Walmart: Cooling off on Africa?

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Five years after global retail heavyweight Walmart tied the knot with Massmart, their African romance seems to be dwindling.

Back in 2011, Walmart paid R16.5bn to wrest control of Massmart for R148/share, in a move which CEO Doug McMillon lauded at the time as slotting in neatly with “our focus on large, high-growth markets”.

Today, with Massmart’s share price having ebbed to R123/share, McMillon is singing a very different tune.

Speaking at the Consumer Goods Forum in Cape Town last week, McMillon notably left Africa off his “priority list”, gushing instead about the US, Mexico, China and Canada as Walmart’s key growth markets.

“We have to win the US — that is the biggest priority of business. China is a tremendous opportunity but it is extraordinarily competitive … so that one is going to be tough,” he said.

To some extent, it’s understandable that Africa wasn’t mentioned. The continent’s marginal contribution of less than US$6bn to Walmart’s huge $482bn in sales places it at the bottom of the Bentonville retailer’s global portfolio of 11,458 stores.

This is despite the fact that Massmart — which owns Game, Makro and Walmart’s African partner — has 408 stores in 14 countries, including SA, and clocked up sales of R84bn last year.

Two of Walmart’s other priority markets aren’t much bigger either: China has only 432 stores, and Canada has only 400. Speaking specifically of Canada and Mexico, McMillon said these countries were “keen to grow”.

He was surprisingly reserved when it came to Walmart’s investment in Africa — a continent which consulting group McKinsey said in 2012 was likely to experience a 52% spike in households with discretionary income by the year 2020.

“SA is a terrific market, and it gives you something to work with. But our aspirations are for the sub-Saharan African region, not just SA,” he said.

But McMillon mentioned no further definite plans in Africa, saying only that he remained “optimistic” about the continent.

This caution reflects Massmart’s own conservatism when it comes to expanding outside its comfort zone in SA. Of its 408 stores, only 38 are elsewhere in Africa, and they contributed just 8.4% of total sales by last December. In dollar terms, the 26% drop in Massmart’s share price since Walmart’s takeover looks even worse. Especially since Walmart’s own stock has jumped 52% to around $71/share over the past five years.

The poor return has fuelled speculation that Walmart has thought about selling its holding in Massmart, but the company has given no indication it’s considering such a dramatic reversal.

“We like the geographies that we are in,” said McMillon.

“I don’t know that we need to be in a lot more countries. But within the countries in which we are, our supply chain will be more dynamic, better at predicting what customers want.”

Alec Abraham, a senior equity analyst at Sasfin Wealth, says the developed economy of China provides more immediate “tangible growth” for Walmart.

“Africa has a big revenue opportunity, but whether you can monetise that, I don’t think is as close to monetising the China market,” he says.

That may be true in some respects.

China, with a working population of 1.37bn people, has a GDP per capita of $14,107 according to the International Monetary Fund (IMF). That’s higher than SA’s $13,165 and more than double Nigeria’s $6,108. Still, the population of sub-Saharan Africa is expected to double to 2bn by 2050, which will make it an attractive value proposition for retailers.

Charles Allen, a London-based analyst at Bloomberg Intelligence says: “I have noticed that Walmart’s management are often cautious about making statements that would commit Massmart to taking specific actions.”

Allen says the relative strength of a country’s economy is the primary factor that would influence a company to decide whether it is a good opportunity or not.

“In China, for example, things are extremely difficult for most food retailers but Walmart has outperformed its peers recently, so there may be an opportunity for it to expand further,” says Allen.

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