Wal-Mart bid brings African allure

The tide has gradually turned for Africa a continent long shrouded in scepticism and tension by international bidders.

"South Africa presents a compelling growth opportunity for the global retailer and offers a platform for growth and expansion in other African countries," said Wal-Mart's executive vice president responsible for Africa, Andy Bond.

According to a report titled Lions on the move: The progress and potential of African economies by management consultancy firm McKinsey & Company, Africa's collective gross domestic product will reach an estimated US$2.6 trillion in 2020, with consumer spending forecast to reach US$1.4 trillion in 2020.

Africa's steady growth and infrastructure developments have caught the beady eyes of multinationals hoping to tap into its growth potential.

The next best thing - Africa!

In August, Old Mutual which owns 53% of Nedbank said that HSBC Holdings plc could acquire up to 70% of South Africa's fourth-largest bank, a deal that could be worth about R49 billion, and before that there was Tokyo-based global telecommunications service provider Nippon Telegraph and Telephone Corporation's R24.4 billion acquisition of South Africa's Dimension Data Holdings Plc (Didata).

The recent economic meltdown has stunted growth in developed economies triggering investors to turn their attention to the next big thing.

"There was Asia and India, now Africa is seen as the place to be. Huge potential exists. South Africa is seen by many as the springboard to bigger and better things in Africa," said a retail analyst.

Wal-Mart's African safari could mark the retail giant's single largest foreign move since it acquired UK supermarket group Asda for £6.7 billion in 1999.

The American behemoth has more than 8613 retail units under 55 different banners in 15 countries, racheting up total sales of US$400 billion in 2009, of which international sales accounted for 25%.

Wal-Mart's attention has in recent years been focused on growth in emerging markets since a saturated home market has slowed US expansion.

Not always successful

However, the group's international forays have not all been successful, it was forced to pull out of Germany with a US$1 billion loss in 2006 after eight years of failing to become a viable force in one of Europe's toughest retail markets. Also in 2006, it exited South Korea after a 10-year stint.

Wal-Mart sold its 16 South Korean stores for US$882 million to discount chain, Shinsegae.

But the group has had great success in Mexico and is expanding in both Brazil and China.

Lessons learned?

According to a retail analyst, if the deal does go through, Wal-Mart's success will depend on whether it acts on lessons learnt from other countries it has operated in.

"Massmart's high-volume, low-margin general merchandise offerings are what they offer too but they have to be aware of who the local consumer is.

For this they need good insight and a management team that is able to take-on the various challenges of operating locally and possibly in the rest of Africa," said the retail analyst.

Wal-Mart last month said that if the deal went forward Massmart's management team would be retained obviously giving the retail heavyweight even more clout as it steps into the competitive South African retail market.

The often-quoted one billion African consumers ripe for picking does not however come without its fair share of hurdles.

A tough but lucrative market

"Africa is a tough but lucrative market. Key ports are often congested, logistics are a nightmare and exchange rates are volatile.

"These are all issues that retailers, Massmart, included have expressed in running operations in Africa," said the retail analyst.

He added that Wal-Mart's global supply chain would be an advantage but that the group would have to learn to adapt its big city ways to African conditions and challenges.

The roving eye of international investors could still be rampant for the rest of South Africa's big retailers like Shoprite, Pick n Pay and Spar who all have African presence.

On Thursday, ratings agency Fitch said that it believes that should the Wal-Mart/Massmart acquisition take place, it could trigger further foreign interest in the continent and specifically the South African retail sector as a platform for further expansion into sub-Saharan Africa.

"Who would have thought that Wal-Mart would come knocking, anything is possible now," said the retail analyst.