Wal-Mart set to spark price war

Massmart last month said it received a non-binding proposal from Wal-Mart Stores (Walmart) which could lead to Wal-Mart making a cash offer to acquire the entire issued share capital of Massmart for R148 per share, a deal that could lead to a R32 billion offer for the consumer goods distributor.

"If the deal happens, Massmart will be able to take on the big players that dominate the market.

"Up until now it's been focused on general goods and warehouse-type retailing, but Wal-Mart could provide it with exactly the right resources in needs to change the entire dynamic of the industry," said a retail analyst.

Massmart's 53% food and beverage component provides the perfect footing for the global giant into the South African food market.

Changing landscape

Wal-Mart is known for its aggressive pricing strategies that attract thousands of customers into its stores around the world with the slogan: 'Everyday Low Prices.'

Credit ratings agency Fitch Ratings said that the landscape of the South African retail market was likely to change significantly with the foray of Wal-Mart into the local market.

"This is expected to lead to increased competition and margin pressure driving greater efficiencies and price benefits to consumers through increased value and choice," Fitch said.

According to the ratings agency, the entry of large multinational players into SA is likely to lead to stronger price competition, with the likes of Wal-Mart having significant advantages in terms of buying power and economies of scale.

"Fitch expects that this will lead to some margin pressure among South Africa's large supermarket chains, which include Pick n Pay Stores, Shoprite Holdings, Spar Group and Woolworths Holdings and would also over time present a major strategic threat to smaller retailers," it said.

The public spat over market share started in October last year when Shoprite claimed that it had the largest share of all supermarket groups in South Africa with a 31.67% share of the market.

'Hogwash!'

Pick n Pay disputed this by saying Shoprite's claims were "hogwash" and that it was the leader in market share, with 34.7% claim, backed by research firm Nielsen.

Shoprite again declared itself the leader in the very hot, and contested battle for market share in August this year.

"According to the revised information now used by Nielsen, the group holds a 34,4% share of the market for the month of June and 32,6% for the year, the highest of all supermarket groups in South Africa, up from 31,4% a year ago," said Shoprite.

Market share is the percentage of the total market that a company controls for a particular product or product category.

"Market share figures are not always an accurate measure as some companies include entities that others do not.

"But if we estimate among the big four, then Shoprite leads will 34%, followed by Pick n Pay at 32%, Spar at 23% and Woolworths at 11%," said another retail analyst.

All-out price war?

But if the new kid enters the block we're talking an all out price war that could make the battle for market share look like a playground tiff.

Racheting up total sales of US$400 billion (about R2652 billion) in 2009, with 8613 stores in 15 countries, Wal-Mart is the world's largest listed company by revenue.

Consider the size of the retail behemoth, who earlier this year reached the US$200 billion (about R1326 billion) market cap, with the likes of Apple and Berkshire Hathaway.

Market capitalisation is the total market value of the equity in a publicly traded entity.

Massmart, the 35th largest company on the JSE, has a market cap of about R29.2 billion - roughly 2% of Wal-Mart's total value.

SA's biggest food retailer, Shoprite has a market cap of R53.8 billion, followed by upmarket retailer Woolworths at R22.4 billion, Pick n Pay at R20.8 billion and Spar at R15.3 billion.

Wal-Mart is a stalwart in the global retail industry and its big city ways and imminent entry into the South African market is likely to spark a fierce price war as it wrestles for a spot among SA's big four, no doubt consumers will be happy if the new sheriff comes to town.