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As part of its plan to offset slowing growth in its home market of the US, Wal-Mart has announced plans to buy South African-based Massmart Holding Ltd for R32 billion (US$4.6 billion). If completed, and the acquisition is expected to take six months to complete, the purchase will be Wal-Mart’s largest acquisition since buying UK-based Asda in 1999 and will extend the company’s reach into South Africa and 13 other sub-Saharan countries.

Over the medium term it is likely that Wal-Mart will maintain Massmart’s existing brands, as it has done in a number of other markets in which it has acquired a retailer, and so it is expected that its Game, Dion Wired and other brands will remain for the foreseeable future. However, the opportunity to launch brands under the Wal-Mart name will remain if the companies feel there is a gap in the market to be exploited.

Africa has been overlooked by global retailers for a number of years, but rumours about South African companies coming under the microscope have grown in the last 18 months, culminating in Wal-Mart’s offer for Massmart. If completed, the purchase will almost double the number of countries in which Wal-Mart operates, while it is also set to have a profound effect on retailing in South Africa.

Implications for Massmart Holding Ltd

The company’s purchase by Wal-Mart will boost its purchasing power and provide strategic support to initiatives it is already taking in relation to improving its supply chain and widening its product range, especially in relation to grocery products. This support should enable Massmart to make the changes quicker and better than initially envisaged, which should give it an edge in the increasingly competitive South African retailing market.

Implications for Wal-Mart Stores Inc

The acquisition of Massmart will almost double Wal-Mart’s international presence and will give it access to a number of markets in Africa. Purchases like this, and of D&S in Chile in late 2008, are boosting Wal-Mart’s presence in emerging markets which are expected to enjoy longer-term growth, but could put its margins under pressure in the medium term. As the company has found out previously, not every market entry is paved with gold, although Wal-Mart has learnt a lot since its ill-fated entrance into Germany and South Korea.

Implications for retailing in South Africa

Massmart will be looking to push increasingly into grocery products as a way to drive footfall at its stores. Backed by Wal-Mart’s huge purchasing power, Massmart should be able to offer the best prices in South Africa and will certainly drive down unit prices across a range of products. If this occurs, a full blown price war could emerge in grocery retailing, a development that neither retailers nor manufacturers will enjoy.

Massmart is Wal-Mart’s best fit in South Africa

Speculation has linked Wal-Mart with a market entry into South Africa on an almost constant basis for the last 18 months. With the company looking to skew its expansion increasingly towards faster growing emerging markets, the purchase of Massmart, with a presence in a number of markets in sub-Saharan Africa, makes sense.

However, despite its presence in Botswana, Lesotho and Zambia, Massmart’s existing operations are dominated by sales in its home market of South Africa, which accounts for 92% of value sales and so in the short term it is this section of the company’s operations that Wal-Mart will be looking to drive sales and profit growth. Commenting on the reasoning behind the purchase, Andy Bond, Executive Vice President with responsibility for Wal-Mart’s operations in the UK and Africa, said: “We like South Africa. I think there’s a definite confidence in it as a true emerging economy”.

Economic and population growth set to boost Massmart’s growth prospects
Massmart-growth-trend

Source: Euromonitor International, Countries and Consumers.

Notwithstanding the economic growth expected to be seen in the country, Massmart has been chosen by Wal-Mart, over larger grocery-oriented retailers like Pick ‘n Pay Stores and Shoprite Holdings, due to the company’s product mix, which skews more towards general merchandise than its peers, and its stated short-term aim of moving increasingly into grocery-oriented products.

According to Massmart’s 2009 annual report, its sales mix was 53% food and liquor, 34% general merchandise and 13% home improvement, while the company’s Game variety store brand was acknowledged as being the closest comparative to a US-based Wal-Mart store, which together made Massmart Wal-Mart’s first choice.

As part of its 2013 Vision for Growth strategy, Massmart said that it was looking to improve six parts of its business, with a number of these likely to have chimed with Wal-Mart’s global strategy. Firstly, under the heading of SMART trading, Massmart said that it was looking to build brands in food retailing, manage stock shortages in general merchandise and home improvement and reduce overall stock levels in food.

Secondly, Massmart set out initiatives to improve its supply chain, long a strength of Wal-Mart’s, thirdly, to boost private label sales, and, finally, to increase the breadth of its range of clothing and pharmaceuticals.

Together these strategies either echo what Wal-Mart is doing in a number of its markets globally, either as part of its push to convert its mass merchandisers into hypermarkets in Canada and the US or as part of its attempts to improve margins and grow profits globally, or play to the company’s long-held strengths. As such, Wal-Mart is likely to be envisaging a number of quick wins that it can bring to Massmart if the acquisition goes through.

Wal-Mart’s buying power, as the world’s largest retailer by sales, is unparalleled and so the company can boost Massmart’s ability to buy products more cheaply and, thus, drive down prices in the market across a wide range of goods. In addition, through what it has learnt in converting its own stores towards a more food-oriented product mix, Wal-Mart will be able to help Massmart through this process. Long term, these two items are likely to help drive footfall and, in turn, sales growth in the country.

Where does this leave Massmart’s competitors?

With a Wal-Mart-owned Massmart likely to push further into stocking grocery products, this will put pressure on South Africa’s leading grocery retailers, Shoprite Holdings Ltd, Pick ‘n Pay and Spar Group Ltd, which together account for nearly a 57% value share of grocery retailing in the country. First of all, the companies will have to learn to increasingly compete on price, which will mean looking closely at where costs could be stripped out of their business models or supply chains, and then about how they can improve the shopping experience they offer consumers.

In the US Wal-Mart has come under pressure in the past as consumers move up the spending scale, choosing to shop in a nicer retail environment or where they feel the product quality is better, such as Target and Whole Foods Market. Meanwhile, in the UK, Tesco and others have been able to compete against Asda despite the support Wal-Mart has given it, by concentrating on quality and expanding their store bases to be present in areas where Asda is not.

However, it is clear that other South African-based grocery retailers will have to up their game in order to compete over the medium to longer term.

Wal-Mart will have work to do, but could reap the rewards in the longer term

South Africa, alongside markets like Brazil, China and Mexico, will provide Wal-Mart with long-term sales growth that it is unlikely to see in its home market. However, the company will have to work hard to improve Massmart’s margins, which at 18.1% are below Wal-Mart’s 24%. Given that a Wal-Mart-owned Massmart is hoping that a push into grocery products, with its low margins, will help drive sales, it is going to be hard to close the gap between its US- and South African-based operations, especially if a price war breaks out among grocery retailers.

Despite this issue, however, Wal-Mart is likely to provide strong competition for existing retailers in South Africa and, if the purchase goes through, will have first mover advantage on its global competitors if they decide to follow suit. As such, the move seems sensible and in line with its existing global strategy, and will only extend the company’s lead at the top of the global rankings.

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