Massmart operates in 14 sub-Saharan markets in Africa

Massmart operates in 14 sub-Saharan markets in Africa

Wal-Mart, the world's largest retailer, has sought a foothold in Africa through its bid for South African retailer Massmart.

The US retail giant yesterday (27 September) tabled an offer of US$4.3bn to buy Massmart, a retailer that operates nine banners, ranging from general and discount merchandise through to cash and carry and home improvement stores.

The nine banners are grouped under four divisions: Massdiscounter, which accounts for 26% of sales; Masswarehouse, accounting for 24% of sales; Massbuild, which accounts for 13% of sales and Masscash, which takes around 37% of sales.

The move will give Wal-Mart its first foothold on the African continent. Massmart operates stores across 14 African markets that also include Nigeria, Tanzania and Zambia.

The move, Deutsche Bank analyst Bill Dreher said, would make Wal-Mart the "first major, global retailer to move into the sub-Saharan African market, providing a first-mover advantage". He added that the transaction would be "consistent with Wal-Mart's acquisition strategy to move into large, high-growth markets, which are unconsolidated and under-developed".

Analysts, however, have mixed opinions on Wal-Mart's plans to acquire the South African retailer, citing the high price being offered for the retailer as well as the lack of synergies between some of Wal-Mart's and Massmart's operations.

Janney Capital Markets analyst David Strasser said: "Massmart is well positioned as a springboard for Sub-Saharan Africa, but we believe that it will take a much longer time-period for the company to earn its cost of capital in Africa - due to the high purchase price, and the difficulty of dealing with a variety of economies throughout the continent."

Additionally, BMO analyst Wayne Hood questioned how well Massmart's operations map onto Wal-Mart's global operations. "We don't believe all of the company's four operating divisions align themselves with Wal-Mart's global strategy - namely home improvement and the 11 Dion Wired stores [consumer electronics]," he said.

However, Hood added that Massmart's Massdiscounters, Masswarehouse and Masscash businesses "seem aligned" with Wal-Mart's operations "and have potential synergies, although the real expansion potential is unclear at this juncture".

The acquisition may also create issues with Massmart's mixed labour relations. On one hand, Massmart touts its Broad Based Black Economic Empowerment programmes, and Andy Bond, the Wal-Mart executive heading its operations in the UK and Africa, has maintained the retailer's commitment to continue with these efforts.

However, Massmart remains mired in a labour dispute with unions after the South African Commercial, Catering and Allied Workers Union (SACCAWU) claimed in June that Massmart had decided to cut 1,500 jobs to prepare for a takeover by Wal-Mart.

The SACCAWU yesterday told just-food that it was still negotiating with Massmart over the job cuts and that the "unilateral restructuring" remained an issue. However, when asked what the potential new ownership would mean for workers, the union spokesperson said "the takeover is not confirmed" and that he did not want to "pre-empt the outcome" of planned meetings.

Another question mark around the potential acquisition remains around the strength of the South African and broader African economies. Strasser said South Africa has a per capita GDP of US$10,250 versus a GDP of $46,400 per capita in the US. He also highlighted the country's high unemployment rate of about 25% - "a lingering effect of the worldwide recession", he added.

Strasser's lukewarm summation of the market extended to the other African countries Massmart operates in. "We believe South Africa is the best economy in that continent, and it goes downhill from there," the analyst concluded.

However, Strasser's conclusions around the South African market may be somewhat simplistic given the country's position as a fast-growing emerging market. According to research from Business Monitor International, although South Africa's economy is "comfortably" Africa's largest and its food industry the most developed, it remains "some way from realising its potential".

The research said the emerging middle class is driving growth in what BMI describes as a two-tiered consumer market which is "highly segmented and increasingly premiumised on the one hand and extremely underdeveloped on the other", adding that food consumption is set to grow by 10.8% a year on average until 2014.

While consumer confidence is currently weak on the back of the recession, BMI says that rising incomes will bring a much wider proportion of the 50m consumer base into the sphere of South Africa's leading consumer companies.

However, claims that Wal-Mart is moving into an entirely underdeveloped market may underestimate the power of its competitors and the degree of formal retail penetration in the country. According to BMI's research, close to 70% of grocery sales in South Africa are accounted for by organised retailers.

BMI argues that growth will be driven by these leading retailers increasingly focusing their resources on expanding into low-income townships, with budget supermarkets being launched in populated areas.

With Massmart's focus on discount, cash-and-carry and wholesale formats, it is poised to take advantage of this shift.

All the analysts canvassed by just-food agree Wal-Mart's planned acquisition of Massmart has the potential to drive profit in the long term. However, growth will not be without its challenges as, according to Strasser, many of the the countries in which Massmart currently trades have a slew of geopolitical and economic challenges.

"For this deal to earn its cost of capital, Wal-Mart will have to succeed in several other Sub-Saharan markets," Strasser argued. After it closes this deal, Wal-Mart faces a long and challenging road ahead.