Walmart’s 7-year gamble in Africa slowly paying off

by Kim Souza ([email protected]) 8,016 views 

It’s been seven years since Walmart plunked down $2.4 billion for a 51% stake in Massmart Holdings Limited, the second largest retail holding company in South Africa.

Doug McMillon, CEO of Walmart International at the time, said the retail giant planned to accelerate its presence with an expansion into South Africa and surrounding countries because of the attractive growth potential.

“This combination fits perfectly with our strategy to enter high growth markets in which we can apply our global expertise and generate strong returns,” McMillon said in November 2010. “Also, this acquisition will allow us to bring to South Africa our significant experience in connecting small farmers with Walmart’s global supply chain, boosting farmer income as well as helping them improve the quality of their produce. We hope to help South African suppliers grow their businesses, become more efficient, environmentally friendly and ultimately more competitive.”

Walmart faced challenges with the deal and it was not legally effective until June 2011. Formal approval was finally granted in March 2012.

Over the years, Walmart has shared very little about its African investment and progress on the massive continent is slow going.  McMillon, now CEO of Walmart Inc., has said the retailer will continue to evaluate its global assets and some wonder how Massmart will play in Walmart’s future with so much focus on India and China.

Walmart has shaken up its international holdings this year, unloading an 80% stake of its troubled Brazilian business unit to Advent International in June. The deal cost Walmart a $4.5 billion charge to its second quarter earnings, and it still retains a 20% interest in the business.

In April, Walmart also agreed to sell a majority (58%) stake of its Asda business in the United Kingdom to Sainsbury’s for $4.09 billion and operate as partners in this venture. Grocery retailers in the United Kingdom have had their challenges in recent years, and Walmart Asda struggled to be in the top two retailers for share in that market on its own. By partnering with Sainsbury, this pushed Asda/Sainsbury’s to the No. 1 spot.

Judith McKenna, CEO of Walmart International, said in June the retailer is pleased with the progress it’s making in Japan and she quieted some rumor that the retailer was looking to exit that market as well. Still, Walmart has said virtually nothing about its stake in Massmart.

Talk Business & Politics looked at Massmart’s earnings report for the first half of 2018 and found the business has annual sales equal to roughly $6.061 billion operating 425 stores across 13 sub-Saharan countries. For the first six months of 2018, Massmart reported total sales of $2.801 billion, up 1.9%, with flat comp sales, up just 0.2%. The company cites product deflation at 0.7% and consumer weakness in its South African stores in the period with sales growing 2%. Outside South Africa, sales grew 5.7%, the report states. Sales were boosted by more liquor and home improvement with those categories increasing 9.2% and 7.6%, respectively. Food sales declined 1.5% and durable goods sales were up fractionally at 0.9%.

The bulk of Massmart’s stores are located in South Africa, where economic conditions continued to deteriorate throughout the first six months of the year. South Africa comprises about 91.6% of the business unit sales and the country reported a 2.2% drop in GDP to start the year. Massmart said the other 43 stores elsewhere on the continent also struggled in the period.

Massmart reports on a comp basis, gross margins declined slightly from 19.7% to 19.6%, which was caused primarily by margin pressure from deflation in food. This business unit continues to restructure itself internally with the relocation of headquarter offices for the Massdiscounters and Masscash business units from Durban to Johannesburg.

Walmart said the reason for moving the offices was to take advantage of greater coordination of procurement activities across the various businesses within the group. Walmart expects to realize direct savings from this restructure to be around $3.565 million. The one-time charge incurred for the moves totaled about $11 million, most of that in the first half with about a quarter of it to be charged in the back half of the year.

Massmart reported its headline earnings for the six-month period fell 42% at roughly $14.185 million. Excluding the restructure costs, earnings were down 20.4% at roughly $19.526 million.

Walmart/Massmart continues to look for more service revenue opportunities and said in the period services achieved double-digit growth. The services offered include: money transfers, lotto sales and extended warranty sales. Massmart is also focused on growing its omnichannel presence. Online sales grew 69% in the period thanks to the following banners:

  • Makro — Club warehouse trading in food, general merchandise and liquor. There are 21 stores in South Africa with online sales increasing 27% in the period.
  • DionWIred — High-tech retailer with 22 stores in South Africa. The retailer plans to open six more of these stores this year.
  • Builders Warehouse — Home improvement building retailer with 110 stores in South Africa, Botswana, Mozambique and Zambia. The online marketplace launched in early 2017 and inventory has been expanded to 26,000 items. Sales growth has pushed higher with “incredible” consumer support, the retailer notes in the report.

Massmart said these retailers achieved a 23% increase in average online basket size and 159% uptick in online traffic in the first six months of the year. While online sales are growing, Walmart said it plans to open another 17 stores over the back half of 2018, keeping its African growth plans on track.

Economists have said Africa is not without its challenges, but multiple research projects over the past two years indicate the next decade could hold tremendous potential and Massmart is well positioned to take advantage.

“What comes with investing in Africa is volatility and high peaks and troughs,” noted Thabio Mamathuba, an analyst with FNB Securities. “At the moment we are just going through a difficult time in Africa, mostly for global reasons around commodity pricing and the strength of the dollar. But I do believe the story remains intact and we are going to continue rolling stores out.”

He said Massmart is positioned well to grow as it looks to expand further outside of South Africa into more sub-Saharan African markets.

Massmart announced plans to open 58 stores in two years, 11 of which will be in markets outside of South Africa. The retailer said it plans to increase its growth on the continent by 17% in the next two years. Massmart executives have said Nigeria is very much part of the core strategy along with more growth in Ghana. Walmart is also looking to grow its footprint in Kenya, Uganda and Tanzania with more stores and increased online marketplace opportunities.

“We support this move and think that a first mover advantage is important when expanding into Africa and believe the continent offers solid long term growth. However, current conditions are challenging out there and currency translation effects could continue to dominate the African expansion narrative.” Mamathuba said.

He said Massmart does benefit from adopting Walmart’s supplier planning process to improve merchandise availability and growing the local farmer development program to improve fresh food supply chain efficiencies. He’s still waiting to see what Walmart is getting from this partnership.