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Will Walmart ditch Massmart as things go from bad to worse?

Game horror show looking increasingly unfixable.
Massmart's struggling Game retail business has impaired its assets by approximately R570m. Image: Moneyweb

A trading update for the first half of the year from Massmart on Friday spooked investors who had been banking on a stronger recovery.

The share closed over 9% lower at R54.95, having traded as much as down 11% on the day.

While the headline number seems ‘satisfactory’ – sales are up 4.4% ­– it must be remembered that the group is comparing sales this year to a period last year during which the country was practically shut down for a month, with the Level 5 hard lockdown from March 27 through the rest of April. In May, some restrictions were eased, and in June the economy was opened further. Compare the first half of this year to 2019 and sales have dropped 5.7% across the group.

Makro’s R13.7 billion in sales for the 26 weeks are 2.2% higher than the comparable period in 2019. At Builders, sales of R7.2 billion are 7.5% better.

The real horror show is in the group’s cash and carry and Cambridge food businesses as well as Game.

Read:
Massmart to sell Cambridge Food, Rhino and Massfresh
Game over for fresh food at Massmart’s biggest chain

Total sales in the cash and carry and Cambridge units is down by 9.8%, or R1.4 billion, when compared to the first half of 2019. This decline was led by Cambridge, which the group has been trying to sell for the last six months. Sales in this business, ranked eighth in food retail in the country, are 9.4% lower than last year.

A far bigger problem, however, looms at Game.

Can Game be fixed?

Massmart says sales at Game were “7.6% lower than the same period last year, with comparable stores sales being 6.9% lower” – this despite half the period being impacted by lockdown last year! (In South Africa, the decline was 4.6%.)

Compare sales at Game to the first half of 2019 (excluding the impact of lockdown), and although there is some impact of ‘lost’ sales due to the closure of Dion Wired, these are down 19.1%!

Game and Dion Wired were part of Massmart’s former Massdiscounters division.

What’s concerning is that at the 19-week mark, trading was “only” 3.3% lower than the same period last year. This means trading over the seven weeks between May 10 and June 27 has been significantly worse than last year.

On R36.5 billion in sales in 2019 and 2020, Game racked up R1.3 billion in operating losses and R923 million in trading losses.

Put another way, for every R10 000 in sales, Game has lost R253 over the past two financial years.

Massmart points to “foot traffic in most super and regional malls and retail centres remain[ing] constrained” as a reason for Game’s poor performance, but financial results from landlords show this not to be the case as foot traffic has mostly recovered.

Massmart CEO Mitchell Slape has sold a “reset” of Game to investors (and the easy work has mostly been done).

Read: Massmart CEO slates ‘ridiculous’ rent escalations

The fundamental question facing Game, however, is whether it has any relevance in 2021.

It has been trying to compete on so many fronts – from TVs and electronics to appliances to dry groceries to sports and leisure to home and DIY, and most recently to clothing basics. In most of these categories, it is nowhere close to being market leader (or top of mind for shoppers).

In 2020, the retailer said it had “achieved overall 230bps” of gross profit margin uplift. But the business remained loss-making. This year, it will report a loss for the fourth consecutive year.

Rising impairments

In the update, the group said it will book an approximate R570 million impairment on the value of Game’s assets.

Considering it only has R9 million in goodwill, this is a big number and one likely not expected by the market. Could the bulk of this be leases?

Will there be substantial Game store closures announced alongside the half-year results at the end of this month?

This chunky impairment brings the total impairments to R1.1 billion since the end of 2020. At year-end it booked a R348.5 million impairment on the value of Cambridge and Rhino and a R175.2 million impairment on the value of Fruitspot. This is likely higher than the cash amount Massmart paid for the latter.

Looting losses still unquantified

Of further concern is that Massmart says “it is too early to estimate the cost of damage caused by the civil unrest and the subsequent loss of sales. Insurance cover is in place but will not fully offset the losses suffered”.

Of the 43 impacted stores, eight have reopened.

Massmart says “with the exception of those stores that sustained structural damage, most stores should be open for business in the coming weeks.”

The problem for Massmart is that two of the worst-affected stores are Makros (in Springfield and Pietermaritzburg). Each will have had (and lost) hundreds of millions of rands in inventory.

The group also lost two distribution centres which would include more hundreds of millions of rands of inventory. Could the stock losses (never mind the lost sales) run into the billions? Most of the group’s Makro properties are on its balance sheet (to own these was a strategic decision taken many years ago).

Read: The scale of the destruction

Are both of these Makros, one of which has been completely destroyed, on the group’s books? The losses are certainly higher than the amount covered by Sasria, but how much higher? How many billions?

The group will report a headline loss of between R591 million and R700 million for the half-year, with a net loss of somewhere between R1 and R1.1 billion. The latter is an ‘improvement’ of between 1.5% and 11.5% on the lockdown impacted first half of 2020.

The R6 billion question (the current value of its 51% stake) is how long Walmart will continue to waste management time – and money – trying to fix Massmart.

Its man Slape has already done the easy work: shutting and selling underperforming stores, fixing retail basics in Game, stripping out large chunks of head office costs (by outsourcing central functions to Walmart suppliers) and securing a R4 billion (soft) loan from Walmart to bolster its balance sheet during a Covid-19 impacted year last year.

The rampant looting and destruction in July may have been the final straw.

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When you have A-Type personalities leading, not listening, then this is what happens.

Will the ANC refund the R240 million in protection money…. Er…. “development funds” it forced Walmart too pay before it could buy Massmart?

How’s AA working for you Wallmart ?

There is strong Affirmation of value destruction.

Game needs to revamp their tired old look and offer more of a range in electronics. However their biggest problem is their staff. Useless, don’t look like the interested in helping you and just plain rude in some instances.

Apart from the staff, the stores look like a time-warp from the 80’s. And their online store doesn’t compare with e.g. Takealot.

So in my mind they do not have anything unique in the market distinguishing them

I have always associated Game with electronics, home improvement and appliances. Was very surprised when I visted some stores last week to see that they have become mainly a grocery store. With very uncompetitive prices.

Fully Agree. Game must rebrand to the “Old” Dion’s! Those were nice shops!

Could not agree more. Dull, uninspiring stores, don’t-care checkout personnel, and a hostile security guard at the door, making everybody feel like a criminal by searching your bags and demanding to see your slip. I avoid Game like the plague.

Dreadful, sulky staff, def make one feel they are doing you a favour by ‘serving’ you. The comment above about the security guard at the door, what is that? I’ve just paid, why go through my stuff? I avoid Game now

It was the same at Dion Wired; their staff couldn’t be bothered to help you. Go to ANY Builders Warehouse: staff more interested in forming little groups in some obscure part of the store and chatting away whilst the customer battles to find their overpriced products. As for Games’ staff, their lack of knowledge about anything on display for sale is overwhelming. I’ve been to a few Walmarts in the US, and you do NOT get third rate treatment from their staff irrespective of what colour the person is whom you ask for assistance from. So Game is going down the s chute and they have brought it on themselves.

Lamberti dodged a huge bullet when he sold to the nieve yanks .SA workforce is world’s worst . dom , demanding lazy thieving and now the looting to put the cherry on the top

Game has been in decline for years. Led by dull stores and awful staff.

Yip … like OK Bazaars, CNA and Edgars … material for a business school thesis.

When Walmart initially bought a controlling stake in Massmart (which to them was small change) people said, “This will be the end of Pick ‘n Pay Spar, Checkers, Woolworths etc. Now we are going to see real price competition!” Fast forward a few years and CEO Grant Pattisson moved on to Edgars and the rest is history. Whether you like them or not, South Africa has got very good food retailers and nobody is going to take them on in their own backyard. Besides, they already have all the sites. But I assume that Pattisson and the other execs did very well out of the share options from the Walmart deal. At the end of the day, it was much ado about nothing.

The business environment is highly competitive. Entrepreneurs wage war, within the legal framework, for the opportunity to satisfy the needs of consumers. The USA invaded South Africa to confront Whitey Basson, and Whitey Basson won. Whitey Basson is a superior general with superior strategies. He still dominates the competition, even though he is retired.

And it is a classical case of evolution ( Game) from a true discount store in cheap premises to an up market store in every expensive shopping mall. Examples abound – Stuttafords, Payne Bros, Greenacres, etc, all failed to adapt to the timesin my neck of the woods. The Hub has managed to survive but adapted with the times to do so.

@JNRB —ha ha ha, you need to trravel more mate. Go to Europe and then tell me SA has good supermarket chains. Apart from the new age Checkers making a big effort and the dozen or so owner run Superspars which dazzle the senses, South African supoermarkets are dull places. Pick n Pay is astock standard totalitarian dump and Woolworths is all looks and no substance.

At least you get 10% off if you are vaccinated lol

i’m happy to pay 10% extra to avoid being herded and coerced into medical interventions by big pharma and government.

Can’t believe there are so many experts on the virus… Stupid idiots. Get vaccinated!

Oh boy, the University of Google graduates are out in full swing.

I’m young and not at risk – i’ve had the virus, for me it was mild. My antibodies are excellent and based on the latest community strain in SA, not the outdated strains that the experimental vaccines are based on. You can have my vaccine! More for those that want it. Make your choices, leave other people to make theirs. Cheers,

I hate going into a Game. The store looks run down, tired and untidy. Some of the sections looks out of place and of course the staff won’t do you any favours either. Just close it already.

I buy from Take-a-lot, have not set foot in one of these huge stores for years.

I wish they would stop bringing in foreigners to head up local companies.

They don’t understand South Africa and hence they end up doing the wrong thing and dragging the companies down.

e.g. SAA, Piok ‘n Pay, Absa, have all had their share of this.

I was in my local Game yesterday. I haven’t bought anything from Game in years. Chief reason being that they are trying to sell volumes so they only stock things that supposedly sell quickly.

Inevitably, the result of that is that any identity with that brand is lost because they try to become everything to everyone.

Edcon is another great example of that.

Why were u in Game yest if you haven’t bought anything in years ??

The problem with Game is that it has an identity crisis. They’ve been pivoting to food but its half hearted because there’s very little selection. So its got a bit of everything but why would I go to Game when I can go to Makro and get the full selection of products? I think that explains why Makro is performing well.

Game ceased to be a factor in the market many years ago, long before Slape took over it was in serious decline.
From my experience their product range is poor, mostly inferior in quality and their staff unmotivated and poorly trained, my absolute last point of call.

They used to stock golf balls and gloves at a good price, so every now and then when I visited them to buy golf equipment, I browsed a little and end up buying garden tools, pool equipment, electronic stuff and hardware items. Then they stopped the golf equipment and I had no reason to visit them any more, I can buy the other stuff from any other store. Maybe a poor example, but when you change the line of your stock, it may lead to unintended losses.

Not surprised at all.

Main reasons:

– Have you been to a Game store lately? Looks like a 2nd hand grocery spaza shop!
– Builders Warehouse: most staff never ask if they can assist. Can’t believe they are actually making a profit… You can learn a lot from Chamberlains and Leroy Merlin!

Even though it’s 3 days after the article appeared, read my reply (above), #The Oracle 2. I agree with you entirely regarding the crappy service one receives from these stores.

Just kill the brand and rename it to Makro Express – stocking only the fast-moving stock

over past year the share price delights even if Game is still a bit of a time bomb

I personally feel,that Game has the most unhelpful, not knowledgeable, and frankly the rudest staff I have dealt with. Maybe if staff were trained in customer service, they might start to see amazing results. I won’t shop there, due to their rude staff.

Wait until the regime buffoons get their extra 12% tax for the useless

End of comments.

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