Massmart also sings the retailers’ blues
Walmart-owned chain attributes woes to declining consumer spending amid rising costs
Massmart, which is owned by US retail giant Walmart and runs the Game, Makro and Dion Wired chains, saw its share price drop 21% on Tuesday, to close at R90.65, after reporting flat sales for the festive season.
The decline in the general goods retailer’s share price followed a similar fall in the share prices of clothing retailers Mr Price and Woolworths in the past week, when they also reported disappointing sales for the weeks leading up to Christmas.
South African retailers have had to deal with difficult trading conditions over the past few months. A rise in the VAT rate, higher fuel prices and below-inflation pay increases have put South African consumers under severe economic strain.
Higher levels of indebtedness and a recent increase in interest rates have also put consumers under pressure.
Though the past year was a particularly difficult one for consumers, Sasfin Bank senior equity analyst Alec Abraham pointed out that they had been under pressure for far longer. “Consumers are getting poorer every year.”
The past few reporting periods have not been easy for Massmart and its CEO, Guy Hayward, who took over from current Edcon CEO Grant Pattison in 2014. Massmart saw like-for-like sales rising only 1.9% to R41.6m for 2018 half-year and only a 2.7% increase to R92.1bn for the 2017 financial year.
Abraham said by comparison it was not so long ago that Massmart was reporting annual sales growth of as high as 7%.
He said as Massmart was a low-margin/high-volume operation the problem was in essence a function of the economy. This basically meant if the economy performed poorly it tended to struggle as it was sensitive to consumers buying fewer goods.
Massmart, Africa’s second-largest retail group by turnover, said it experienced a slowdown in all divisions besides its Massdiscounters in November and December 2018, with sales rising only 2.9% to R90.9bn for the 52 weeks ended December.
The modest rise in sales came despite what it described as “satisfactory sales performance” for its Black Friday promotions.
The difficulty the group is in can be seen in comparable sales growths in that two-month period, being 0.1% and -0.9% respectively. Massmart said the weaker than expected sales, particularly over the crucial November and December 2018 period, along with slightly lower gross margins, “adversely impacted (on) profitability.”
The difficult trading conditions had left Massmart with few options. Abraham said the company had taken steps to reduce costs,such as buying some of the properties its stores operated from, as a way to protect itself from steep rent increases. Massmart, like most of the other retailers, was also arranging shifts of its workforce in a way that reduced labour costs.
Massmart said total costs grew “a credible” 5%, but this was well below its sales growth of 2.9%, resulting in further compression of its operating profit.