Over the next five years, Massmart will invest substantially all its efforts in three areas of the business: Makro, Builders and e-commerce.
Already, nearly three-quarters of its capex for this year has been allocated to this. Expect an even greater portion in the years ahead. From the build out of additional Makro and Builders stores, it sees as much as R9.4 billion in new sales over the next five years.
Absent from this investment drive? Game.
The uncomfortable truth is that (still relatively new) CEO Mitchell Slape as well as the group more broadly have spent an immense amount of time and effort to fix the underperforming unit.
Over the last three years, Game has reported total trading losses of R1.95 billion.
That’s on around R51 billion in sales. This means for every R1 billion in sales, Game loses R38 million. To be fair, half of those trading losses came last year as the business was hit by civil unrest and riots (primarily in KwaZulu-Natal, with some impact in Gauteng) and challenges in having enough stock in stores (due to global supply chain disruptions).
The bet is that the slimmed-down portfolio – it is divesting 14 East- and West African stores and 15 unprofitable ones in South Africa – will deliver a “much improved” performance.
Trading profit in the “core” stores (in other words, excluding those that are to be sold) was ‘only’ 28% lower last year. Compare that to a trading loss that nearly doubled across the full portfolio. The African stores outside of the Southern African Development Community (SADC) and those 15 unprofitable ones in this country are an astonishing drag on performance.
Together, these 29 stores contributed a trading loss of R350 million last year. That works out to an average of R12 million per store per year, or R1 million a month.
After all the cuts and right-sizing and retrenchments and rental renegotiations, the Game “core” delivered a trading profit of R44 million in January, 64% ahead of last year’s R25 million. (At least Massmart had the upper hand in those rental renegotiations, given how desperate mall landlords are.)
Reading between the lines (and numbers), there are two main reasons Massmart is not going to be investing significantly more money in Game: first, it is unlikely to move the needle materially for the group from here; and, secondly, even if it does, the margins from selling toasters, fridges, televisions, homeware, and some basic sports equipment are not exactly terrific.
Put another way, Builders and Game are roughly the same size (R15 billion in annual sales). Builders generated R1.2 billion in trading profit last year, admittedly a boom year for the home improvement category. Without disruptions, at best Game could conceivably report trading profit of about R500 million a year. This is just a structurally different business, with a lot more competition (most recently from Takealot).
Massmart summarises the decision to focus on everything but Game as “overweighting our investment in high-return assets”.
Perhaps this decision is also a (subtle?) admission by the Massmart executive team that while it can see a path to profits and returns from the reset Game base, this is not really a business it wants to be in for the long term. Maybe the thought has crossed at least one executive’s mind that with the help of some tailwinds, it might be able to sell this unit at a decent price in a year or two.
How realistic is the growth strategy?
The plan for Makro is to expand its store base by a quarter (a curious way of phrasing the opportunity, which translates to 5.5 stores). We would assume this means another five to six stores by 2026. But given the lead times, it is unlikely we’ll see a new store until the end of next year. Expect, then, one or two stores a year from that point. Because of their size, Makros have a large catchment area. Each store does between R1.5 billion and R2 billion in revenue a year.
The current 22 stores are concentrated in Gauteng (seven in Joburg and the East Rand and three in Pretoria). There are three in Durban (plus the Pietermaritzburg store that is being rebuilt), three in Cape Town and five in regional centres (Bloemfontein, Polokwane, Gqeberha, Vaal and Nelspruit).
The Riversands (Fourways) and Cornubia (near Umhlanga) stores are the newest and are instructive as they manage to stock the same range in a more compact footprint than the older stores.
Expect new outlets to be the same. The group will have a very clear idea of where it can add stores without cannibalising existing Makro (and Shield) stores (and, to a lesser extent, Game).
There’s surely space for another store or two in the Cape (Somerset West/Stellenbosch and Paarl), and probably one or two in Gauteng. KwaZulu-Natal looks well covered.
Then, it will look to regions where it would be capable of having an outsized impact on the market. East London is a possible gap (but with a largely lower income population than, say, Gqeberha). The Garden Route is an interesting and less obvious opportunity, but has a total population (spanning from Plettenberg Bay to Mossel Bay) that is second in the Western Cape after the Cape Town metro.
It sees additional sales from these stores of as much as R7 billion after five years. Add to that its plans to remodel more than 11 stores. This will result in a sales uplift of between R1 billion to R2 billion.
Massmart says it sees the potential to increase its footprint in the country by 50% in the next five years.
With 109 Builders stores in SA (and what presumes to be the current sustainable figure of nine outside of SA), that is going to require the group to add more than 50 new stores. That is a big ask.
Consider that five years ago it had 99 stores in the country. It’s going to need to open (net) the same number of stores each year for the next five that it’s opened in total since 2016. It may also find itself needing to close existing marginal stores, so that hurdle may be higher. One gets the sense that there are many more untapped opportunities in the neighbourhood Builders Express format than the Warehouse one. Then, there’s the peri-urban stripped down Superstore format that competes head-on with Cashbuild.
There are areas of the country, though, where Builders is underrepresented.
It has fewer stores in the Western Cape than in KwaZulu-Natal, which is atypical. Its store footprint in the northern provinces (North West, Limpopo, Mpumalanga and Free State) is also somewhat limited, and it doesn’t have a single store in the Northern Cape (mostly due to strong independents in the region). These are clear opportunities; it is doubtful that the retailer will find another dozen locations for stores in Gauteng, for example.
It says these 50-plus additional Builders stores will deliver another R1.4 billion to R2.4 billion in sales. This translates to a very modest average incremental increase in revenue per store, suggesting that these will be smaller format and take some time to grow into their markets (and it may start cannibalising existing stores).
One gets the sense that Massmart is up against it and simply must double down on formats and divisions that are working in order to grow. Otherwise, this is a business that’s going to be stuck growing in line with the market (as it has been over recent years, excluding the cash and carry mess where sales continue to evaporate).
The jury is out on its e-commerce aspirations where it aims to achieve growth in sales – measured by gross merchandise volume (GMV) – of between 50% and 65% a year for the next five.
Right now, online sales are running at 2.2% of what it terms “sales participation” (where those products are actually available for sale online).
In 2020, it reported GMV of R1.1 billion. Growth of 56% gives you R1.7 billion (which is scarily close to the 2.2%). Last year (to March 2021), Takealot group’s GMV was R16.7 billion (this includes sales by third parties on Takealot’s marketplace as well as the Mr D Food platform).
But Massmart’s growth plan for e-commerce sees its online revenue at comfortably over R13 billion by 2026 (at the low end of its estimated compound annual growth rate). That’s about as big as the entire Builders business in South Africa right now (or just smaller than the Takealot group, which includes Superbalist).
By then, it plans that R150 in every R1 000 in sales will be online.
‘Ambitious’ is certainly a good description.
Listen to Massmart CEO Mitch Slape discuss the group’s latest results with Moneyweb editor Ryk van Niekerk (or read the transcript):