SA retail abroad: buccaneers with burnt fingers
Steinhoff saga begs a hard look at global forays by local groups
● The scandal surrounding Steinhoff International has placed local retailers — and particularly their lofty ambitions of global expansion — under scrutiny.
Steinhoff, dual-listed in Frankfurt and South Africa, catapulted itself to infamy when CEO Markus Jooste resigned after the company was accused by German authorities of misstating its financials for the past few years. The company, which had been on an acquisition spree — clinching deals worth almost R70-billion on three continents in the past two years — lost almost 90% of its share value last week in under 72 hours.
The blatant disregard the company showed for financial accounting brought into question the ability of other South African businesses — which often groom themselves for international dominance — to carry the weight of becoming conglomerates.
Rushed deals
Phibion Makuwerere, a financial analyst at Intellidex, said in hindsight one might argue that some acquisitions have seemed rushed, and lacking in thorough due diligence.
“In some cases management is under pressure from shareholders to utilise cash sitting on the balance sheet.
“A number of deals were done when the rand was at its weakest, which means most deals were overpaid, at least in rand terms. This does not apply just to retailers (Truworths and TFG) but to hospital groups (Mediclinic, Life Healthcare Group) as well,” said Makuwerere.
Much like Steinhoff, other South African retailers have shown signs of the strain placed on a new entrant onto the international retail scene when the business it acquires turns out to be poorly managed.
Woolies down under
One of the most prominent of these casualties is upmarket food and clothing retailer Woolworths and its brewing storm with its Australian operations.
Woolworths bought a stake in Australian retailer David Jones in 2014 for A$2.1-billion and just three years later decided to combine its Australian assets, including David Jones and Country Road, under one head office.
At the same time the retailer also let some key personnel go, including Sacha Laing, chief operating officer of Country Road, as it aimed to drag the legacy Australian businesses out of the peripheries of underperformance.
But these efforts have been slow to bear fruit: the stock is down more than 18% this year, partly due to shareholders having not bought into the Australian dream.
Another retailer slow to realise its international promise is diversified fashion house TFG. The retailer, which bought its stake in UK retailer Phase Eight only two years ago, followed up by putting up a hefty R3-billion purchase price for Retail Apparel Group, and last month bought international retailer Hobbs for an undisclosed amount.
Local conditions
Jon Copestake, chief retail and consumer goods analyst at the Economist’s Intelligence Unit, said South African retailers in particular needed to look abroad because domestic opportunity was limited.
“Organised retail’s low penetration means that there is plenty of room for growth and until oil prices collapsed a few years ago global retail attentions were switching firmly to Africa as the next long-term opportunity after India and China,” said Copestake.
“But this is a long-term play. These markets may be ready for initial investment now, but they are unlikely to start reaping rewards for at least a decade.”
However, it seems that it is in the waiting that companies can make the biggest mistakes.
Brait, an investment vehicle owned by Christo Wiese, the interim CEO at Steinhoff, bought UK retailer New Look for £763.5-million in 2015, but just a month ago the company said it had taken the decision to value the company at nothing, until a decision can be made on the future of the business.
Copestake said any global strategy for retail expansion needed to be both top-down and bottom-up.
“Acting internationally requires a solid assessment of local market dynamics in the countries you plan on operating in,” he added.
“The most successful global consumerproduct firms in the sub-Saharan African region have tailored their offering specifically to local markets and price sensitivities and have established hyperlocal supply chains to ensure they get in front of shoppers in the predominant (usually informal) retail channels.”
Mr Price is right
The Mr Price Group’s hyperlocalised strategy seems to have worked in its favour, as the retailer grew its profits after tax 23.7% to R1.1billion from a 14% profit drop (on an interim basis) in 2016.
South Africa is the most developed retail market in the region, and organised retail accounts for around half of sales. In markets such as Nigeria this penetration can be as low as 10%. But as far as acquisitions by South African retailers go, failing fast may be the answer. “Most of these acquisitions have failed to live up to expectations.
“But in the case of Shoprite, it failed at first but now it seems to be getting it right,” said Makuwerere.
A number of deals were done when the rand was at its weakest Phibion Makuwerere Financial analyst at Intellidex