Survival 101 Massmart in firing line in Amazon battle
Walmart’s African unit needs to ramp up its operations
● When a parent goes to war, it is often their offspring that is left in the crossfire. And in the case of Walmart’s proxy war with Amazon through its subsidiary companies, its African unit, Massmart, will have to look to its parent’s tactics to ensure its survival.
In the seven years since Walmart, the world’s largest bricks-and-mortar retailer, landed in Africa, through the purchase of a majority stake in Massmart for almost $2.3billion, it has been indifferent to the continent and its ambitions.
In a recent Walmart conference call with investment analysts, Africa was not outlined as an immediate strategic priority for the retailer — North and Central America, China and India were at the top of that list.
But with Massmart’s stock trading 36% lower since the deal was approved by competition authorities in March 2012, the market has been reacting negatively to its underperformance.
This week the share was trading as low as R109.11.
Charles Allen, a senior retail analyst at London-based Bloomberg Intelligence, said: “Walmart is more focused on investing in markets which have potential for rapid growth. Its purchase of Flipkart in India shows that it is prepared to take a longerterm view on value creation with online investments. I think, though, that Africa remains a place where Walmart anticipates that there will be growth in the future but it doesn’t need to accelerate the investment in the way it has in India.”
In India, Walmart bought the majority stake of e-commerce giant Flipkart, which is expected to put Walmart in direct competition with Amazon. In May Naspers, the South African internet and entertainment firm, sold its entire 11.18% stake in Flipkart to Walmart Inc for $2.2-billion (R29.75-billion). While Flipkart is the market leader, Amazon’s relatively new site in India is quickly closing the gap.
But Massmart has been hurt by both the slow growth of e-commerce on the continent and the generally poor trade environment in which it operates.
In a trading update last month, Massmart said it expects to see interim earnings fall by 69% as a result of restructuring costs of about R116-million related to relocating Masscash and Massdiscounters head office functions from Durban to Johannesburg to enable better co-ordination between these divisions.
The plunge in profit came despite the 423 stores that the white-goods retailer operates across its well-known brands such as DionWired, Game, Makro and Builders. The 42 stores it has outside South Africa represent only 8.3% of sales.
If Walmart is to dethrone Amazon it is going to need scale and Massmart’s 42 Africa stores are unlikely to be enough to satisfy its parent’s monstrous appetite.
Phumzile Siboza, Massmart’s brand and corporate communication executive, told Business Times that “when Walmart entered
When Walmart entered the market the decision was taken not to leverage the Walmart brand with customers. We have, however, benefited from Walmart’s relationships . . . Phumzile Siboza
the market the decision was taken not to leverage the Walmart brand with customers. We have, however, benefited from Walmart’s respected relationships with global suppliers, which have allowed us to build closer relationships with these suppliers.”
Siboza said the relationship with Walmart had allowed Massmart to bring several aspects of the business on a par with international best practice.
“These learnings have been implemented across our business and have contributed to the excellent cost control that has been evident in Massmart’s results in what has been a tough economic environment,” Siboza said.
Yet Walmart’s aggressive digital strategy that has seen it ramping up its efforts against Amazon will mean that Massmart needs to ramp up its own operations in order to compete with Amazon on its home turf.
Listed as one of its strategic priorities, Massmart’s online sales grew 47% in 2017, while it had 151 unique customer collection points for its online orders.
This is part of the group’s strategy to encourage growth through an omnichannel offering — where consumers can use different methods to shop, including online or physical shop.
Allen said: “Walmart has already adjusted the strategy of many subsidiaries to be more aware of online competition. The degree of maturity of online in each market is likely to affect the level of investment in online, although Walmart is likely to be more prepared for online to expand rapidly.”
With Amazon having started to lay roots in South Africa with Amazon Web Services, preparations may be under way by Amazon to expand its retail presence in South Africa, which would spark a big retail battle.
Massmart also expects to increase store space by approximately 200 000m² between January 2018 and December 2020, including opening stores in Ghana, Kenya, Nigeria, Zambia, Mozambique and Swaziland. The group currently has 181 296m².
While in the US brick-and-mortar revenues among retailers rose on average a mere 4%, e-commerce retail sales have grown by almost 30%, according to the 2017 Mastercard Spending Pulse report.
In South Africa, e-commerce contributes only about 1% of total retail sales, the report said.
For Massmart in Africa, the growth plan seems to be investment in its brick-andmortar stores.
“A key challenge involves sourcing suitable sites for stores in other African countries,” Siboza said.
But for Allen, all of Walmart’s subsidiaries should prepare themselves for the next wave of growth.
“I think that all retailers need to be prepared to compete with online-only disrupters. However, retailers need to be prepared to [compete with] all competitors as online-only is not the only significant competitive threat,” Allen said.
Massmart, which owns brands such as Makro and DionWired, expects to increase space by about 200 000m² between January 2018 and December 2020.