Big-box retailer Massmart is in a difficult position: its costs are growing faster than its revenue.
It has made efforts to cut costs, but for a low-margin, high-volume retailer to grow, it needs some economic activity.
The problem for it and the entire retail sector is that over the past year, there has not been much activity to speak of. The Christmas season was one of the most dismal on record. Rival Shoprite noted that parents spent more on school supplies than on toys.
In a sense, Massmart is also a victim of its own success. When times were good, it grew rapidly, but now that it has such a large retail footprint — with the overheads to match — it has to come up with a way to run this infrastructure in a more affordable manner while demand tapers off.
There are no easy answers.
It can only cut costs so far. Rolling out new stores as a way to drive growth is an option, but this has to done carefully, as there is the danger that they will not generate enough revenue to justify the increase in expenses they bring.
The only thing Massmart can do is wait for the economic winds to change in its favour. But the forecast doesn’t look promising. Retailers are looking to some kind of unspecified government action to spark a rise in activity after the May election.
Chances are that whatever the government comes up with, it will not provide the sharp impetus Massmart and the rest of the sector are looking for.
Uncertainty surrounds Choppies
That its stock will not take another beating at the hands of the market appears to be one of the few certainties for Choppies management right now.
Shares in the Botswana-based retailer remain suspended, and not only is the company still unsure of when it will be able to publish its audited financials for the 2018 year ended June, but what its auditors are busy uncovering will be deeply unnerving to investors who have not yet bailed.
To recap, auditors PwC have been combing Choppies’ books since they raised a number of red flags. These include certain commercial deals struck in Botswana in years past, Choppies’ compliance with international reporting standards, and a forensic investigation into certain “transactions”.
So far, Choppies can now say that its net income for the 2018 financial year should in fact be 389-million pula lower than previously estimated, while its equity for the year ended 2017 should be 378-million pula less.
Impairments and inventory losses are to blame. More worryingly, those numbers could yet change depending on the outcome of the forensic probe. What all this means is that results for the half year to end December are backed up too, and it is now in breach with its lenders, who understandably want a set of the company’s results under the terms of their loans.
When Choppies eventually does re-open trade, it may be safe to assume that its days on the JSE are numbered.
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