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Massmart in need of an ‘Edcon-like’ overhaul?

Retail analysts say it is overspaced, with weak strategies and divisions that operate ‘too autonomously’ in an economic environment that doesn’t support its business model of high volumes and low margins.

Retail and wholesale giant Massmart will have to take a long, hard look at its embattled Massdiscounters division to turn the group’s fortunes around, and this should include an ‘Edcon-like’ rationalisation of its Game and DionWired stores.

This is the consensus of analysts speaking to Moneyweb this week, following Massmart’s recent sales and trading update that warns of an operating loss of up to R30 million for the six months to June. The news of Massmart’s first loss in 19 years saw its share price plummet to a 13-year low of around R43 last week, before recovering to just below R50.

Read: Massmart shares hit 13-year low after it warns of loss

Massdiscounters, the largest division within the group with more than 160 stores, is expected to see its losses for the half-year to June 2019 increase more than four-fold, from R95 million (June 2018) to between R395 million and R425 million.

Veteran retail analyst Syd Vianello tells Moneyweb that incoming Massmart CEO Mitch Slape (from US parent Walmart) will have his work cut out for him, which will ultimately include some sort of rationalisation of the group’s Game and DionWired stores.

Mitch Slape will take up the role of Massmart CEO once his visa and other paperwork are in hand. Picture: Supplied

“Slape will have no option but to analyse each and every store,” says Vianello.

“Effectively, Massmart and particularly its Massdiscounters division, will have to go through an ‘Edcon’. Unprofitable stores will have to be closed and poor-performing stores either downscaled or shut down.

“He will have to look seriously at rationalising the business and unfortunately this will mean job losses.”

Slape, a Walmart veteran, has insights on how to downscale a retail operation. Between 2015 and 2019, during his stint as Walmart Japan’s chief operating officer, the group reduced its number of stores from 438 to 322 and its selling space from 2 275 million to 1 885 million square metres.

Daniel Dias, an equity research analyst at Arqaam Capital, has similar sentiments to Vianello, saying the biggest issue that needs fixing at Massmart is Massdiscounters. “A rationalisation of stores will have to be done as many Game stores are ‘over spaced’ by 10-15%. Besides Edcon, other retailers like Mr Price have also reduced space at some of their stores in a move to reduce leasing costs and increase trading densities.”

He adds: “Massmart is also facing strong competition from online retailers like Takealot, which has done some heavy discounting. A lot of tech, electronics and appliance sales now take place online. Even Pepkor’s JD Group division is halting space expansions of its Incredible Connection and HiFi Corp chains.”

Food strategy not paying off

Dias says that Massmart’s food strategy needs a thorough relook and questions why the group still operates its four divisions (Massdiscounters, Masswarehouse, Massbuild and Masscash) so autonomously.

“It does not make sense that each division works autonomously when management can benefit from a cross-pollination of ideas. Massmart’s drive into food, particularly through its Game stores, has not worked out as it would have liked. It has faced tough competition from Shoprite and Pick n Pay.

“The fresh food strategy at Game still does not resonate with consumers.”

Vianello agrees, saying it is unclear whether the decision to go into fresh food retail with Game and Cambridge Food was a strategy driven locally or by Massmart’s major shareholder Walmart.

Read: How Walmart lost $1.5bn on Massmart

“It was a mistake to do it within Game, because the general merchandise side of the business has suffered. The food business has grown, but Massmart has never disclosed what impact food has had on higher margin general merchandise. The growth of the lower margin food business has disguised the lower contribution of general merchandise,” he says.

Masscash losing money

Vianello adds that Masscash, which houses Jumbo Cash & Carry, Rhino Cash & Carry and Cambridge Food, is another problem division for the group. “Masscash is losing money and seems unable to compete with independent retailers in the cash and carry wholesale space. I also never understood why Cambridge Food was put into this division.”

In its latest trading update, Massmart revealed that its Masscash division would report a trading loss of between R180 million and R210 million for the half year to June 2019. Masswarehouse, the division that houses Makro stores, is still profitable but has also seen a decline in trade.

Massmart’s new 19 000m2 Makro store at Cornubia, North of Durban. Picture: Supplied

Dias notes: “There is no doubt structural issues in SA’s economy over the last few years have affected Massmart badly. But it has turned into a perfect storm for the group with increased competition from fellow retailers, the growth in online competition, food deflation and some poorly timed decisions by Massmart’s management.”

Alec Abraham, an equity analyst at Sasfin Wealth, says the economic environment prevalent in SA for almost a decade now is simply not supportive of Massmart’s business model of high volumes and low margins.

“I believe the probability of a return to supportive conditions in the medium term is extremely low and possibly non-existent, unless the structural weaknesses in the economy that act as powerful inhibitors to growth are addressed,” he adds.

Abraham maintains that “a business such as Game also appears to have lost its relevance” in the South African retail market. 

“Furthermore, while Massmart has embraced an online strategy, I believe it is extremely poorly executed. I also have no doubt the smaller independent retailers are impacting Massmart’s Massbuild division. Having said that, the terrible guidance from Massmart alludes to other possible major cost over-runs and/or other significant problems within the business,” he adds.

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The terminal SA economy is hitting the consumers hard. Massmart has some internal challenges of its own though. Shopping at some of the Massmart chains leave you perplexed. Game is friendly but completely overstaffed. Was at one in a major shopping center last weekend. Eight staff members in the electronics section all having a nice chat behind the sales counter, all with their backs turned to the customers. But very helpful once you do manage to get their attention.

Game is in the midst of an identity crisis. I don’t know…Is it a hardware store? Or maybe a grocery store? Or a sporting goods store? Or is there just too much open floor scape and we’ll fill it with “whatever”. Maybe Game is the postman’s child and neglected in preference for the other brands? Also, each time I visit a Game it appears there are fewer customers about.

Dion Wired has two kinds of customers: the ones who emigrated, and the ones who buy on credit, i.e. champagne drinkers on beer budgets. The credit buyers are in deep trouble and Dion doesn’t offer any appealing deals for them anymore. Dion is the quietest store of the lot. It feels like a library some days. Even on Saturdays. Expect the axe to fall first at Dion and Game.

Builderswarehouse is going to get pummelled by Leroy Merlin. Expect at least 2 years of price wars between the two. Leroy Merlin is also opening a sporting goods chain along the same principles: called Decathlon. Marko is going feel the heat there. Any other sporting goods chain in SA too. “”hit for a six” is coming to a Massmart boardroom near you.

Makro seems to be in the best shape, but you can’t expect them to pull the whole group out of trouble.
Still lots of customers there, and premises wise a good investment.

Massmart management appears very calm about the coming perfect storm…..

The costs incurred to relocate Game head office was a battle that was won at too far great a cost. Retrenchment costs, new salary replacement costs, new Capex costs, new people does not mean new ideas. The number of CEOs Game has had In the pat 5 years about 3 or 4,let alone other executive changes.

As the other comment stated small issues the staff take for granted like huddling and chatting, out of stock, aged stocked that

When they say each division runs autonomously it means
There is a Biscuit Buyer at Game then a Biscuit Buyer at Makro and yeah another one or two at Masscash… Now let alone each divison with its own board of directors strategy. They created unhealthy internal competition. Purge incomming. Easier way to slash costs.

Game will close alot of SA stores and maybe Walmart will buy its African footprint and sell off local.

Makro is an everyday store not so much Game Dion

Your average Game storage is like a time capsule from the late 1980s. Not a pleasant experience and I agree on your point of an identity crisis!

Makro is fine

Game is looking painfully tired with its Lenasia pink. I don’t think they’ve lost the plot because I don’t think they ever had it.

Heaven knows why they went for food markets. Their stores have always looked like a fleamarket with badly packed shelves. The items that you would typically want there have had their shelf space reduced over the past few years and items that you have no idea what they are have been expanded on shelf space. Their electronics sections is way too big for what it offers.

There are too many things wrong with Game specifically to bother trying to list everything.

Dion Wired has a good approach to appliances and electronics. The irony is that in the past few months, Game has been transforming to have the layout of the Dion of the 1980s.

Was in a Makro on Friday afternoon. Stood in a queue for about 20min just to pay. Makro doesnt have a shortage of clients.

The problem with Makro is way to many staff. I just see little groups of staff on the floor having a jol. Chatting away to each other, sharing cell phone jokes etc etc. Even when its quiet, the floor is staff heavy. Start there with restructuring.

Again…..my experience at our local Makro in the Western Cape is excellent service. It is a warehouse style operation, so ludicrous to expect staff to be running up to you. It happens nowhere in any event.

Simply asking for assistance has always resulted in a positive outcome. Have had Makro staff phone back later when an out-of-stock item has arrived. Not difficult just to ask?

Have never waited longer than a few minutes in a queue but peak times are obviously worse. Woolworths in my experience is WAY WORSE of staff quality and queue waiting time all round.

Have you ever tried to get service at Game or Makro. There’s lots of staff milling around doing their best to avoid customers and look busy at the same time. I recently bought a microwave there – the assistant tried to put his code on the box after I finally helped myself. I told him to get lost. Even worse in the liquor store where I bought 12 cases of red wine for a party. With service like that the prices don’t matter. Anyway, I think Leroy Merlin will also struggle once their staff default back to SA style service, so a welcomed price war should be coming our way!!

Lot of unwarranted negative comments on this topic. Do we want Mass to fail?

Popped into our local GAME this morning.

Yes it is sad to see such a nice store with fewer customers than it deserves. Yes it is too close (6 kms) from another.

Here’s the thing though: Game had the food product that we have not been able to get at PnP or Checkers for weeks. Nothing wrong with the service; I do not do the shopping so do not know the products/aisles. Hey presto, asked one of the packers and was taken directly to the product. And no, it was not old stock and the best by date in 2020.

Better not to do oneself down simply because an offering is not as peachy as we would like.

Massmart is proving that SA is in recession due to ANC politics and corruption and the fact that they own so many brands selling the same thing means there is a lot of cannibalization taking place.

At times we blame the economy for poor and pathetic management decisions. Massbuild generates about 30% of its revenue from RDP housing. To my knowledge government has not stopped building these. Try and find an empty Makro store. Where queues don’t snake around like an anaconda.

Poor management decisions are merely made obvious when the economy is not performing.

Game stores, which are usually in malls should be rebranded makro metro or something and focus on selling the items the big makro’s sell is small individual quantities.

makro’s current fashion along with sporting goods come to mind.

Shopping experience at all divisions bad. Staff terrible. Moved our buying somewhere else.

The overall economy is a huge factor as are online stores.
I used to go to Makro almost every weekend, it was a great experience and ended up spending a bunch mostly on stuff I probably did not need.
I have got so tired of being mobbed by parking attendants whom I am expected to pay for the privilege of going shopping at Makro I avoid it at all cost.
The whole offering has got a bit tired and with the exception of the bottle store which still has some good retailing going during a Saturday I think I will stick to online.

I feel the problem with MassDiscounters is truly the business model of being an Omnichannel business. If you having a store like Game which business model is based on giving customers the lowest price and also price beaters, having an Omnichannel model at this point only means the store foot traffic will suffer and online sales may be on the upside however you essentially cannot do the volume online as compared to store level.

Retailers like Woolworths, Pick n pay offer customers a better shopping experience where in the tough economic times for some people going shopping is the only form of an outing. You can go to woolworths browse all the sale items on clothing , then grab a coffee and relax in the store and also go into a food section that feels like you in a totally different store. Compared to a ‘Modern day Game store’ you simply in a Makro looking DionWired want to be. If you browse the DIY section at times will find meat or other food items left there.

Having the lowest price doesn’t cut it, as a customer wants to feel special whilst shopping. In order for a Game store to truly succeed, the Online shopping should be put on hold, get the foot traffic in store by surveying customers needs and wants at a store level. Downsize the store so a customer isn’t tired by the time they walk out your store. Have the food business out of a Game store until the store has its own environment for a food store in store concept.

Out with the Pink, a customer does not want to feel like his walking into a cheap store , the colour can stop at the front. As far as electronics side of the business goes. Have brands that are only and i mean only sold at Game. Brands that are cheap and not premium.

That where DionWired as a business will grow. At this point in time Game and Dionwired seem to compete at times by having similar products on special like samsung and Hisense. Dionwired does have a great value offering for the customer except it does not live up to its name of having the best and latest technology.

Visiting a store like Hirsch at most of the time you will find a newer product range and better lifestyle offering. I am not sure if store managers choose to keep the old merchandise for longer on display at Dionwired to get rebates from suppliers. The biggest disappointment is having staff members that are not as tech Savvy as they should be. When walking into a Dionwired store you should get a sense of having seen something for the first time. having skilled and highly trained staff demonstrating new tech and even product demos. There should be the smell of freshly brewed coffee and the sound of something being cooked by a chef from Smeg.

Except walking into the store now feels like walking into a bored room. Staff members yawning when you great them because they actually shocked to see a customer. If you want to sell the dream you have to be the dream. Rather have fewer stores but give customers the experience no Online retailer can ever offer the customer. They should really look at the online space to see whats not being done then to be a copycat and follow the likes of Takealot.

Dionwired should have a fully online shoppable app not because its easy for the customer but because you can’t call yourself technology simplified and remain so complicated. If the business itself has so many complications how will the customer find it simple.

Shopping by the big ones. Waiting in line. Count the visible clients and staff members. Always wonder how they do it. Let you wait for service so simple as payment. With staff outnumbering clients most of times.

In my humble opinion Game should have stuck to its original formula, many customers i have spoken to only shop there for their hardware, electronics, white goods and homeware. When talking about GAME there is never any association with them selling FOOD.
Introducing Food was a big mistake, very seldom does one buy both, at the same time. (whereby Makro is a different market)
Dions actually could easily be reincorporated back into Game, but staff will need to be knowlegable, about what they are selling especially to the higher end, with the more expensive lines.
Another major complaint is the quality of the merchandise being sold, brand choices.
If Massmart wants to sell food, groceries & liquor it should be a stand alone entity, not part of the Game store. Seperate entrances.
Lets no talk about Builders, where the lighting is so poor it is sometimes difficult to see clearly. Pricing appears problematic.
(Cheaper at the local hardware store)
I am sure if Management goes back to basics,

Good luck with having a Yank, Mitch Slape, fixing things in a market that is very different to America. I worked for them when Walmart took over and then already saw this coming.

When Makro Online first started it was top-notch. Now it’s totally useless. Don’t even think about expecting action on an item that is damaged during warranty. They expect you to return to a physical store and my nearest is about 300km away. As a result, I am lost to them as a customer and will carry on supporting Takealot

This will be interesting… I would love to be a fly on the wall at those meetings with Mitch and the locals. The reality is S. Africans today have less disposable income and the market is saturated with competitors. The other factor is the exchange rate. Imported electronics and white goods, with the exception of TV sets, are today much more expensive due to our pathetic currency. So people just stop buying them or wait for Black Friday sales. If I was Mitch I would close half the Game stores and get rid of DionWired completely. The latter has been killed by Takealot and the former is a dinosaur.

Too many workers and too much competition from other retailers.

But but but, competition is a wonderful thing.

We even have a Competitions Commission and Tribunal with business destroying penalties to enhance competition.

Games foray into food ; served up the appetizer for Walmart ; who’s primary was to partner with a grocery retailer.
Inter company competition ; no alignment across the divisions ; hence you could prompt Game to beat the price at Makro ; and they serve it up (margin lost).
Best to “Walmart” to step in and re-structure ; and try salvage some return on investment…

Game in Durban started in down market premises in Durban with loaded shelves of genuine bargains and with a sense of youthfull enthusiasm. As they went up market it became a very different animal. But it is the typical life cycle of a retailer. Greenacres, Stuttafords, John Orrs all gone. The Hub however survived. Why?

I love shopping at my local Makro – clean interior,with lots of natural light and a huge parking area.Staff are friendly and helpful.If you buy in bulk you can save a small fortune.There’s even a coffee shop.But then this is one of the newer branches..

Spot on.

Exactly my experience.

Pensioners on Tuesday get 5% on non-electronics and booze and up to 10% it seems on other items. We also get free coffee and a muffin in a small demarcated area (not a coffee shop as such but it is free).

Their retail staff are amongst the very few that behave as if they have had some training. If the guy/lady on the floor cannot help they call someone who can and does help.

At Woolies also today (nearly everyday): appalling staff from bottom to top and this in an upmarket centre.

In Mark Lamberti’s days they were one of the best run retailers in the business always traded at massive premium to the sector. Completely lost the plot.

Disagree with some of the comments here that Games was always poorly stocked and with poor product display.

Used to be very neat store and you could almost bet that they would have the best prices in town.

Another victim of online retail. Storm yet to fully hit SA, but our malls will become ghost towns. Not always sure progress truly is progress especially considering that most of these online guys dont make any money…

Couldn’t happen to a nicer bunch of people…. When you buy a Samsung QLED TV from Dion-Wired in Jan, and then same TV from same store is R9000 cheaper in June, you tend not to shed a tear in pity when they hit the skids. There’s a sucker/consumer born every minute. (Let me go finish the rest of my sour grapes…..)

So true; shocking really. They should never have reduced the price.

There’s a sucker/consumer born every minute.

the worst part is that tvs are advertised for ultra high defenition, cant get better if one looks at tvs displayed at makro, game etc. the catch is: it is prerecorded uhd videos – haven’t heard of dstv to bring its broadcasting standard to that level, so only prerecorded games, movies etc will currently delivered that quality – of course the salesman does not spell that fact out loud and clear to the naive buyer

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