How being sceptical paid off for Massmart

Picture: Bloomberg

Resisting pressure from investors to expand at all costs has insulated Massmart from the dramatic fallout in many oil-dependent African countries, says CEO Guy Hayward.

For years, Massmart has been slammed for its sluggish expansion plan, while some rivals, such as Shoprite, have marched across the continent and brought back enormous returns. This manifested in sharply different trajectories: while Shoprite’s share price soared 551% over 10 years, Massmart’s stock rose only 70%. Shoprite gets 17% of its sales outside SA, but for Massmart this figure is only 9%.

In 2016, however, the hype of "African expansion" came badly unstuck, as it slammed head-first into the reality of shoddy governance and poorly diversified economies being battered by a steep plunge in oil revenues.

Casualties included Tiger Brands, which sold its Nigerian business and uncovered a scam in its East African operations; Mr Price and Woolworths, which couldn’t sell stock in Nigeria; and Standard Bank.

Hayward says investors had stars in their eyes between 2010 and 2012, thinking African expansion was a one-way bet to huge profits.

"I was having investor meetings where I said we were going to be quite cautious. The audience would say: ‘You just don’t get it.’ [But] I wanted evidence supporting either that I was right or that I was wrong."

The pressure from investors intensified from the time Walmart took control of Massmart in 2010, and shareholders expected this to spark a speedy raid into sub-Saharan Africa.

Hayward resisted. Now it seems to have been a wise move.

"At no time did we slug the Africa Kool-Aid and demand 10 stores a year. I think those of us who are still trading well in Africa never did that — we always remained fairly measured. My impression is that the guys who came unstuck and who have had to withdraw probably went in a bit hard," he says.

This isn’t to say there isn’t the potential for big profits, but rather that this must be done in a considered, carefully planned way.

Two years ago a study commissioned by Massmart found that 15 sub-Saharan countries are likely to represent 88% of the retail potential in the region until 2024.

That study was undertaken by Canback (owned by The Economist Intelligence Unit) and looked at how "informal retail", such as markets, are expected to be converted into formal retail. Whereas formal retail now stands at 8% of the region’s retail, that should grow to 17% by 2024.

At the moment, Massmart operates in 13 of the 15 countries included in the study. It is not represented in Angola and Ethiopia.

"What we’ve learnt about Africa is that securing title to real estate is still fraught and very expensive. Often these countries don’t have a deeds registry," Hayward says.

One also needs to counteract volatility in the region, he says. "You don’t want to be in two countries only. The risk-diversification approach says you should be in more than six or eight countries, to spread the risk," he says.

The Game division, with two decades in the business, is the star performer for Massmart in Africa. Hayward says other arms of the company are now making names for themselves.

"A bit like a very talented 20-year-old [making an impression] in a cricket side, Builders Warehouse is emerging, and has made a lot of runs. Game is a deeply experienced African operator — the company has seen it all," he says.

Builders Warehouse is recording sales of more than R1bn in three countries outside SA, and growth rates are high.

"It’s triggered some very interesting interactions. African consuls-general have approached us and said: ‘My president has come to me to ask: when are you going to build a Builders Warehouse?’"

Yet, two years after the Canback study, Massmart has plans to build just one Builders Warehouse store outside SA. Hayward adds: "But that doesn’t mean we aren’t in 20 discussions."

Hayward says retailers have learnt some hard lessons in recent years.

"One of the reasons why other countries in Africa are so volatile is that they are heavily dependent on exporting commodities such as oil, diamonds, coal and steel — and heavily dependent on dollar revenues. So when both go wrong they are doubly affected," he says.

This is what happened in Nigeria in 2016, as the country dipped into recession for the first time in decades and its inflation rate hit an 11-year high of 18.3%.

These alarming changes wrongfooted many investors, who had bet the house on Nigerian growth.

The Canback study says that of the top 50 cities in Africa, 20 are in Nigeria.

Hayward speaks of a deeper investment discipline within Massmart that is now paying off. "We are very clear about the end goal and what we want to achieve, whereas five years ago we were less well informed. We, and I include myself, were winning the prize but not sure of how we got there," he says.

Massmart has had its failures too.

For example, Builders Warehouse first opened in Gaborone in 2012, and it didn’t go well.

Hayward says its Botswana travails were possibly linked to the collapse of the Zimbabwean economy. "We didn’t realise the extent of the cross-border trade going on. We opened in Maputo [Mozambique] about two years ago, and then all the dials went bright green. The size of the stores were right, as was the offering. We opened in Lusaka [Zambia] in 2015 and are doing similarly well there and in Tete, in northern Mozambique, where we opened in about 2013," he says.

As well as Game and Builders Warehouse, Massmart owns Cash & Carry stores in Botswana, Namibia and Mozambique, and plans to open in Zambia soon.

Though Massmart’s African stores are often contrasted with Shoprite, there are big differences. For a start, Shoprite’s stores are smaller and about convenience, while Game and Builders Warehouse stores are more destinations for specific purchases.

Each of Massmart’s non-SA stores averages about R200m/year, while Shoprite’s sales average about R60m for those stores.

But even as the "Africa rising" narrative has hit a speed bump, Massmart’s stock has strengthened. This suggests the poor sentiment of recent years following Walmart’s takeover of the company may finally be turning.

Though Massmart’s share price has slid 22% since 2011, it gained 36% in 2016 as its sales trumped analysts’ expectations. For the 44 weeks to October, sales grew 7.6% to R73.2bn — marginally more than price inflation of 6.4%.

But analysts are still wary.

"We expect market conditions to remain tough for the short term," says Momentum SP Reid analyst Alexander Sprules. "Massmart remains one of the more pricey retailers, and we are of the view that the current price level is not substantiated by the growth implied."