Massmart, Walmart’s South African subsidiary, has started the consultation process to close up to 34 stores in South Africa as part of the turnaround plan from new CEO, Walmart veteran Mitchell Slape. But Massmart needs a more radical change of focus. We outline what that means.

In a statement, Massmart said it had “recently conducted a store optimisation project that highlighted a number of underperforming stores in its portfolio.”

Massmart’s portfolio includes a large number of banners, many of which overlap with one another:

• Discounters: Game (box box grocery and general merchandise retailer) and DionWired (electricals and electronics.
• Semi wholesale/cash and carry: Makro (grocery and general merchandise) and The Fruitspot (fruit and vegetables).
• Wholesale/cash and carry: CBW, Jumbo Cash & Carry, Sunshine, Trident, Eureka, Saverite and Shield (wholesale) and Cambridge Food and the Rhino (cash and carry).
• Home improvement: Builders Warehouse, Builders Express, Trade Depot and Superstore

CEO Mitchell Slape’s problem is that Massmart’s share price is in the doldrums. Since Walmart purchased its 51% stake in Massmart, Massmart’s share price has since fallen by 70%. The weakness of the Rand is also not helping: The Rand is already down 3.28% against the dollar in 2020. It only gained 2.46% for the whole of 2019.

Massmart is lossmaking and those losses are expected to widen, driven by Massmart’s discounter division. In 2019 Massmart recorded a 52% decline in trading profit to R318.9m ($22.1m). Put simply, the cost of sales is rising faster than sales. Among other things, Massmart blames slower than expected recovery in margins at Game and Masscash (its wholesale/cash and carry division). This can be clearly seen in the image above, which is taken from the group’s 26 week interim results ending June 30th 2019.

Massmart has also taken a hit from foreign exchange losses – increased to R157.1m ($10.9m), compared with a R23.4 ($1.6m) gain last year. CEO Slape, who has just passed the 100 day mark leading Massmart, has reportedly spent much of his time on the shopfloor in Massmart’s outlets in South Africa. He has yet to turn his attention to Massmart’s stores outside South Africa, which also look vulnerable.

Former CEOs Guy Hayward and Grant Patterson oversaw a programme of expansion into new markets including countries outside the immediate vicinity of South Africa – Ghana, Nigeria, Kenya, Tanzania and Uganda. However, Massmart elected to go for a thin footprint – there is just one store in Tanzania and Uganda, for example, and for a long time only two outlets in Ghana. Even in Nigeria, there are just five stores – having planned for 10 within two years of entering the country in 2014.

By mid 2017, Massmart was lukewarm about its expansion strategy in Africa, but has continued to open new stores. In fact, by March 2018, Massmart had plans for 20 new stores outside South Africa and a possible entry into major Francophone markets in West and Central Africa. It has not entered Francophone markets and its expansion strategy outside South Africa has not yielded 20 new stores.

Trendtype believes Massmart’s international footprint may also be trimmed. The company is in 13 countries, adding a considerable layer of cost and complexity for what is still a small number of stores: more than 90% of Massmart’s revenues come from South Africa. There has been no growth in store numbers in Nigeria, Massmart’s flagship market outside southern cone, in almost two years.

Another area we think CEO Mitchell Slape will need to address is the number of banners and formats Massmart operates. In the US, Walmart operates its core Walmart brand (supercenters and discount stores), Walmart Neighborhood Market and the Sam’s Club retail warehouses. It also owns the Amigos chain in Puerto Rico.

By our count, Massmart operates 17 separate banners in South Africa alone, and also acquired the Kangela brand in Mozambique in 2010. Does Massmart need five separate banners covering home improvement or 10 different formats in the wholesale/cash and carry space? Of course not.

Does Massmart need a standalone electronics and electricals retailer? One of the most vulnerable banners in the short term is DionWired. Long term, as we have seen with Comet, Maplin Curry’s (UK) and Best Buy in the US, specialist electricals companies are intensely vulnerable to the growth of online retail. Yes, online retail is still immature in South Africa, but it is high growth.

If specialists are to survive, they have to build a relationship with consumers that is about more than just price. But for Massmart, it is having to sort out two challenging retail brands – once with its big box discounter Game (which has a significant electricals and electronics section) and then also with DionWired. Why bother, when DionWired can simply be subsumed as a branded retail area within Game stores, enhancing its Game stores and enabling Massmart to work on its discounter proposition more holistically.

Long term, home improvement is also an issue. Massmart will also note that French home improvement giant Leroy Merlin is about to open its third outlet in South Africa. The typical positioning for a South African home improvement store, epitomised by Massmart’s Builders stores, is to be largely male oriented, with a strong focus on price, and more of an expectation that the customer knows (or thinks they know) DIY.  It is easy to dismiss the threat Leroy Merlin poses, because it still has a small footprint in South Africa.

But Leroy Merlin is aiming to be a destination in its own right and will be incredibly disruptive. This means huge stores, more showrooms, more in-store technology to help consumers choose products, a more female-friendly store environment and a focus on empowering consumers to make their homes better.

Leroy Merlin is aiming to do in home improvement what IKEA does for furniture and home furnishings. Again, four banners in South Africa all broadly doing the same thing (Massmart would argue that some are more trade or consumer oriented) just leaves Massmart, and rivals Cashbuild, Spar’s Build it and Italtile fighting for diminishing market share. If Massmart is going to operate different banners in home improvement, they have to each perform a strategic role to acquire customers.