It has been a torrid two years for South Africa’s retail sector. Latest figures showed the narrow definition of unemployment at over 29%, Shoprite’s final and Massmart’s interim trading updates were far worse than expected, and Reserve Bank statistics indicate that SA is in the throes of the longest economic downturn since 1945, with negative first quarter GDP figures of -3.2%.
Shoprite released a dire prediction of headline earnings per share (HEPS) being down by up to 20% for the year to end-June 2019. This was softened somewhat by the announcement that its second-half performance was significantly better than its first half, with the final quarter of the current financial year showing significant absolute and relative strength.
Nevertheless, it is still a bitter pill to swallow. Shoprite has been a strong favourite in the retail sector over the past two decades. It successfully penetrated much of the rest of Africa. Also, its target market in SA was the low end of the social spectrum, supported by growth coming from greatly increased numbers of social grant recipients.
However, new CEO Pieter Engelbrecht experienced a baptism of fire on taking over the reins from James Wellwood “Whitey” Basson. Almost immediately, Shoprite began suffering hyperinflation in Angola, many African countries experienced foreign exchange shortages and in SA it began losing market share to archrival Pick n Pay, and armed robberies at outlets reached nightmare proportions, with more than one per day occurring at its peak.
Now the group is confident that it is in turnaround phase, having addressed most of the operational issues affecting it. The African problems appear more intractable, however, and may well take a lot longer to address.
Shoprite's share price is currently around R155, 40% below its all-time high of R267 in March 2018, not long before Basson vacated the CEO position. Recouping that amount of lost ground against a moribund consumer economy is going to be extremely hard work.
Massmart expects to make a loss of around R30m in the first six months of the financial year to June 2019. This compares with a profit of R550m for the previous comparable period, with the group citing lower than anticipated sales growth, further squeezed margins and higher expenses. The share price slid to a level not seen since 2006. Since peaking at just over R205 in May 2013, the Massmart share price has lost 75%, currently trading at around R51. Incoming CEO, Wal-Mart veteran Mitch Slape, has an unenviable task of turning this monster around.
At its financial year 2018 results presentation in February this year, outgoing CEO Guy Hayward appeared quietly confident that the worst was over and that Massmart’s extremely low-cost base could cope with the poorly performing ambient economy. This confidence was misplaced and it is now obvious that Massmart’s business model of offering a wide range of general merchandise is not suited to the local retail arena in which highly focused competitors offering narrower, more focused lines of products are slugging it out with each other. The durable goods division, predominantly Game and Dion Wired, is struggling with poor consumer demand and continuing deflation. Only at the extremely low end of the market are outlets such as Cambridge doing well.
Mitch Slape may have good emerging market credentials, with experience in countries such as India and Vietnam, but should not be expected to be a miracle-worker. He will require fast-tracking in familiarising himself with Africa and will have to apply tough business practices to the business.
He does at least have one advantage over his predecessors — no baggage and no entrenched ideas about how Massmart should be run. American retailer Steve Ross saved Edcon from almost certain extinction in the late 1990s, as with no sentimental attachment to the business he simply got on with implementing tried and tested retailing methodology.
Slape would do well to check out the Steve Ross playbook before beginning the arduous task of the Massmart turnaround.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.