NOMPU SIZIBA: Beleaguered retailer Massmart, which is the owner of Game, Makro, Builders Warehouse, DionWired and other brands, has warned that as many as 1 440 jobs could be at risk. This follows a review of its stores, with the identification of those not performing. Massmart, which is majority owned by Walmart, registered a first half-year trading loss in August last year, citing high unemployment and the rising cost of living which had impacted South African consumers’ buying power. The retailer is eyeing the possibility of closing down some 34 stores and is in discussions with the unions.
Well, to give us his analysis on this development I’m joined on the line by Simon Brown, a market analyst and the founder of Just One Lap. Thanks very much, Simon, for joining us. Even before that first half-year loss recorded in August last year, Massmart had been experiencing quite pedestrian growth in the lead up to that, hadn’t it?
SIMON BROWN: It absolutely had. It’s tough for retailing in South Africa right now across the board. But Massmart really has been struggling more than most. There are a couple of issues, I think, some bad for their stores – the footprint, what they’ve been trying in those stores. And obviously most recently they’ve brought in a Walmart person from the US to try and turn it around, because of course Walmart is the majority shareholder in Massmart.
NOMPU SIZIBA: They are looking at closing some 34 stores, and I see they are focusing on DionWired – that’s the tech store – and Masscash, which is the wholesale division that includes cash and carry, food and cosmetics. Would these have been obvious targets for you? What do you know about demand in these divisions?
SIMON BROWN: I think DionWired, yes. There are only 23 DionWired stores across the country, really struggling with a sense of critical mass. It is almost a destination store. I have to think, right, I’ll get it from DionWired. Let me go to DionWired, rather than just one of our shopping centres and find it there. There are pros and cons to it, but my sense is they just haven’t got that critical mass. They call themselves a hi-tech retailer, but my sense is they’ve never got that positioning quite right. They should have been sort of [like] Incredible Connexion, but with more gadgetry stuff, fancy fridges and that sort of thing. My sense is DionWired has never quite worked as they had hoped, pretty much since whenever – and I think that’s an obvious place to do some of the closures. They of course haven’t said which or how many of each, but I think we are probably going to see a lot of DionWired go. And, frankly,
I think in time there are probably going to be no DionWireds left – not from this part of the process, but in four, five years we might find as a brand it has completely gone.
Masscash, targeting the lower LSMs, is in a hugely competitive space. Cambridge Food never really worked. Jumbo Cash and Carry has certainly had its day, but I think it is finding it a lot more competition and that it is a lot harder to compete in this space. And they’ve got 117 stores across Masscash in South Africa. I think a lot of closures are going to come from that.
NOMPU SIZIBA: Do you think strategically they should move away from food altogether? In Game you pop in there, you see a little square area of food, and then you’ve got fridges and you’ve got cell phones. Do you think it’s worthwhile them pursuing the food thing?
SIMON BROWN: I don’t. I was never convinced. It’s a hugely competitive area against the big players, the Shoprites, the Pick n Pays, the Spars. You’ve got literally decades of experience, massive distribution networks and buying power. You pop into Game – it was never in the mind to get food. Some of them did have decent locations, but they were then also relatively small. It was never like a monthly or even a weekly shop. It was more a quick on-the-way-home for dinner tonight, maybe for tomorrow. I never thought food was a good idea for them. I though they should have stuck to their knitting – which is the large-box retail, the discount retail – and really focused on that.
And then of course, parts of the business are doing well – the building side has done very well.
NOMPU SIZIBA: Unfortunately, when there is a possibility of job losses at a company, it tends to lead to market cheer, and I suppose that’s just because the market views it as a positive thing as the company will become more efficient.
SIMON BROWN: That’s so. As an investor it took me a long time to wrap my head around this because we are talking not 1 400 people, which is a wee percentage of the Massmart staff losing their jobs. At an individual level that’s a horror show, but the market looks at it and the stock is up 5.8% today. The market is taking the view that these are loss-making stores, they are going to be closed, so this will help in the divisions that are losing money, it will help margins.
Masscash lost R190 million for the first six months, and that is a significant loss. So the market typically views it positively in that they are expecting that you are not getting rid of the profitable stores, you are going to get rid of those that are struggling, or those that have just been loss-making for an age.
NOMPU SIZIBA: Yes. Given its bad luck with Massmart since it bought it some years back, do you think that Walmart may look to dispose of it once it has created more efficiencies? Then again, who would buy it if the largest retailer in the world hasn’t been able to mould it in the way that they want?
SIMON BROWN: I think they will, and Walmart has retreated from other markets – South America, Western Europe. I think they need to fix it to get it into a better position. They paid, if I recall correctly, R150/160 a share for it. They are trading at just over R51 as we speak. I think that’s part of bringing in the Walmart CEO and making it look better, and then trying to sell it to someone. To your point, who is going to be the buyer?
We criticise our local companies for going offshore and struggling – Woolies runs to mind, and there are many others. It’s no different with the sort of developed markets. Western Europe, the North American companies also move into new territories. Typically they struggle. They find it very hard. Most often, they fail. But invariably there is someone who will look at Massmart and think, well, hey, here is an opportunity, a beachhead into Africa – which is exactly the phrase that Walmart used back in 2011. They will find it’s not going to be an easy sell. But I think they will find someone who looks at it and says, “Okay, let’s try our hand at this, let’s see if we can [make it work].” But they are going to have to pretty it up first.
NOMPU SIZIBA: So, when the likes of the World Bank revised South Africa’s economic growth downwards for 2020, what will this likely mean for the broader retail sector? We know that parts of it are very vulnerable to bouts of load shedding, which seems to be the order of the day for us.
Load shedding hurts. And those places that manage to circumvent the load shedding with generators – that’s just a cost.
So that then hurts margins. I think the stores targeting lower LSMs, which Masscash targets, will benefit because some people will be shopping down. The Woolies shopper goes to Shoprite or Checkers, and Checkers to Shoprite. Then USave and Boxer. Shopping down helps them, but it’s fiercely competitive out there. And I think the basket that the average consumer is buying is seeing fewer and fewer luxuries, and a lot more focus on those staples, on what’s for dinner tonight, what’s for lunch for the weekend, and that sort of thing.
One area in which I think we might see some benefit is particularly in the food retail space. You’ve seen some inflation coming through in food; the lack of inflation has been hurting. That should benefit them. You should see some trading updates coming this week. But if they can bring out sort of mid to high single-digit growth in headline earnings per share, I think they are doing great in a very tough environment, which, as you mentioned, is not going to suddenly get better. GDP is going to be sub-1%, and load shedding, at whatever level it comes at, will hurt.
NOMPU SIZIBA: If you are not a speculative market investor, but one really seeking long-term value, do you think the retail sector’s valuations are prime enough now for investors to pick up good bargains, of course for the long haul?
SIMON BROWN: I do. And even in the case of Massmart. I was talking about it in sort of November, and then one of the offshore banks upgraded it to a buy and the stock jumped up some 14% in the day in early December. But even at this R50-odd I think it’s looking attractive for the long-term investor. Shoprite ditto. I think they’ve got some of their problems behind them. The stock again sub-R120. People are always going to be eating, and these are some of the best food retailers in the world. I think Richard Brasher at Pick n Pay has finally got that turnaround to work. I think they are well positioned. They are probably the more expensive of the food retailers locally, but they are in a position where they can now start growing those operating margins. If you can grow an operating margin from 2.5% to 3.5%, that has a massive impact on your bottom line. I think Pick n Pay is the more expensive of them, but I certainly think in the food retail sector there are great prices. In the clothing and the big-box and the white appliances it’s still tough out there because we don’t need to buy a new fridge; we do need to eat.
NOMPU SIZIBA: Yes, we really do. Thanks for your time tonight, Simon.