Africa’s third-largest retailer, selling everything from food to electronics, has added fewer than 10 stores to the existing 25 outside its home market since 2010, lagging rival Shoprite, which doubled the company’s outlets to 300.
Massmart’s slow inroads into the rest of the continent, touted as the next big growth area, highlight the challenges of doing business in Africa, and raise questions about Wal-Mart’s goal of expansion abroad.
“From the start the Africa Rising story was a bit euphoric when looking at it from a retail point of view, and Wal-Mart is now facing the reality,” Boris Planer, an analyst at London’s Planet Retail, said.
Shoprite, which many investors expected to be a casualty of Wal-Mart’s investment in Massmart, has nevertheless pushed ahead in familiar local markets where the US retail giant has moved more cautiously.
“If you want extra growth, you’ve got to take on that extra risk,” said Wayne McCurrie, a fund manager at Momentum Wealth in Pretoria.
“Recognising that risk, by that I mean a severe shortage of shopping infrastructure, Shoprite started setting up warehouses and partnering with developers to build shopping centres and that’s why it is in this quick store roll-out phase whereas Massmart is a little bit behind.”
Guy Hayward, an accountant who took over as Massmart chief executive a year ago, acknowledges the need to catch up with Shoprite, whose chief executive cheekily asked in 2013: “Where is Wal-Mart?”
“We all face challenges but Shoprite has done a good job in getting ahead,” he said.
Wal-Mart’s slow progress in Africa also underscores the struggles the US company faces in pursuing a rapid expansion to 27 countries and 6 300 stores outside the US market.
Scott Mushkin, who covers Wal-Mart at Wolfe Research, has argued Wal-Mart should look to exit markets in Asia, Europe and Africa due to lower returns than in the Americas. “We believe these operations are a distraction from what appears to be a fairly synergistic operating model from Canada to Chile,” he wrote in a note to clients.
Wal-Mart said it was still committed to Africa. “We are excited by the retail opportunities in Africa and we’re confident in the ability of Massmart’s leadership to drive future growth,” said Marilee McInnis, the director of International Corporate Affairs at Wal-Mart.
Failed deals
The last five years in Africa have been punctuated, for Massmart, by deals that failed to come off.
Grant Pattison, who abruptly resigned last year as chief executive, tried and failed to buy Botswana’s biggest grocer Choppies Enterprises, Ramachandran Ottapathu, Choppies chief executive said. In Kenya, Massmart was unable to complete a deal with private retailer Naivas because of a family dispute over its ownership.
At home, too, some customers are underwhelmed by Massmart’s performance. Famed for its aggressive pricing, it appears to be struggling to compete with Shoprite on cheap groceries. “I was very excited when I heard Wal-Mart is bringing low prices to South Africa but I haven’t seen that,” said Themba Khumalo, a bank teller outside a Johannesburg shopping mall.
Wal-Mart has also had problems in its bid to fast-track the expansion of Massmart’s grocery unit Game. Massmart has complained to the competition watchdog against three rivals over shopping mall leases that prevent Game from selling groceries.
“Africa Rising”
Wal-Mart, and other international companies, want to benefit from a continent poised for dynamic growth fuelled by a rising young population of workers and consumers and global demand for its commodities, an idea known as “Africa Rising”.
There are promising signs for retailers: Shoprite’s Basson reported “insatiable” demand for big brands after five Shoprite stores in Angola sold more Red Bull cans than nearly all 400 stores in South Africa in one year. But others are also finding it tough. Woolworths pulled the plug on its Nigerian business, citing high rents and duties.
The Spar Group said its partner in Nigeria had managed to open just five of 20 planned stores, having struggled to find suitable real estate and having to import everything from lighting and tiles to refrigerators.
Pick n Pay recently shut its franchise stores in Mozambique and Mauritius because they were not profitable. “Retail in Africa is just not that romantic, it’s not easy. Anything that looks like an overnight success has probably been around for 20 years,” said Pick n Pay chief executive Richard Brasher.
A common complaint is the time it takes to get goods from ports to shelves. “Even if you air-freight the goods and you think within a week your goods could be in store, it may take five weeks,” said Ronnie Steyn, the chief financial officer of TFG, the biggest reseller of Nike and Adidas products in South Africa.
Gabriel Sacks, the investment manager at Scottish-based Aberdeen Asset Management, the third largest shareholder in Massmart with more than 4 percent, is prepared to be patient.
“Whilst we appreciate the market’s frustration with the pace of growth, we are of the view that a more cautious approach to rolling out stores in Africa is no bad thing given our preference for capital discipline,” Sacks said. “Faster growth would be welcome, but not at all costs.” – Reuters