Mass store and job cuts at Massmart
Changed market conditions and an appalling economy has hit low end cash-and-carry outlets
When American retail behemoth Walmart signalled it wanted to enter the South African market way back in 2010 it wasn’t welcomed with open arms.
Concerns that it might use its global muscle to overwhelm local retail led the imposition of conditions on its acquisition of a 51% stake in Massmart.
But its performance against other South African incumbents has been less than stellar. Now, after nine years since Walmart’s acquisition, Massmart will add to the country’s unemployment rate because of underperformance in a weak economy and tough competition.
On Monday Massmart announced that it has started restructuring the company, which will result in the closure of underperforming stores and mass retrenchments. The process is expected to affect 34 Dionwired and Masscash stores and about 1 440 employees.
Massmart owns local stores such as Game, Dionwired, Makro, Builders Warehouse and Cambridge Food.
Walmart made a bid in 2010 to acquire Massmart. In 2011 the government and trade unions resisted the merger over fears that Walmart’s global supply network could threaten local manufacturing and production, resulting in a loss of local business and jobs.
At the time, the country’s unemployment rate had risen to 25% in the first quarter of 2011. Now the latest unemployment figures are heading towards 30%.
It was only with the approval of a Competition Tribunal ruling in March 2012 that the takeover, which amounted to R16.5-billion, was granted. The tribunal allowed the deal under the conditions that the company did not cut jobs for two years and that a R100-million “development programme” for local suppliers was set up.
“Government interventions should be seen in the context of the economic situation of the country,” said a statement issued on August 8 2011 by the ministers of economic development, Ebrahim Patel; trade and industry, Rob Davies; and agriculture forestry and fisheries, Tina Joemat-pettersson.
Retail analysts said that a changing wholesale market, a weak economy and customers’ ability to source hi-tech appliances cheaply online have been at the heart of Massmart’s underperformance.
“A long time ago, I said that when the new chief executive comes on board, he will clean the portfolio, because the profitability of those divisions [Masscash and Dionwired] were subpar and totally unacceptable,” said independent retail analyst Syd Vianello.
After the restructuring announcement the Massmart’s share price rose from R51.64 to R57.01 on Wednesday afternoon, indicating that the market is agreeing with the company’s approach.
In its financial statement for the six months to June 2019, the group recorded big losses. Their statement showed that headline losses amounted to R796.6-million, a decrease from prior headline earnings of R204.1-million.
“The big surprise is Masscash,” said independent analyst Chris Gilmour.
Masscash is the wholesale division and includes cash-and-carry stores such as Rhino, Jumbo and Cambridge Food.
Gilmour said stores in the Masscash division appeal to the low end of the market, which shows that the low end consumer has been hit proportionally harder by the weak economy.
“The economy is really in a bad, bad place. I’ve never seen it this bad in my almost 40 years of covering this sector. This is by far the worst economy I’ve ever seen. Nothing is even close,” he said.
This week the World Bank cut
South Africa’s economic outlook to 0.9% for 2020, compared with the 1.5% it estimated last June. The revised number is the result of Eskom’s inability to supply the country with sufficient electricity.
Gilmour said the cash-and-carry stores do not have the same degree of traction they had back in the 1970s and 1980s.
“A lot of independent cash-andcarries have opened in recent years and they are doing incredibly well. They are convenient and much cheaper, and they are making the big organised cash-and-carry less relevant,” he said. “It is not what it was, and they are taking a beating on Rhino and Cambridge.”
Massmart’s Refilwe Boikanyo said that although the restructuring process is in motion, a final decision on the number of stores to be closed depends on the outcome of consultations with the union.
“If the outcome of consultation is that we close the 23 affected Dionwired stores then this would lead to the effective closure of the brand,” said Boikanyo.
The South African Commercial, Catering and Allied Workers Union (Saccawu) said that it is planning to “vigorously” challenge the section 189 retrenchment notice.
“Direct foreign investments are a problem as once they have got a majority shareholding they start cutting jobs and increase the challenges that our country is facing, tackling high unemployment, poverty and inequality,” said Saccawu’s Khulekani Ngubane.
He said the union will be canvassing support from labour federation Cosatu and other unions and organisations in other countries to help challenge the matter.
Vianello said years have passed since Walmart made the acquisition and agreed to not cut jobs for two years. “They honoured the agreement.”
He said market conditions have changed dramatically and the reality is that Massmart could close shop if they do not cut a number of jobs now.
Vianello said he does not doubt that more stores, especially cashand-carries, are going to be closed down.
The new chief executive, Mitchell Slape, who joined the company in September 2019, has worked at Walmart for 25 years, holding leadership positions in Argentina, Korea, and Mexico.
Gilmour said Slape is suitable for the job because he’s not affiliated with anyone in the country. “The new guy has got no baggage and he can look at this with a very clear eye.”
He said Slape is taking a surgical approach. “He says, ‘this is not working, cut it’. Typically an American approach and, unfortunately, this is the only way.”
Massmart is set to release a detailed strategy at the end of January, which will show how it plans to turn its fortunes around.
Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian