Massmart, which recorded a R2.2bn annual loss, will be expanding its Builders chain by 50% over the next five years and also hopes to increase Makro stores by about a quarter, a sign of confidence in the chains that have been a bright spot in its portfolio of brands.
The Walmart-controlled retailer, which extended its money-losing streak to a third consecutive year when its losses widened 25%, has been undergoing a tough turnaround plan under CEO Mitchell Slape, a Walmart insider.
In the past two years, four retail units were merged into two in order to benefit from bulk-buying discounts, while the IT support and financial administration functions were outsourced and investment in e-commerce increased. Tech chain store Dion Wired was closed down and loss-making Cambridge and Rhino discount grocers were sold to Shoprite, though this deal is awaiting approval from the competition authorities.
Massmart has almost completed its turnaround strategy and is now looking at growing the Makro and Builders businesses, but continuing underperformance at Game has piled pressure on Slape to offload it or even shut it down.
Massmart predicts that if the Builders store footprint is grown 50% using both smaller and large-format stores, it will add between R1.4bn and R2.4bn in annual sales to the R15bn in revenue. Makro, which services a large informal catering sector, could see sales increase by R7bn from sales of more than R40bn annually if it expands by a quarter.
About 72% of Massmart’s 2022 capex budget has been allocated to e-commerce and new Builders and Makro store development and remodelling.
“If you look at the return on investment, that’s exactly where we ought to be investing our money right now, and really building our market presence in SA principally with those formats,” Slape told investors.
Slape had initially predicted that the company would break even in 2021, but it would not have done so even with losses from the July riots excluded. Massmart was particularly hard hit in the riots after two warehouses were looted and one burnt down, leaving it with stock shortages and weaker Black Friday sales — and a R650m bill not covered by insurance.
Game continues to lose money and its trading loss almost doubled to R1.03bn while sales fell 8.7% to R15.3bn.
Despite Game’s underperformance, Slape is not giving up on the brand, which faces competition from ordinary food retailers such as Pick n Pay selling kettles and general merchandise, as well as from Mr Price Sport and Naspers-owned Takealot.
The group has done significant work in redesigning every store and improving product assortment and customer service. “We’re starting to see that manifest itself in better sales and better profitability,” Slape said.
“Game is a now a fundamentally different business,” he said of the changes. However, he conceded that the benefits of the changes are not evident in the financial results.
“I am as demanding and challenging as anyone on the numbers. And from a pure numbers perspective, the turnaround has not landed,” he said, referring to Game.
The challenges were many years in the making and he expects the turnaround to take some time, though he would “love to see this go faster”.
Game has put 15 unprofitable stores up for sale in SA and 14 in East Africa, with initial agreements signed in East Africa and possible buyers expressing interest in the SA stores.
The remaining Game stores saw growth of 3.8% in January, with a gross profit margin of 28%. However, the growth is being compared with a low base in January 2021, when malls were quieter due to the third Covid-19 lockdown.
Slape admitted that as Game continues to lose money, many investors remain sceptical about its turnaround prospects. “The jury is still out,” he said.
Frozen food was removed from stores, resulting in Game’s sales being down by about 19%. CFO Mohammed Abdool-Samad told investors that replacing frozen and fresh food with value clothing apparel “is really starting to do quite well”.
Slape said his record showed he could make hard decisions if necessary, as he had done in closing Dion Wired stores.
“If it came down to it, we would make a hard decision. But my view is that Game still remains and plays a role in the portfolio,” he said.
Massmart’s share price closed 7% lower at R44.92.
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