Wal-Mart Turns Attention to Africa
There may have been some who expected Wal-Mart to try to
buy its way into the South African market through an acquisition, but most
seem to have been taken off guard by the company’s non-binding offer to acquire
Massmart for around $4.8 billion in cash.
Massmart, which The New York Times described
as a cross between Home Depot and Wal-Mart, is the third largest retailing
company in South Africa. It is the largest food retailer in the region with
stores in 14 African nations below the Sahara.
Doug McMillon, president and
chief executive of Walmart International, said in a statement, “We have
the opportunity to leverage our experience from around the world to more effectively
serve customers, create opportunities for our associates and add shareholder
value. …This region of the world fits with our focus on large, high growth
markets. This potential combination with a market leader will enable us to
add value to an already successful business through investments in people and
technology.”
Brian Sozzi, an analyst with Wall Street Securities, described
the bid as coming out of “left field,” in a research note.
“Though Massmart would benefit from the Wal-Mart know-how and its best
of class supply chain, the margin structure (18.1 percent) is well below Wal-Mart
at around a 24 percent gross margin and a six percent operating margin,” wrote
Mr. Sozzi. “Keep in mind the South African retail marketplace appears
highly competitive, maybe becoming more so if Wal-Mart decides to undercut
competitors further on price as it does in the U.S.”
Mr. Sozzi expressed
concern that the acquisition attempt could lead Wal-Mart to to take its eye
off of challenges in the U.S. market as well as in the U.K., where its Asda
division is rebounding, and in Japan, where it “has finally
gained traction” with Seiyu.
Should the MassMart deal go through, Wal-Mart would find itself managing an
organized workforce. Mr. McMillon said, “We respect and honor pre-existing
union relationships and are committed to abiding by South African labor laws.
We also look forward to serving communities and working with the leaders to
support the continued development and momentum in the region.”
South Africa’s largest labor union has come out against the deal, according
to a Wall Street Journal report. The Western Cape provincial arm of the Congress
of South African Trade Unions (Cosatu) said in a statement, “We will oppose
the setting up of any Wal-Mart stores in the Western Cape. These companies
are notoriously antiunion and anti-workers’ rights.”
Discussion Question: Would an acquisition of Massmart be a good or bad move
for Wal-Mart Stores at this time?
The South African market is not nearly as competitive as Germany. The market share of major competitors does not approach 90% like in the German market. Thus Wal-Mart is entering what will be the growth continent early on. This is good long-range planning.
Wal-Mart entering the South African market is a surprise. After reading the report it makes some sense. They are planning to buy a company that is a blend of them and Home Depot. This could be their long range exercise of learning how to be successful in the Home Depot piece of the business. Then they can bring that education to their other markets including the US. My take is, maybe Home Depot & Lowe’s should be on the alert.
Studies show that anywhere from 50% to 70% of all acquisitions fail. The reason is that the acquisition does not generally take into account any Sustainable Competitive Advantage (SCA).
With regard to Wal-Mart, they have one particular SCA that no one is even in second place. That is the efficiency of their supply chain.
Any one of us could predict this move. If we were charged with looking for a vibrant market where Wal-Mart could make significant bottom-line improvement by implementing its operating skills, we would come up with a short list that likely would include South Africa.
The core Wal-Mart business is not going to grow in the U.S. If they want to expand that base business they must continue to go to other parts of the world. This is an excellent and obvious move.
Could be a smart long-term move but one has to wonder if this will divert some sorely-needed attention away from their challenges in the U.S., which are significant at the moment.
Let’s be honest here: how many of us know anything about the SA market? (Even after the World Cup, I imagine an embarrassingly large number have trouble finding it on a map). Of course all the usual cliches can be given: the U.S. market is saturated (or nearly so), Africa is a huge growth area, this will benefit both sides, etc.; the reality is SA is a developed economy (certainly compared to most of Africa) with serious crime issues and, unsurprisingly, a racially charged political environment. These things don’t necessarily make it a “no go,” but they should raise caution flags.
Is it possible that this is a little bit of a desperation move by Walmart? While they dominate the U.S. market, chains across all retail channels are maturing and creating more effective competition. It’s getting harder and harder for the company to keep achieving sales growth. They certainly have the capital to take some risks, but this seems like their biggest challenge to date.
Meanwhile, while many weren’t looking and others were hand-wringing, world domination occurred.