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 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.
Massdiscounters, the largest division in the group with more than 160 stores, is expected to see its losses for the six months 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 said 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. “Slape will have no option but to analyse each and every store,” said 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 275m² to 1 885m².
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 said: “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.”
Dias said that Massmart’s food strategy needs a thorough re-look 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.
“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 said.
Vianello said 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 will 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.
“There are no doubt structural issues in South Africa’s economy over the last few years have affected Massmart badly,” Dias said. “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.”
‘Lost its relevance’
Alec Abraham, an equity analyst at Sasfin Wealth, said the economic environment prevalent in South Africa for almost a decade 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.”
Abraham said 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 said.
- This article was originally published on Moneyweb and is used here with permission