For keen watchers of South Africa’s economy, finance minister Pravin Gordhan’s annual budget statements are a bracing tonic – a refreshingly honest, if occasionally bitter, overview of the country’s prospects.
In February, businesses listened intently to Gordhan’s admission that while the country’s outlook has improved, GDP growth this year is likely to be just 1.7% – in the finance minister’s scathing words, “too low and highly inadequate”. For South Africa’s retailers, reeling from several years of tepid economic growth, Gordhan’s candid update did little to boost flagging spirits.
Yet a day after the finance minister delivered his judgement, Walmart-owned retailer Massmart offered some cheer to the beleaguered sector with news of a 15.5% rise in operating profits. Kuseni Dlamini, chairman of the Sandton-based firm, says the results are a welcome vindication of Massmart’s back-to-basics strategy – and proof that the company’s diverse portfolio, encompassing groceries, home improvements and general merchandise, can prosper against a discouraging economic backdrop.
“The team has been focused on the basics of retail, looking after customers and making sure we offer value for money. We make sure our shelves have the right products that our customers want and when they want them … that’s what’s enabled us to unlock good results. And obviously operating for less, continuously reducing expenses and passing the savings to customers.”
Massmart’s disciplined strategy has focused on reducing store rental fees, slashing travel costs and closing underperforming sites from its portfolio of over 400 stores. Supply costs have been bought under tighter control, new product lines have boosted the food business and favourable pricing has attracted new customers, says Dlamini.
The strategy appears to have had the desired effect – trading profits rose to R2.6bn ($206m) in the year to December 2016, allowing the firm to raise its dividend by 16%, even as customers keep a close eye on their wallets.
While this slow and steady approach appears to be paying off under the leadership of chief executive Guy Hayward, it’s a strategy that few would have foreseen several years ago. When the firm was controversially taken over by US giant Walmart in 2011, most retail watchers expected Massmart to follow its owners’ titanic ambitions by hoovering up retail space across sub-Saharan Africa in a bid to capitalise on the rise of a free-spending emerging middle class.
Few expected Walmart’s African surrogate to settle for anything less than a position as the pre-eminent retailer on the continent. Instead, rapid expansion was largely left to Massmart’s South African peers, including Shoprite, who enthusiastically poured resources into other sub-Saharan markets.
Massmart opted for a more cautious approach outside South Africa, a strategy cemented by the decline in commodities prices and subsequent reduction in regional growth. Today, Massmart operates in 13 countries in Africa, but over 90% of sales still take place in the home market – not quite the explosive expansion analysts expected.
Yet all that may be again set to change. Dlamini says that the firm has continental plans for its major brands – among them general merchandise retailer Game, wholesaler Masscash and construction supplies business Builders Warehouse.
The firm plans to add 26% to its retail space in the next two years while increasing total stores to 470. While refusing to be drawn on specific countries, Dlamini insists that the firm’s pan-African ambitions remain firmly intact – but says that the company will not be forced into rash acquisitions at the wrong time.
“We’re currently in 13 countries and are continuing to look at opportunities to expand our footprint. It’s a very disciplined and deliberate approach, informed by fact and evidence around the magnitude and nature of opportunities in Africa.
“We’re constantly looking at markets we’re not in, we rank them and subject them to investment criteria. To the extent they tick the relevant boxes, we will invest in those countries … at the right and appropriate time.”
Yet for all the interest in expansion among Massmart and its peers, sub-Saharan Africa remains a hard market to crack. The dominance of the informal sector and the need to invest heavily in real estate and supply chains makes instant gains elusive.
Total sales growth from Massmart’s non-South African stores slowed to 11.2% at the end of 2016 from 23.2% for the six months to June 2016. Nevertheless, Dlamini points out that long-term trends favour Massmart’s expansion strategy.
He sees Builders Warehouse as a cornerstone of the expansion plans, pointing out that home improvements, which currently account for 13.9% of total group sales, are well placed to benefit from the predicted increase in discretionary spending among emerging African consumers.
“The big theme is urbanisation and industrialisation. As you industrialise, more infrastructure needs building and as the middle class increases, people want to improve their houses. Looking at real estate in Kenya and Nigeria – just two markets – property developers have planned an additional 350,000 square metres of retail space in just the next three years.”
Yet as the firm expands its various stores and brands, much will depend on the extent to which Massmart can improve the efficiency of its supply chains. With the costs of cross-border trade still prohibitively high – intra-African trade costs are around 50% higher than East Asia, according to the World Bank – local sourcing could offer Massmart a valuable lever to make further savings.
“We try and make sure where possible that if we can source locally, we do so. In South Africa we set up a supplier development fund which has been instrumental in assisting the emergence of new suppliers and entrepreneurs who are now suppliers to our stores […] we believe that the long-term development of Africa is inextricably intertwined with world-class supply chains being developed.”
The home front
Yet while Dlamini insists that the firm’s ambitions remain pan-African, the company’s dependence on the South African market cannot be ignored. As the firm looks to break out of its foreign beachheads, the troubled home market remains the bedrock on which all other hopes are built.
That outlook remains precarious as South African consumers tighten their belts amid persistent economic insecurity. According to official data from January, total retail sales declined 2.3% year-on-year, with falls in textiles, clothing, furniture, and appliances.
While Gordhan’s budget forecasts offer some hope of an improved economic performance in 2017, policymaking could take a back seat as the ruling African National Congress enters a potentially bitter succession battle to choose President Jacob Zuma’s successor. While businesses maintain faith in the fiscally conservative Gordhan, his position remains vulnerable as populist factions vie for control over economic policy.
Despite those dangers, Dlamini – a Rhodes Scholar and member of the South African business establishment via executive stints at Old Mutual and Anglo-American – remains bullish on the home market.
“The South African economy is expected to grow at a higher rate compared to last year although last year’s growth was pedestrian. We have confidence that the retail market will continue to be resilient in South Africa and as the economy grows and hopefully jobs are created the spending power of consumers will be enhanced … on the policy side we are hoping that the authorities will continue to invest in energy capacity, and making sure the massive infrastructure build programme will be implemented.”
Betting on the African consumer
With a struggling home market and the rest of sub-Saharan Africa yet to fully emerge from the commodities downturn, Massmart’s leadership may feel that hedging their bets remains the most successful way of navigating Africa’s temperamental retail sector. The recent uptick in commodities prices offers hope of a more sustainable recovery in South Africa and beyond, while Dlamini insists that the long-term trends of population growth, urbanisation and an emerging middle class continue to support the dual track of consolidation at home and expansion abroad.
“We are seeing green shoots starting to emerge from the fall in oil and commodity prices. What we’ve seen is that despite the fall, African economies are being resilient. They are now coming of age and are no longer just dependent on commodities. That’s really taking root, and that can only auger well for our business.”