FU­TURES IM­PER­FECT

Ron Derby col­umn

Financial Mail - Investors Monthly - - Contents - RON DERBY

The more things change, the more they stay the same, and this ap­plies to cor­po­rate South Africa’s re­sponse to the slow­ing do­mes­tic econ­omy and the weak­ness of the rand. The an­swer is not sim­ply ex­pan­sion into the rest of the con­ti­nent, which has been a theme for a few re­port­ing sea­sons, but a foot­print in de­vel­oped Europe or Aus­tralia.

When­ever there’s been a pro­longed pe­riod of cur­rency weak­ness or eco­nomic strug­gles, I think we can rely on this one rather am­bi­tious strat­egy to be dusted off the shelves in the man­age­ment com­mit­tee meet­ings of some of SA Inc’s large cor­po­ra­tions. In years past, fi­nan­cial ser­vices giants sold the idea to share­hold­ers of a Lon­don base, Old Mu­tual be­ing the lead­ing light along with An­glo Amer­i­can.

And here we are again, but this time around banks and other fi­nan­cial in­sti­tu­tions aren’t the ones lead­ing the praise-singing for Western ex­pan­sion. Re­tail­ers, frus­trated by the slow progress in any African ex­pan­sion strat­egy, are lead­ing the charge.

Per­haps en­cour­aged by the mar­ket em­brace of Wool­worths’ Aus­tralian ad­ven­ture with the pur­chase of David Jones, there’s now a grow­ing list of re­tail­ers that are ei­ther plan­ning or are in the process of plant­ing their flags in the high streets of Lon­don.

Per­haps Ian Moir’s affin­ity with Aus­tralia will help Wool­worths — the big­gest ben­e­fi­ciary of the ex­plo­sion of South Africa’s black mid­dle class — in its trip Down Un­der. The jury is still out on that.

But one feels that in the not too dis­tant fu­ture, share­hold­ers may have to pay dearly for these ad­ven­tures. If dou­ble-digit growth for re­tail­ers cor­re­lates with the emer­gence and growth of the mid­dle class, it’s near im­pos­si­ble to see any ad­van­tage in a store in Pic­cadilly over one in Luanda or Ad­dis Ababa.

Ad­mit­tedly, the en­tire vil­lage of emerg­ing mar­ket na­tions is in a bad space eco­nom­i­cally at the mo­ment, since China’s slow­down has caused com­mod­ity prices to fall. But on a de­mo­graphic div­i­dend alone, these parts of the world are where any­one in search of high growth rates should fo­cus.

The world’s big­gest brewer, An­heuser-Busch InBev, wants to pur­chase SABMiller, not for its Euro­pean and US oper­a­tions but for its emerg­ing mar­ket foot­print and in par­tic­u­lar the African con­ti­nent.

The quar­terly fo­cus of man­age­ment teams, which is the re­sult of pres­sure from the in­vest­ment com­mu­nity, may make it ap­peal­ing to boost scale by buy­ing a Euro­pean re­tailer, but over the long term, I can’t see the value.

Let’s take strug­gling credit re­tailer Tru­worths, which is look­ing at plac­ing a flag in the UK. Al­ready fight­ing a los­ing bat­tle on the lo­cal front, the Cape Town man­age­ment team are look­ing to turn their at­ten­tion to a sat­u­rated UK mar­ket.

How much man­age­ment time is go­ing to be spent in get­ting those oper­a­tions run­ning, and at what ex­pense? A con­tin­ued de­cline of its lo­cal for­tunes and, by ex­ten­sion, a weak­en­ing of any chances of an African strat­egy bear­ing fruit.

In this cur­rent pe­riod of low growth that has lasted for the bet­ter part of two years (to be kind), there should be bet­ter strate­gies be­ing sold to the in­vest­ment public. And in the case of Tru­worths, a bet­ter strat­egy is to im­prove your of­fer­ings, which clearly aren’t as at­trac­tive as those of your ri­vals.

But judg­ing by the stock per­for­mance af­ter the an­nounce­ment of Tru­worths’ in­ten­tion to buy into the UK mar­ket, it’s a strat­egy that has in­vestors in­ter­ested. As one an­a­lyst put it, if the re­tailer doesn’t head west, it risks be­ing crowded out in the lo­cal mar­ket by its fierce com­peti­tors.

It’s a con­cept that I don’t quite un­der­stand. The UK ad­ven­ture, in my book, leaves the re­tailer in an even more frag­ile place.

There’s a bat­tle for mar­ket share lo­cally, one that is go­ing to leave some bod­ies, Ed­con seem­ingly the big­gest. Who’s next? We don’t know, but start­ing a Euro­pean ad­ven­ture doesn’t seem the smartest gam­ble at the mo­ment.

South Africa and an African strat­egy make log­i­cal sense.

In this cur­rent pe­riod of low growth … there should be bet­ter strate­gies be­ing sold to the in­vest­ment public

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