Massmart takes knock from Game

"As middle- and lower-income customers are struggling, selling them general merchandise and durables is very, very difficult. Customers don't have enough money so they're spending it on food and increasingly less on durables," Massmart CEO Guy Hayward said yesterday, 28 August 2014.

Competing for market share

Retailers targeting the low- to middle-income segment are vying for market share as rising living costs and poor job prospects crimp household budgets.

Massmart, owned by Walmart, posted a 25.5% fall in headline earnings per share in the 26 weeks to June 29, to 167c. Adjusting for foreign exchange movements, a decline of 5.7% was reported.

Locally, retailers continue to compete aggressively, especially at month-end, which has become the only time many customers are spending. Mid-month trading was soft as customers opted for smaller pack sizes and private label brands, the group said.

Massmart's total sales of R35.7bn rose 10.2% over the prior comparable period. Comparable stores' sales growth was 7.1% with product inflation of 4.8%.

Hayward said while it was too soon to be sure, it was possible that the five-month mining strike had had a greater direct and indirect adverse effect on South African industries, the associated work forces and their families, than was fully understood.

"Certainly, our stores in towns immediately affected by mining unrest and regions traditionally associated with migrant mine labour have experienced significant sales declines," he said.

Game, DionWired contributions

The company's Massdiscounters division, which includes Game and DionWired, saw sales rise 8%, and comparable sales 4%. At Game, comparable store sales of 0.4% were recorded.

Kagiso Asset Management investment analyst Dirk van Vlaanderen said Massmart appeared to be negotiating a difficult consumer environment fairly well in all divisions except for Massdiscounters, and particularly Game in SA.

Group profit before interest and tax (PBIT) fell 1.4% as margins reduced to 2% from 2.3%, primarily due to weakness in Game.

PBIT margins in Massdiscounters fell to 0.3% from 1.7% and have fallen from about 5% since 2012, highlighting the challenges facing the group in this division.

Focus on food

"Massmart's first-half results showed a solid performance from three out of four business units. The strategy to put fresh food into Game remains a focus for the group, and the 20% comparable food sales growth reported in the period is encouraging but still not enough to shift the business into a positive trajectory at this stage," van Vlaanderen said.

He said the move away from more cyclical general merchandise into food was strategically sound, but fresh food was a notoriously competitive, lower-margin and difficult retail format to get right. "The jury is still out on the ultimate success of fresh food in Game. Visibility over the trajectory of margin recovery and ultimate sustainable margin level in Massdiscounters remains low in our opinion," he said. About 55 Game stores sell dry groceries and its Fresh offering.

Both Game Africa, with sales in local currencies growing 13.2%, and DionWired, with total sales growth of 12.6%, performed well.

Massbuild

Similarly, Massbuild, whose brands are Builders Warehouse, Builders Express, Builders Trade Depot and Builders Superstore, saw solid growth - comparable sales advanced 8.8%.

Masswarehouse's Makro traded well in a difficult environment, with comparable sales increasing 9.4%. Masscash's comparable sales grew 6.8% as wholesale stores targeted at lower incomes struggled.

A dividend of 146c was declared, the same as last year.

Looking ahead, Massmart said South African retailers faced a weaker consumer environment, accompanied by some inflation volatility, higher interest rates and negligible economic growth, all of which seemed likely to persist for this year and possibly next year.

"The gradually tightening interest rate cycle will make things more difficult for middle-income customers and possibly upper-income customers too."

Source: Business Day