Massmart has already kicked off its shopping spree with the acquisition of 51% of Cambridge supermarkets, a chain of six retail cash and carry stores in Durban that are strategically located near rail and other busy commuter links.
Cambridge turns over R600m annually. “We will buy as many independent retailers as we can,” says Pattison. “The formal sector — such as Boxer, U-Save and Score — services this market, but we think there is a gap to be exploited.”
Following a strategy announced last year, Massmart is increasingly servicing the needs of both the wholesale and retail sectors. While Masscash supplies goods wholesale through its subsidiaries CBW, Jumbo and buying group Shield, the hybrid stores, such as Cambridge, combine traditional wholesale cash-and-carry with retail direct to the consumer.
“Grant [Pattison] knows that cash and carry wholesaling is a mature business,” says Nedcor Securities retail analyst Syd Vianello. “Think about it: which is the fastest-growing food retailer in the country? Shoprite. Every time Shoprite opens a new store, it takes business away from the independent retailers and spazas that source from the likes of Masscash and its unlisted competitor, Metcash. Massmart is already strong in retail. Now its aim is to control procurement.”
Under its previous CEO, Mark Lamberti, and Pattison, Massmart has shown that it is not afraid to spend money on acquisitions that provide the base for a new business model. “Cambridge will be a vehicle to understand the dynamics of the hybrid model. Once it understands the model, it will develop its own stores,” Vianello says.
Though customers serviced by independent retailers are not necessarily brand-conscious, Masscash's hybrid model, which it is calling retail cash-and carry, will be branded PowerSave. There is no immediate urgency to introduce the brand though. “These are consumers who are driven by convenience, not brand,” says Pattison.
Masscash is growing and generates the largest portion of Massmart's turnover. In the group's half year results to December the wholesale division, which includes Shield, grew turnover by 17% to R7,8bn — though food inflation accounted for 85% of this. Group turnover was R22,7bn. However, profit margins are thin in wholesale, which is reflected in the numbers: Masscash earned just R289m of the group's R1,4bn profit before tax. Higher-margin businesses like Massdiscounters (Game) generated lower turnover but net profit before tax grew 8.4% to R541,5m.
“Massmart's concept has a lot of merit,” says Vianello. “In low margin businesses the trick is to boost volumes. Pattison will do this by being in both retail and retail procurement.”
Viannello thinks Massmart is supplying Cambridge with 10% - 15% of its products via Shield. The remainder is sourced through other buying associations and competitors like Metro Cash & Carry and direct distributors.
“That will cease overnight,” Vianello says. “Now Cambridge's retailers will source more of their dry groceries from Massmart's CBW so you get ‘double value' in capturing more business from an existing customer [Cambridge] and you get half the profit from the acquisition.”
Massmart is not stopping there. Shield turns over R3bn/year. It has other customers as big as Cambridge and executives are likely to tap the Shield network of customers for more potential acquisitions.
The business model is similar to a franchise model and that deployed in CBW. Massmart will acquire a majority stake in the retailer, but keep the owner on as part of the management team.
“In the case of Cambridge, Massmart has the capital and the systems to support that entrepreneur in growing the chain beyond its current six stores. This could be a big business,” says Vianello.
Certainly Pattison is optimistic. “The 10 retail cash and carry stores [in the division] turn over R1,2bn. We expect that to reach R2bn within a year.”
In these tough times, growth comes to those that box clever. “Opportunities lie in taking market share where competitors are weak,” says Pattison.
Source: Financial Mail
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