Why the Walmart takeover is good news for Massmart
|Published
By Fred Razak
Walmart's intention to buy out and delist South Africa's Massmart perfectly positions the American retailer for the next five to ten year.
It's been no secret that the South African company has had a difficult few years and in August it announced a 51% decline in headline earnings for the 26 week period ended June 26. This translates to a potential loss of R974.9 million compared with a R645.4m loss in the previous comparable period.
Despite all of this, these figures won't have factored into Walmart's decision to now buyout the beleaguered retailer. These deals don't happen overnight. Ultimately, they won't be thinking about business for today, or tomorrow, they are thinking five to ten years down the line.
Walmart is Amazon's biggest rival. While Walmart is a retailer and Amazon is a digital presence both are competing for the same markets and Africa with one of the fastest growing populations in the world is one of them.
While Amazon's strength is in their quantity of data and their ability to offer clients 100 examples of exactly what they are looking for, it will be Walmart's contention that the retail experience still has a lot to offer, particularly in emerging markets like Africa, where a traditional retail experience is still preferred.
Amazon are restricted when it comes to feeling and touching the products. In a fast paced world, this doesn't matter much, however when you are dealing with rural or undeveloped areas, people still like to go into a store and see what's on offer.
At Amazon that browsing experience is gone. Walmart is, therefore, positioning itself for the next five to ten years to benefit from a rapidly growing market, where most are still inclined towards that retail, touch and explore experience.
Walmart's vetting regarding the quality of products and brand standards will also help them to expand in Africa.
If I go to Amazon, I am presented with a dozen options from two dozen suppliers and I have to do my own research as to whether these people and brands can be trusted. With Walmart it's the other way around. You only get to choose between a few brands of any product, but these have been ruthlessly vetted allowing customers more certainty on their purchases..
This is not to say that the expansion in to Africa will be immediate. The current Massmart situation is one made, not only from Covid disrupted logistics and the KwaZulu-Natal looting, but possibly long term mismanagement and it may take some time to fully position the brands for expansion.
Mismanagement doesn't necessarily mean being corrupt about how they allocate the funds. Mismanagement can be about not retaining clients, or not maintaining customer satisfaction, or lack of delivery standards or a lack of sales morale. It doesn't need to mean something financial. A company or a business is a living entity and at this point, they have to restart its heart.
That said, Walmart is a Titanic business and it will take some time to get it all pointed in the direction they want it to go. For all that, Walmart is not hesitating to take the tough decisions. The retailer recently announced the closure of eight of its stores around the country.
When a company looks to take over another company and use that as a springboard to enter an emerging market, they want to focus on doing more of what is already proven to work and decrease doing the things that are not creating wealth.
This won't be a one day process. We are going to see some form of makeover for all these brands. It could be a financial makeover, a distributional makeover, but it's going to be slow to allow employees and customers to acclimate to the new standards that Walmart will be bringing into the market.
However, while changes may slowly be coming for the brands in the Massmart stable, they won't be closed down and won't vanish from the South African retail space.
To build a recognisable brand takes decades and they won't want to give that up. Whatever changes they make will be slow. I don't think they will change the names, but they will do brand refreshes alongside new logos.
It's not by chance that Walmart became the largest retailer in the world. I think Walmart's decades upon decades of accumulated knowledge will add a lot more value to the company both in efficacy and efficiency. The whole Walmart culture is geared toward maximising retail and that's what we are going to see here. New, highly efficient, versions of the brands we knew before expanding into Africa and potentially dominating the space much as they do elsewhere.
Fred Razak is the chief trading strategist at CMTrading.
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