Massmart’s CEO Guy Hayward issues a lukewarm statement of support for the company’s operations beyond South Africa as he faces a battle to improve trading performance.
Guy Hayward, Massmart’s CEO, has given further insight into how the company is thinking about its operations beyond South Africa. His commitment to the current strategy reads a little like those of a football club board expressing support for the manager of a struggling team: we’re staying the course, there are positive signs of change – and the most telling part, “it’s difficult to turn the process on and off based on events happening now.”
Massmart has two issues:
- Its expansion strategy has been based on putting a limited number of stores in many countries.
- It is struggling to generate growth in its core South African market
Massmart’s expansion strategy – a little, but everywhere
Massmart has stores in 12 countries outside South Africa. In most countries it enters with its Game big box discount retail banner. In Botswana, Lesotho, Mozambique and Swaziland its Saverite supermarket banner is also present. Massmart typically has only one or two Game stores in each of the 11 countries the banner is present in outside South Africa:
- Botswana – 2
- Ghana – 1
- Kenya – 1
- Lesotho – 1
- Malawi – 1
- Mozambique – 2
- Namibia – 3
- Nigeria – 5
- Tanzania – 1
- Uganda – 1
- Zambia – 4
This means a lot of operational drag to set up and maintain a large number of small networks. Which would be OK if the stores were all high performing. But Massmart’s stores outside South Africa saw a decrease in sales of 11.9%, or an increase of only 2.6% in constant currency for what are intended to be high growth, emerging markets.
Hayward has said that Ghana, Nigeria and Kenya do have robust sales. However, in each of those countries, a combination of wobbly economic performance, question marks over consumer spending capacity and growing competition from Shoprite or Carrefour remain factors.
Problems at home
The second issue is that sales growth within South Africa has been weak. Total growth from Massmart’s stores (which include Game, Saverite, Jumbo, Cambridge Food, Makro) was 1.7%. But like for like sales, generally seen as the real indicator of trading health, fell by 0.2%.
Like other South African retailers, Massmart points to the difficult trading environment in South Africa and looks ahead to a happier time of low inflation and improved consumer confidence. Certainly, we expect to see food price inflation falling, which is good for consumers.
But the problem is not that Massmart is facing an economic headwind. It cannot control that. It is that Shoprite has just delivered an impressive set of results that clearly show its focus on efficiency and cost control. Shoprite is not only a direct competitor in South Africa but in most of Massmart’s non-South African markets too.
Hayward’s choice
As CEO, Hayward’s dilemma is a familiar one for expansionist chains in Africa: what is the cost – in cash and operational focus – of trying to keep the plates spinning at home while penetrating more markets in Sub Saharan Africa.
Hayward has said he will close underperforming stores. He has also said that in the short term, the company’s focus is “exceptional expense control and carefully evaluating capital expenditure.”
The big strategic choice he faces is what he does with the 12 countries outside South Africa. The long tail.
Mozambique may see its stores closed down, which could see Massmart lose a prime spot on Avenida Da Marginal in Maputo. Where does the CEO draw the line? Uganda, Tanzania and Malawi also look at risk. All of those stores have been opened as footholds for growth that will inevitably come. Uganda’s population will double in size in a generation. What CEO wants to walk away from that kind of growth?
Is Massmart’s model too inflexible for the markets it is targeting?
The answer perhaps lies in the product mix. Like Shoprite, Massmart has exported a business model that has worked well in South Africa. Its products are good value and good quality, aimed at middle class consumers. Massmart has elected for this model because it is operationally efficient, relatively simple and easier to replicate. It is a proven model in middle income South Africa, where average consumer spend and standards of living are higher than in most of Sub Saharan Africa.
In Massmart’s pioneer markets, this business model is more vulnerable to economic instability and its impact on consumer spending. Massmart is also vulnerable to the risk that middle class consumers in Nairobi or Lagos are not as attracted to South African sourced products as readily consumers in Southern Africa.
In order for Massmart to remove some of the risks it faces in its pioneer markets it needs a more adaptable product and pricing policy for markets outside South Africa with greater focus on even cheaper products. This will introduce more operational complexity. Long term it would improve Massmart’s ability to compete effectively in a range of countries whose middle classes are small and less stable, and whose tastes are not necessarily like those of consumers in South Africa. Whether Massmart’s parent company Walmart, which has built its 6300+ global store network by minimizing operational complexity, would agree is a moot point.
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