Suhail Suleman
The recent decision by the competition authorities to approve the purchase of Massmart by Walmart will probably go through despite continued protestations by opponents. In my opinion, there are two important aspects of what has transpired that are worth reflection.
Firstly, although the intention of the opposition was to protect the poorest South Africans, it could have unintentionally achieved the opposite if successful, while secondly there is an underlying suspicion of foreign investment in this country that is not warranted when looking at its historical effect.
Walmart’s labour hiring and firing policies come in for heavy criticism, but that is a matter for courts where they operate since labour legislation varies greatly between jurisdictions. If they are found liable by courts, then by all means they should be held to account, including potentially here in the future.
The greater fear is that their buying power will see our domestic manufacturers retrenching workers due to cheaper foreign goods.
This implicitly assumes retailers and manufacturers are not already importing on a large scale and that domestic food manufacturers always operate in the best interest of consumers, so if they were to be challenged the consumer would lose out. I believe there is sufficient evidence that each assumption is flawed.
The formal food retail market is dominated by just four players – Shoprite/Checkers, Pick n Pay, Spar and Woolworths Foods. Estimates of market size suggest these companies comprise between 50 percent and 60 percent of total food and grocery sales, with the balance from independent chains and small grocers.
The bargaining power of the “big four” with local producers far exceeds that of Massmart today and it would take many years, if ever, before Walmart could realistically challenge many of our producers.
Our retailers import products extensively already, particularly for in-house “private label” ranges due to the higher margins they earn on these.
Most of our Fast Moving Consumer Goods (FMCG) producers are foreign owned and usually only manufacture products with high domestic volumes, importing the balance to complete their product ranges. These in-demand products are typically purchased by people at the lower end of the income scale so the direct beneficiaries of lower prices should Walmart/Massmart force prices down or choose to import these will be the poorest consumers not the middle classes.
Our food manufacturers do not always have consumer interests at heart either – think of the anti-competitive actions some took that kept bread prices high. This hit low-income households the most.
It is my opinion that Walmart could potentially introduce further beneficial competition into food retail. The experience of their entry into Mexico supports this contention due to the parallels between the two countries – both are middle- income developing nations with high levels of inequality.
In 1997 Walmart purchased a controlling stake in large Mexican retailer called Cifra, also to much media consternation.
Like Massmart today, Cifra had been around for several decades and operated a variety of store formats. The annual revenue in the year of acquisition was US$4.1 billion and the business employed 54 000 people. In 2010, the Mexican business had sales of US$21.4bn and employed almost 220 000 “associates”. Most of the growth was achieved through opening new stores but they still account for less than 10 percent of Mexican retail sales.
Despite the North American Free Trade Agreement and fairly easy access to Chinese goods just across the Pacific Ocean, the company procures over 90 percent of its inventory domestically and only a small portion of the remainder is purchased through Walmart’s supply channel.
This is because most consumers prefer their favourite brands so if local producers continue to invest in quality and brand building, customers will demand their products regardless of where they shop.
Leaving aside the contradiction that Massmart is already 75 percent foreign owned, the underlying hostility towards foreign investment in the media since the deal was announced is unfortunate as it lumps all foreign investment into a single “bad” category when there are two distinct types.
The first searches for short-term returns and repatriates profits when better investment opportunities arise. Our position as a relatively open economy makes us particularly vulnerable to these flows. Our currency is strong as a result, and we are not alone in emerging markets – Brazil has been even more affected despite instituting taxes on capital inflows to try to stem the tide.
We may be able to offset some of the negative impact of a strong currency by importing the billions of dollars worth of equipment we need for infrastructure upgrades and electricity generation while the exchange rate is in our favour. This would be positive for future economic growth. The second type of foreign investor has a long-term time horizon. In my opinion this type of investment is almost always beneficial whether it takes the form of capital investment, technology transfers or migration of skilled labour to address skills deficits.
The few exceptions tend to occur when foreign firms demand special treatment such as tax incentives giving them an unfair advantage over local firms, or where the dominant firm in an uncompetitive industry is sold to a strong foreign investor who then entrenches its position.
It is rare for foreign investment to come at the expense of success by local companies simply because in a growing economy there is sufficient opportunity for profit by most players. In economic jargon it is a “positive sum game” – the overall gains to society outweigh the losses. I think some examples would be useful to illustrate:
l The world’s largest multinational food, household personal care (HPC) and FMCG companies like Nestlé, Unilever, Procter & Gamble, Reckitt Benckiser and Colgate have been investing in this country for up to a century but we still have several strong domestic players in all these categories like Tiger Brands, AVI, Adcock Ingram and Pioneer Foods;
l The presence of KFC, part of one of the world’s most successful quick service restaurant groups, has not stopped locally-owned chicken outlets like Nando’s and Chicken Licken from being successful. In the same category McDonald’s has sometimes seemed at a loss over how to compete with Steer’s;
l Barclays – whose total assets exceed South Africa’s GDP several times over – bought a controlling interest in Absa but the biggest shake-up in retail banking, in my opinion, is coming from local player Capitec. They have been rapidly capturing the previously unbanked as depositors by offering easy access to their money at very reasonable fees. This has forced the big banks to rethink their fee structures and even their opening hours. Does anyone even remember “Mzansi” accounts?;
l All the large foreign investment banks like JPMorgan, Deutsche Bank, HSBC and Citigroup are here but the merchant banking arms of the original “big four”, Standard Bank, Nedbank Absa and First Rand, continue to dominate the corporate banking market by virtue of their decades-long relationship with client;
l Only 15 years ago maybe 90 percent of the population had little access to telecommunications despite the telephone being invented in the 19th century. Now almost every adult has a cellphone. Vodacom, owned by Britain’s Vodafone, has not destroyed locally owned MTN and the foreign technology they both import has revolutionised our lives. Cell C’s poor profitability shows that foreign investors don’t always have it easy here either;
l The motor vehicle industry is a huge employer and contributes about 2.5 percent of the country’s GDP. All these companies and their technology are majority foreign owned. They can be considered the life blood of a few of our cities like East London and Port Elizabeth.
I may be accused of “cherry picking” my examples, but I honestly struggle to recall a single example of private sector-driven foreign investment into a competitive industry (note the emphasis) that has been clearly negative for South Africa.
In fact, restricting foreign investment sometimes hurts us more.
As an example, government and Eskom could not quite figure out the appropriate manner in which to allow foreign investment in domestic electricity generation.
Given the long lead times required for this sort of investment, the net result has been a chronic shortfall in generation capacity and cumulative increases of well over 100 percent in electricity prices, with more still to come.
Foreign capital has been present in South Africa from the very first days of European settlement and has contributed tremendously toward building this country into one that is far more developed than any other in Africa.
Sanctions and disinvestment in the 1980s contributed towards the downfall of the apartheid regime because the reality was forced home that we cannot produce everything internally. I am not touting foreign investors as some magical solution to the problems we face, but more than half of the adult population are in need of formal employment and many of our own “proudly South African” companies choose to invest elsewhere in spite of this dire need to create jobs.
If someone is willing to commit capital on a long-term basis to our country they deserve our support as long as they agree to abide by our laws and pay taxes. We all benefit from fair competition in the long run.
l Suleman is based in Cape Town and manages international investment funds. He is a Chartered Financial Analyst charterholder and a UCT Business Science graduate. He writes in his personal capacity.
This article is part of the National Dialogue Initiative launched by the Ministry of Economic Development in association with the Cape Times and the SA New Economies network. Earlier contributions can be found at www.sane.org.za Contributions not exceeding 1 600 words can be emailed to [email protected]