In 2011, US retail giant Walmart Inc bet on Africa, acquiring a controlling stake in South African retailer Massmart in what many investors saw as a move toward dominating the continent’s vast untapped market.
It didn’t go according to plan.
More than a decade later, Massmart’s balance sheet is saddled with debt, its books are heavy with losses, and it’s drowning in commercial property lease obligations.
From its late entry into e-commerce to an ill-fated foray into fresh groceries, Walmart’s African journey over the past decade has been a series of missteps, compounded by economic headwinds and the COVID-19 pandemic.
But instead of walking away, as it did after failures in the UK and Germany, Walmart is doubling down on a plan to take full control of its African problem child, which it unveiled in August.
The strategy — according to nine analysts, investors and sources with direct knowledge of Walmart’s plans — is first to build Massmart into a force capable of fending off its brick-and-mortar rivals, and then a looming battle against Amazon over to win the future of African e-commerce. Trade.
“Walmart plans to bring its entire e-commerce business and expertise to Massmart,” said a source close to the acquisition plan. “It takes big investments to keep it relevant.”
The delisting, the source told Reuters, will allow Walmart to make direct capital injections and sustain further losses without pressure from impatient Masssmart shareholders, who have not received dividends in three years.
The prize: the world’s last largely untapped retail market, with a billion consumers and rising household spending.
“We continue to see opportunity in Massmart and the impact the company can have by giving people across the region greater access to the goods and services they want,” said Judith McKenna, president of Walmart International, in response to emailed questions this month.
She did not give any further details on the company’s strategy in Africa.
FROM PARADIGM TO TURNAROUND
Not everyone is convinced.
“Walmart’s entry should be a new paradigm for African consumers,” said the source close to the acquisition. “But that didn’t happen.”
Instead, Massmart’s units outside of South Africa struggled with exchange rate risks, a difficult regulatory environment and macroeconomic volatility.
In South Africa, meanwhile, competitors have upped their game, said Jean Pierre Verster of Protea Capital Management, which manages funds with exposure to Masssmart shares.
“Walmart recognizes that other retailers in South Africa – like Shoprite, Pick n Pay and so on – are very smart retailers and can’t just overwhelm them,” he said.
Game — Massmart’s underperforming general merchandise business that sells everything from furniture to cellphones — was slow to develop an e-commerce offering, so it wasn’t prepared for a pandemic-driven boom in online shopping. And supermarket competitors easily fended off the foray into fresh and frozen groceries.
Meanwhile, the corruption-plagued nine-year tenure of former South African President Jacob Zuma has weighed on consumer sentiment.
By 2019, Massmart was making losses. When COVID-19 struck, Walmart was forced to pump in 4 billion rand ($219 million).
Since Walmart, which tops the Fortune 500 by sales, first announced plans to buy the South African retailer in 2010, Massmart’s share price has fallen 60%.
“The more disappointing part isn’t just the fact that they didn’t make it in Africa,” said Achumile Mashalaba, an analyst at South African fund manager Ninety One, which does not own Masssmart shares. “You went backwards.”
WHAT NOW?
In August, Walmart launched a 6.4 billion rand ($350 million) bid for the 47% of Massmart stock it doesn’t already own, valuing it at a premium of over 50%.
Going forward, Walmart is likely to focus on wholesale retailer Makro and hardware chain Builders — Massmart’s two more powerful brands, according to a source in contact with Massmart’s management.
Massmart is already planning expansion to capture more of South Africa’s R455 billion wholesale and DIY markets. Then there’s the game Headache.
After Walmart began closing stores in East and West Africa this month, it must now decide on the future of Game’s loss-making South African business.
However, its big bet will be on e-commerce.
“Our strategy is to create and expand an e-commerce offering for all three formats — Game, Builders, and Macro,” Walmart responded to emailed questions.
Due to the company’s late start and relatively underdeveloped market in Africa, only 2.2% of Massmart’s sales came from online retail in 2021. For comparison, of Walmart International’s nearly $101 billion in total sales, e-commerce accounted for $18.5 billion.
Recent acquisitions of on-demand marketplace OneCart and delivery company Wumdrop could help. Massmart has also begun leveraging Walmart’s group-wide e-commerce infrastructure.
Earlier this year, an internal memo from Amazon.com Inc was leaked to the media detailing its expansion plans, including an initial foray into the continent via South Africa.
The upcoming battle with its global rival threatens Walmart’s e-commerce strategy for Massmart, several shareholders told Reuters.
“Amazon is coming and the competition in this market will only intensify,” said Marlo Scholtz, portfolio manager at Sanlam Investments, a leading Masssmart shareholder.
“So you have to be there and be there early.”
Amazon declined to comment on this story.
While Walmart lags behind Amazon in US e-commerce market share, it has outperformed the world’s largest e-commerce retailer in China and India.
Africa could actually offer another growth opportunity for Walmart. Don’t expect immediate continental competition, however, said a source involved in Walmart’s initial acquisition of Massmart shares.
“Walmart needs to do South Africa right,” he said. “If it goes to Africa, it will go to Africa very slowly.”
Africa’s e-commerce potential is a tough nut to crack. Logistics – from warehousing to last-mile delivery – is a major hurdle in cities where street names or house numbers are often missing. And despite the official launch of the African Continental Free Trade Area in 2019, cross-border trade within the continent remains cumbersome and expensive.
While Walmart now has firm direction in its South African unit, its track record outside of the United States is patchy. Success stories in markets like Mexico are being undone by struggles in others, including Europe, South Korea and Japan.
“To believe that Walmart will be successful in markets outside of the United States, you have to believe that what matters in the United States is the same as what matters abroad,” said David Klink, senior equity analyst at Huntington Private Bank, which owns more than $45 million in Walmart shares.
“That’s not always the case.”
