With the general instability of the global economy, corporations like to play it safe; Walmart is an example of a multinational which is making a bold move. Acquiring South African grocery chain Massmart offered Walmart a safe foothold to prepare for the next step, which is continental expansion.
South Africa is arguably the most westernized country in Africa. Western companies in general perceive it as easier to do business there than in other African nations.
South Africa is also the continent’s largest economy and considered No. 1 for technological readiness, financial market development, and business sophistication according to African Development Bank´s Competitiveness Report 2013.
South African grocery chains are leading the way when it comes to expansion, but many large retailers from around the continent have expanded beyond borders or are planning to do so. Some of the biggest challenges for expansion relate to land transportation, infrastructure, and facilities.
Because companies are willing to expand and conquer, regardless of these difficulties, stores may look very different from one country to the next, or even from one city to the next. For example, in Zambia – one of the most attractive markets for retail stores today -a Shoprite store (South African) in the copper mining region may carry only a quarter of the product range of the same store in a rich neighborhood of the country’s capital.
If grocery chains are to succeed in some of these emerging economies, they will have to adapt to cater to the needs of very different populations. Intermittent supplies and lack of demand for pricey imported goods are some of the dangers they must be ready to face.
Other significant risks of this type of investment include the fact that many of the most promising economies, such as Angola or Zambia, rely heavily on mineral resource exports subject to international price changes.
When consulted about how Shoprite deals with these risks, the company´s spokesperson Sarita von Wyk referred to Shoprite´s last annual results announcement where Shoprite, “achieved a higher percentage turnover on its non-(South Africa) division than in the (South Africa) division. The strong growth was assisted by the continued weakening of the rand against the U.S. dollar and certain African currencies, making imports from South Africa more affordable,” which offers a new perspective on expansion, as a way of minimizing the risks posed by each particular local economy.
Ever since the 2008 global economic crisis, Walmart began to rely more heavily on international markets. In fact, according to estimates by Forbes, its international segment is currently contributing about 40 percent to the company’s stock price.
Two years ago, Walmart acquired 51 percent of South Africa´s Massmart for about $2.4 billion. As sales in South Africa dwindle and Massmart loses terrain against strong competitors like Shoprite, the chain targets sub-Saharan expansion, with plans to open 90 new stores across the region over the next three years.
When the company’s Chief Executive Grant Pattinson presented Massmart´s first-half results for 2013, he made the company’s intentions very clear; “we want to slightly shift our focus away from South Africa and put more resources into African growth.” Some of the most attractive markets for this expansion are Nigeria and the dynamic, post-civil war Angola.
If Massmart, with the extra boost of being now partially owned by the world’s largest retailer, wants to compete with Shoprite, it needs to move fast; while Massmart currently runs a mere 29 stores in 11 African countries outside South Africa, which account for eight percent of its sales, Shoprite runs 153 supermarkets, a figure that might easily double over the next four years, according to the grocery chain’s Chief Executive Whitey Basson.
As it did with the acquisition of a majority stake in Massmart, Walmart is pursuing the same strategy across the continent, trying to gain control over successful local retailers in growth economies. In October, Kenyan retailer Naivas, which was reportedly going to sell a similar controlling stake to Massmart, backed out of the deal.
Just a few month earlier Naivas’s chairman seemed quite eager to let the acquisition go through, when he referred to the positive impact a merger with Walmart would have on his company, in terms of bringing in fresh blood and ideas.
It now seems that this was a strategic move from Naivas, as a spokesperson told Reuters, “we are fattening our cow. As and when we are ready we will do that (sell) but as it is now we are not.” At a press conference, Pattinson said that this doesn’t in any way deter Massmart from expanding into Kenya and that the company is still shopping for a suitable local partner.
On the other hand, some analysts believe that the failed deal represents a significant obstacle for Walmart’s expansion plans. As the World Bank predicts a 4.9 percent growth for the Sub-Saharan region in 2013, topping 2012’s 4.2 percent, it seems that speculation will continue across Africa’s promising grocery chain markets.
To all intents and purposes, it would seem that Walmart, albeit dressed in its shiny Massmart clothes, is losing the battle against Shoprite in Sub-Saharan Africa. However, in the grand scheme of things, there are some signs that point to the multinational giant’s imminent success.
At the Consumer Goods Council of South Africa Summit 2013, held in mid October in Johannesburg, a Kantar Retail research spokesperson observed that GAME, Massmart´s signature store chain, bears many similarities to what Wal-Mart was like 15 years ago. Walmart´s strategy back then was to make extremely low-cost food available to the public. According to researchers, this is what lead Walmart to the top worldwide, and they believe that it will take much less than 15 years for the strategy to make an impact in Africa.
Shoprite seems to be well aware of its competitor’s master plan. In fact, the chain has succeeded in stopping GAME stores from trading food products at the Cape Gate shopping centre in Cape Town. Invoking an exclusivity clause in the lease of its stores in the same mall, Shoprite embarked on a legal battle to protect its interests not only in Cape Town, but, ultimately. across the whole Sub-Saharan region.
