Walmart sends in the fixer
The US retailer has seen its investment in Massmart lose 80% in dollar terms. Now it’s sending in its own executives
It’s probably no coincidence that Massmart’s grim profit warning was accompanied by the news that its next CEO will be a Walmart man.
After all, one of the great mysteries of the past decade has been the palpable absence of the US retailer’s influence on the chain it bought in 2010 for $2.5bn. Today, Massmart is worth just 20% of what Walmart paid.
Part of that is undoubtedly the rand’s relentless slide — from just below R7 to the dollar when Walmart first bought it, to the exchange rate now of around R14.60.
But even in rand terms, it’s been a debacle. Walmart bought into Massmart at R148 a share; the stock has more than halved to R65. The cold fact is that Massmart is in the grip of a crushing consumer downturn.
The nature of its business hasn’t helped, as sales of discretionary, big-ticket appliances, like those it sells at its Game stores, have plummeted.
Last week, Massmart warned that operating profit could fall by as much as 60%.
Daniel Dias, retail analyst at Arqaam Capital, sums it up: "Everything’s going wrong at the wrong time. I don’t know what the CEO can do to turn the business around."
This unenviable task will now fall to Mitchell Slape, 51, who will replace outgoing CEO Guy Hayward once he secures an SA work permit. Slape was part of the first expedition from Arkansas to sound out Massmart about a sale, but was a "junior" at the time.
Former Massmart CEO Grant Pattison, who inked the deal to sell 51% to the US powerhouse, says: "First and foremost, the consumer economy is in bad shape. If [Massmart] starts saying things are bad, they’re bad. And it is bad out there," he says.
Pattison should know, as he is grappling with a retail turnaround of his own at one-time fashion powerhouse Edcon.
He says that in the pecking order of business cycles, food retail is regarded as the most resilient, followed by fashion. Massmart, on the other hand, "is the most cyclical", he says.
"In such a bad economy, Massmart is supposed to hurt," he says. What is ominous is the strain experienced by grocery chain Shoprite. Shoprite’s pain "should be scaring SA", says Pattison.
This is the world that Slape will walk into. He is a Walmart lifer, having worked across the group’s international and US operations since he joined as a business development manager in 1995. He has since held similar roles across the retailer’s international portfolio — from Argentina and Mexico to South Korea and India as its COO in 2012.
Since August 2015 he’s been COO at Walmart Japan.
When Walmart bought Massmart in 2010, the American brains trust had become leery of "parachuting" US management teams into its foreign operations, according to Pattison.
"Walmart’s experience up till then was that parachuting people in didn’t work, and what had worked was having independent management, like in Mexico.
"Asda [in the UK] was working well, so the underlying philosophy was: have a good local team and open the cupboard doors," he says.
Fair enough, but there’s a big difference between keeping on a local team and doing what Walmart did in SA, which its harshest critics would characterise as neglect.
Kuseni Dlamini, Massmart’s chair, denies that Walmart has been an absent parent. He points to the fact that there are three Walmart directors on Massmart’s board: Enrique Ostalé, Susan Muigai and Roger Burnley.
Dlamini tells the FM that Slape’s appointment "actually signifies Walmart’s commitment to the Massmart business".
At one stage, Walmart had 12 different workstreams "Walmartising" Massmart.
Then came Walmart Mexico, and everything changed. In 2012, The New York Times reported that Walmart Mexico had paid $24m in bribes to public officials, to secure approvals to open new stores. It’s a scandal that terrified the firm.
Pattison says: "What that started was a Foreign Corrupt Practices Act (FCPA) investigation into Walmart that focused on its emerging markets — Brazil, China, India, Mexico and Africa. Walmart had to self-investigate and started this massive global compliance programme."
The cost, he says, was billions. "Everyone became focused on FCPA compliance and I think that distracted Walmart from Massmart."
Walmart found no compliance breaches in its African business. But this made people "even more suspicious", says Pattison.
Though Massmart is struggling now, it was nowhere near the top of Walmart’s global problems.
For one thing, it never needed money from its parent: Massmart has yet to report a loss, for example.
"Massmart has never embarrassed Walmart or asked for cash, unlike other markets," says Pattison.
That may be so, but Massmart has hardly been a rich seam for Walmart. And it’s clear that the much-touted African expansion, which underpinned the hype of the 2010 sale, has stalled.
It’s not as if Walmart’s other international businesses are leaping ahead either. Results for the quarter ended March showed a 41.7% slide in operating income from Walmart’s international supermarkets, to $738m.
Everything’s going wrong at the wrong time. I don’t know what the CEO can do to turn the business aroundDaniel Dias
While Dias is "neutral" on Slape’s appointment, Pattison rates him highly.
"He knows the business and market and environment … he’s a very competent leader with lots of experience. He knows Walmart well, but but he’s got lots of international experience and you can see from his statements he understands localisation. Right upfront, he was a respect-local-differences guy," says Pattison.
He feels that while Makro and Builders are "fantastic" businesses, Masscash was "always meant to struggle — food wholesale is dying". Masscash is an all-purpose wholesaler, selling food, liquor and general merchandise.
Dias suggests there’s too much autonomy between Massmart’s four businesses: Masscash, Massdiscounters, Masswarehouse and Massbuild. He says the company should consider operating the divisions "in unison" to stop cross-cannibalisation.
"The four businesses are all operating completely autonomously, and not sharing ideas," says Dias.
But Massmart’s main problem, he argues, sits in Massdiscounters, which houses Game.
Food now accounts for about a third of the Game store space, but, says Dias, the option of going to buy food at Game doesn’t seem to "resonate" with consumers.
Dias argues that Massmart could change its Game strategy, to something akin to that of UK discount retailer Poundland (ironically, owned by Steinhoff). Doing so, however, would be at the expense of targeted margins.
One insider, who asks not to be named, says Game is Massmart’s weak spot. Questionable management — like introducing SAP and moving head office in the midst of a near recession — has only made the problem more acute.
But, he cautions: "Change is good; however, it is not guaranted that change will always make things better."