Massmart’s results: struggling performance but online growth a highlight

Massmart results: struggling performance, although online sales growth is impressive. Our key takeaway is that its expansion strategy for Africa looks weak at best, especially in West Africa.
Highlights:
  • Overall sales are up 2.9% from R88.4bn ($6.4bn) to R90.9bn ($6.26bn)
  • 91.3% of sales are in South Africa (up 2.9%); Sales outside SA are 8.7% (up 3.3%)
  • Sales at Massdiscounters (Game, Dion Wired) down 2.1%
  • Online sales growth up 56%
  • Loans business income up 64%
  • Trading profit before interest and taxation down 16.8%
  • Gross profit margin down slightly, with margin pressure in Game, negative stock
    adjustments in Massfresh but increased retail customer participation in
    Massbuild
  • Overall, the results are disappointing, with much of the blame being placed on constrained consumer spending in South Africa
Analysis

Massmart’s analyst presentation also identifies some key focus areas in grocery. It has just 73 private label products – a tiny range for a discounter – and penetration actually fell during a period when consumers were actively seeking value. Outside grocery, private label penetration and product range were also poor.

Outside South Africa, things are more positive: 7.8% CAGR in space growth, driven by 9 new stores in Kenya and Zambia. At the end of 2018, Massmart had 47 stores in 12 countries outside SA. Up to 2021 it plans on opening 43 new stores, equivalent to a space growth of 2.5% CAGR. 31% of this will be outside South Africa. We believe this is too slow. Massmart added just 3 new Game stores outside SA in 2018 and 5 Builders stores outside SA. Massmart has too many pioneer markets with just one or two stores to be operationally focused and cost effective. In particular, it is at risk of being left behind in Nigeria and Kenya by more aggressive retailers. The analyst presentation also made no more mention of expansion into francophone West Africa.

To expand on this point: through to 2021, Massmart does not forecast opening a single new store in West Africa across any of its retail banners. It has just five stores in Nigeria. It has four in Ghana, having opened three new stores in 2018. Why is it in Nigeria if it has no plans to expand beyond the five stores it has for a population of 200m people?

Overall, Game’s strategy for Africa looks unclear. CEO Guy Hayward has previously issued a lukewarm support for growth outside SA, understandably wanting to focus on sorting out the 90% of the business that is based in South Africa. The question is when Massmart will turn its attention properly back on the fast growth (and – for now – high operating cost) markets elsewhere in Sub Saharan Africa. South African retailers like Edcon and Pick and Pay face similar dilemmas: they know the long term growth will come from outside South Africa but have doemstic problems to fix and limited appetite to take on the risk, operational friction and costs of accelerating growth in pioneer markets.

2021 is a long time for a retailer to sit on its hands. Especially when major players like Carrefour and Shoprite are establishing dominant positions in East and West Africa. But Massmart has options. It has looked at acquisition before: its purchase of what is now the Kenyan #2 grocery retailer Naivas was stymied by an internal feud at Naivas. Market leader Tuskys remains private and shareholders may want to exit before international retailers weaken its position. In Nigeria there is a long tail of domestic retailers that could be acquisition targets. Fundamentally though the Game discounter model of 50:50 grocery and non-grocery is still rare in Sub Saharan Africa. There are plenty of supermarket/department stores (such as Ghana’s Melcom) but few big box discounters. So although we think its snail-like progress outside SA makes life more difficult modern channels still have plenty of headroom for growth.