Sur­vival 101 Mass­mart in firing line in Ama­zon bat­tle

Wal­mart’s African unit needs to ramp up its op­er­a­tions

Sunday Times - - Business Times - By PALESA VUY­OL­WETHU TSHANDU [email protected]­day­times.co.za

● 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

Mass­mart ex­ec­u­tive

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.

Pic­ture: An­to­nio Muchave

Mass­mart, which owns brands such as Makro and DionWired, ex­pects to in­crease space by about 200 000m² be­tween Jan­uary 2018 and De­cem­ber 2020.

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