Massmart group takes strain

Africa’s second largest retail group says relocating its Massdiscounters and Masscash divisions cost R116.1m

Massmart, which is owned by US retail giant Walmart and runs the Game, Makro and Dion Wired chains, says moving the head office of two of its divisions from Durban to Johannesburg had a negative effect on its fullyear results to end-December.

Africa’s second largest retail group said relocating its Massdiscounters and Masscash divisions cost R116.1m, and the disruption to its operations also saw it lose hundreds of millions in earnings. Massmart CEO Guy Hayward said this loss of focus saw its Game chain, which was housed in its Masscash division, lose about R200m in business for the year to end-December.

The transition was not easy, as many of its key Durbanbased staff had opted not to move to Johannesburg. Hayward said this meant the group had to recruit new people. Even though the move had been detrimental in the short-term, Hayward said, over time it would pay off, as it would save R30m a year.

The difficulty in getting talented people was the main reason it moved these divisions to Johannesburg. Hayward said the group battled to get potential employees to move to Durban. The knock-on effect of the move, and the sluggish economy, saw overall revenue rise only 2.9% to R90.9bn and trading profit before interest and tax fall 16.8% to R2.5bn. Net earnings were down 35.4% to R868.7m.

Sasfin senior equity analyst Alec Abraham said the move to Johannesburg had played a part in the fall in earnings, but its biggest problems were the modest rise in volume growth and price deflation in some of the products it sold.

As Massmart’s business model was based on selling large volumes at low margins, it was sensitive to downturns in the economy. Abraham said with sales volumes growing at below its cost of 5.9%, the group was in a bind because its growth in expense was outstripping its growth in revenue.

Price decreases forced on it by its suppliers were not helping, as it meant it was basically selling its goods for less while its expenses were rising.

Massmart was responding to the difficult economy by introducing a range of cost-cutting measures. Hayward said an example of this was ensuring that whenever a truck made a delivery, it did not return empty. This way it would save on transportation costs. Abraham said such initiatives would pay off in the long run because when the economy turned, their effect on its results would be “explosive”.

The problem for Massmart, he said, was that it had probably reduced costs as much as it could and it would likely take more than a year for the economy to recover.