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  1. Analysis
June 1, 2011

Talking shop: Wal-Mart’s African debut

South African competition regulators yesterday (31 May) approved Wal-Mart's acquisition of a majority stake in local retailer Massmart. Katy Humphries takes a look at Wal-Mart's African ambitions and discusses the impact that the deal is likely to have on the South African retail scene.

South African competition regulators yesterday (31 May) approved Wal-Mart’s acquisition of a majority stake in local retailer Massmart. Katy Humphries takes a look at Wal-Mart’s African ambitions and discusses the impact that the deal is likely to have on the South African retail scene.

South Africa’s Competition Tribunal has given the go-ahead for Wal-Mart’s acquisition of a controlling 51% stake in local grocery-to-electricals retailer Massmart.

Upon completion of the deal, which is valued at US$2.4bn, Wal-Mart has indicated that it will step up its investment in Massmart in order to drive growth. In a statement released yesterday (31 May), Wal-Mart said that it will provide Massmart with “increased financial stability” and support to “strengthen its presence in Africa”.

The combined Wal-Mart-Massmart entity is planning “significant new store openings” and aims to increase its food business by over 50% in the next five years, the companies have revealed. An acceleration of the group’s food business is likely to be achieved by ramping up supermarket openings, as well as adding a food offer to the company’s Game outlets, which carry general merchandise, FMCG products and non-perishable groceries.

However, as Wal-Mart looks to increase Massmart’s share of the South African grocery market it is worth noting that the world’s largest retailer will be pitting itself against some very successful and well-established local players. Competition in the market is already fierce, with the likes of ShopRite, Pick’n’Pay and Spar Group also battling to accelerate growth.

In an indication that Wal-Mart will look to convert Massmart to the EDLP philosophy it adheres to across its global portfolio, Doug McMillon, CEO of Wal-Mart’s international operations, promised to provide “previously underserved customers and communities with better prices and increased access to the products they want and need”.

In what is currently a highly-promotional market, it has been suggested that this new focus could result in increasing competition around pricing and, ultimately, lower retail prices for consumers.

However, according to Kantar’s director of retail insights Bryan Roberts, rather than generating a “seismic” shift in the pricing strategy of South Africa’s retailers, it is more likely that Wal-Mart’s EDLP policy will co-exist alongside more promotionally focused retailers.

“In the long run, it should bring down prices. But Wal-Mart will need to convince suppliers and consumers of the benefits of EDLP. By Wal-Mart’s own admission, when they enter a highly promotional international market there might be a year or two of pain before they start to see the benefits of EDLP in sales,” Roberts says.

Roberts also suggests that the Wal-Mart is likely to take some time to roll-out its EDLP strategy in South Africa as the basis of the retailer’s low pricing is its low-cost model, which is reliant on a highly centralised, highly efficient supply chain.

“What Wal-Mart will bring to the table is a centralisation of the supply chain…Wal-Mart likes to have very few, but very meaningful, conversations with suppliers” Roberts suggests.

Nevertheless, as the company looks to introduce its low-cost model, it will have to overcome a number of hurdles.

In a nod to the opposition posed by organised labour to the deal, the Competition Tribunal imposed various restrictions on Wal-Mart’s ability to strip costs out of the Massmart business. These included stipulations that the retailers make no job cuts for two years, honour existing labour agreements for three years and establish a ZAR100m (US$14.7m) fund to help support the development of local suppliers.

According to Freddie Mitchell of South African financial services company Efficient Group, some of these conditions could have an impact on Wal-Mart’s ability to convert Massmart to its low-cost operating model and could have a negative impact on the group’s competitiveness in South Africa.

“Some of the conditions which Wal-Mart must adhere to will have an effect on their competitiveness in the South African market compared to their other global operations,” Mitchell suggests.

As Wal-Mart looks to strip costs from the Massmart business and implement best practice across the supply chain, the company will have to grapple with some issues that are specific to the South African market, Mitchell claims.

“In South Africa you must take into account the infrastructure that is available. The rail network is not good and road transportation is getting more expensive… It will pose some challenges, but nothing that Wal-Mart will not have already considered,” he tells just-food.

While Wal-Mart is clearly looking to drive Massmart’s domestic growth, it is also likely to view the acquisition as a springboard to gain traction in sub-Saharan Africa.

Massmart operates in 14 different countries in sub-Saharan Africa and the deal will provide the world’s largest retailer with a foothold in a region that offers significant growth potential.

With around one billion consumers and an age profile much younger than the developed markets of the US and Europe, demographic drivers are propelling expansion of the region’s retail sector. The population of sub-Saharan Africa is expanding by about 3% per annum, while GDP growth stands at between 3% and 5% across the region.

Indeed, according to Daniel Broby, chief investment officer of investment firm Silk Invest, the growing population and “very strong” expansion of the middle class mean that the consumer opportunity in the region is “absolutely phenomenal”.

“The consumer market in South Africa is very developed and the supermarket and megastore concept is fairly mature. South Africa is the most developed retail sector in the region. For this level of investment, they must view the deal as twofold. In South Africa, Wal-Mart will look to drive growth from new store openings and add value by bringing mass purchasing to the table. But they will also expect to develop operations throughout the continent,” he suggests.

So, while Wal-Mart will face some significant challenges within South Africa as it looks to extend the Massmart business, it is likely that the group is preparing to use the South African retailer as a route into the rest of the continent to capitalise on the region’s significant growth potential.

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