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How Walmart lost $1.5bn on Massmart

Massmart’s weak share price, together with an even weaker exchange rate, has tripped Walmart up in its African adventure.

Several South African companies have struggled to expand into other countries, and have had to throw in the towel after a few years. Similarly, some international groups have tried to expand into Africa and failed dismally.

The news in early May that Massmart CEO Guy Hayward had tendered his resignation, and an announcement a few weeks later that the group expects earnings to fall by as much as 50% in the six months to June, would have had many contemplating how Walmart’s investment in Massmart has performed since it announced the engagement at the end of 2010.

A few things conspired against the investment. Growth in the SA economy slowed, local competitors gained market share against Massmart’s offerings and, most of all, the rand weakened from R6.97 to the dollar at the time of the transaction to the current R14.41.

Controlling stake

Walmart’s intention to bid for 52% of Massmart in 2010 saw the share price run up quickly to more than R140 per share, with Walmart eventually acquiring control of the owner of Game, Makro, DionWired and Builders Warehouse at R148 per share, which valued the stake at R16.5 billion.

At the time, the ruling exchange rate required that Walmart write a cheque for $2.3 billion. While the underlying businesses performed well for the next few years, paid reasonable dividends, and the share price increased to a high of R208 in 2013, the exchange rate saw to it that Walmart’s interest in Massmart never reached $2.3 billion again.

Declines and erosion

Lacklustre earnings growth over the last few years resulted in a steady decline in Massmart’s share price, and the profit warning last week depressed the price to below R66, which valued the Walmart stake at only R7.6 billion – less than half the purchase price in 2010. The current exchange rate of R14.41 has eroded the dollar value of the investment even further, to just $526 million. Walmart has lost nearly $1.8 billion of its investment, equal to 77%.

Read: Walmart’s overseas headaches grow as Massmart cuts dividend

The dividends that Walmart collected did not nearly cover this loss. Converting the dividends since 2011 at the relevant exchange rates shows that Walmart would have collected some $252 million in dividends, of which the tax collector would have wanted its share.

The interim dividend of 68c and the final of 140c for the last financial year would have netted Walmart only $16.6 million – a depressing yield of only 0.7% on the purchase price of $2.3 billion.

Dollar value of dividends and Massmart shares

Source: Moneyweb, calculated from Massmart financial reports

Three figures on the third page of Massmart’s latest annual report explain the state of affairs. Sales increased by only 2.9% to R90.9 billion in the year to March 2018, while profit before interest and tax fell by nearly 17% due to lower profit margins. Headline earnings declined more than 31%.

Massmart chair Kuseni Dlamini says in his review that the financial year was characterised by volatility in the political, regulatory and economic environment in SA, which accounts for more than 91% of the group’s sales.

Tough environment

“This had a negative effect on consumer and business confidence, impacting discretionary spend and, as a result, Massmart’s sales,” says Dlamini. “Persistently high levels of unemployment, limited GDP growth and low consumer confidence and spending weighed down on our business.

“The hike in fuel prices negatively impacted consumer spending, as did the decision by government to increase the Vat rate,” he adds.

Hayward, in his last commentary to shareholders, explained the effect of the difficult economic environment further, saying that deflation in prices of food and durable goods resulted in severe pressure on profitability as costs increased at a higher rate than sales.

A segmental analysis shows that Game and DionWired suffered the most from their customers’ difficulties during the financial year to March, with a 1.2% decline in sales for this Massdiscounters division translating into a decline of 91% in trading profit before interest and tax. Makro performed better, but still reported a decline of around 12% in trading profit.

Last week’s trading statement disclosed that the situation has not improved, with sales growth still low during the first 20 weeks of the new financial year. Management warned shareholders that headline earnings per share could be as much as 50% lower in the six months to June compared to the first half of the previous financial year if these conditions persist in the next two months.

Walmat not giving up on SA

Walmart will have to digest the realisation that it will receive even less in dividends this year. But the international group has not given any indication that it is thinking of giving up on Africa yet, as it has done in Brazil, despite the ominous statement in the last annual report that Walmart seeks to spend less capital on stores outside the US.

Walmart has announced that the highly experienced Mitchell Slape, who acted as CEO in an equally difficult India, will take over from Hayward. The figures in the annual report show that Africa is important, with Walmart operating 436 stores across the continent compared to 411 in Canada and 443 in China.

We can expect the new CEO to expand Massmart’s online presence given the direction Walmart is going in India, where it acquired the Flipkart retail portal. At the time it said the potential was huge considering that only 3% of the 1.3 billion people in India’s $3 trillion economy use online shopping.

Walmart noted in its annual report that e-commerce sales increased by 40% during the last financial year and doubled over the last two years. It also mentioned its success in China, where “same-day delivery often means one-hour delivery”.

Massmart is already doing quite well with online sales in SA, reporting growth of 56% in online purchases during the last financial year compared to the previous year. But a lot of work is necessary to win clients and investors back, and even more to get a mention of the SA interest in Walmart’s annual report.

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This was never going to be successful. They just didn’t have the sites to compete with the local retailers. The floor space in existing Game stores for the food offering was 20%-30% with the rest being non-foods and no service departments like bakery, butchery etc. You can’t compete with Pnp, Spar etc with such a small foods offering.

Worst online offering/service/delivery of all major retailers.

“It also mentioned its success in China, where “same-day delivery often means one-hour delivery”

with reference to the above wonder how the chinese people will feel towards american companies after the huawei limitations by the current usa president

Whilst it is useful to blame the usual suspects, economic policy, VAT etc,it doesn’t account for losing market share. My experience of Massmart, at least at Makro and Game, is poor customer service. Staff are more interested in having private conversations amongst themselves than assisting customers. Online shopping is the worst I have experienced. It is my experience that the attitude of staff reflects the attitude of management. Until management take an interest in customer service, staff won’t either.

I pop into Makro now and then just to browse but never buy. Cheaper prices elsewhere. Have yet to find a real bargain on Makro specials.

My experience of particularly Makro is quite different in the Western Cape.

Helpful staff, modern and clean stores and prices competitive. When there was an out-of-stock item it was obtained quickly and they phoned me to come in and get it. A pleasure to shop there.

Makro also good to pensioners on a specified day.

Game is having a rough time though their stores have been meaningfully smartened up. Maybe their positioning is not that good and s/be further from a Makro store.

Why anyone would take a US$ and convert it into a ZAR (whether in cash, equity or debt) absolutely escapes me. The ‘African Renaissance’? Pull the other one

Remember that, at the time Africa was seen as the next big thing with much hype and excitement worldwide. Those (few) who really understand did not fall for the hype. The rest of the world did, and they received a huge reality check in the years since. Experience is the best taskmaster and teacher, hence my pseudonym!

In my opinion, Walmart did in South Africa what Steinhoff did in Europe and the Uk. Bought businesses that could be added to a stable to show a perceived increase in turnover without considering how those businesses would perform after purchase or if the real value was there. To validate the Walmart purchase Massmart created the impression of growth by adding more businesses to its stable – and not necessarily healthy ones.
Massmart bought a lot of small owner managed businesses as well – like Cambridge foods in KZN – very successful whilst the owner is watching things but not a business that can remain successful with just a manager.
Perhaps this is an opportunity for someone brave to make Walmart an offer at a discount!

I admire your frank stance. Care to elaborate on that line ‘very successful but not a business that can remain successful with just a manager’

It’s hard to believe that Game is even in the same group at Makro, DionWired and Builders.

Game has always been terrible. Walking into any Game feels like a jazzed up spaza bazaar. Apart from that the colour theming of the brand is horrendous.

At the moment their strategies are blowing back and fort like farts in the wind. The last is that they are bringing the heights of all their shelves down to shoulder level – sort of like the Dion of the 1980s.

It makes the store feel completely empty. I was in Game at Canal Walk last weekend. That’s the last time they will ever see me.

There is a better offering of everything at my local corner cafe.

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