Massmart would be better off selling its underperforming Game division and focusing instead on its far stronger Makro business, analysts say.
The consumer goods group owned by Walmart on Friday published a sales update for the 52 weeks ended December 26 2021 that shows Game’s total sales fell 8.1% to R15.3bn from a year earlier, and the brand’s total South African store sales were 6.9% lower.
In addition to lower mall foot traffic and pressure on consumers’ discretionary spending, Massmart said Game had been hit hard by disruptions to the supply chain as a result of July’s riots and looting in KwaZulu-Natal and parts of Gauteng.
That resulted in “insufficient in-stocks of some core appliances and home electronics in the period following the unrest” and was worsened by global supply challenges around other key lines of electronics and appliances, Massmart said.
Casparus Treurnicht, research analyst and portfolio manager at Gryphon Asset Management, said Game is the group’s weakest link and is “the part of the business that I think is going to keep dragging them down”.
“It’s the part of the business that doesn’t have a future in my opinion”.
He said the main problem with Game was that it competed with Makro, a more profitable division of Massmart.
Makro is a one-stop shop where you can get everything. I think Makro is a brilliant place
— Casparus Treurnicht, Gryphon Asset Management
“People would rather go to Makro. The thing with Game is, it’s … geared towards a consumer with improving disposable income,” Treurnicht said. “It’s trying to compete with specialist retailers such as Checkers and Pepkor’s JD Group within a mall, but is also trying to compete with its own Makro, and Makro is a one-stop shop where you can get everything. I think Makro is a brilliant place.”
Total sales at Makro increased 6.6% year on year to R29bn in the 52-week period, with liquor sales performing especially well — comparable sales grew 39.8% as restrictions on the sale of alcohol were lifted.
Comparable sales of general merchandise increased 7.2%.
The group’s Builders division was also a good performer, with total sales rising 7.1% to R14.9bn in the over the 52-week period.
Makwe Masilela, who heads Makwe Fund Managers, also believes it’s time that Massmart offloaded Game.
Overall, he reckons Massmart could perform solidly over the medium to longer term, but “they must get rid of Game”.
Vestact portfolio manager Michael Treherne said it’s too early to make a call on Game’s future as Massmart was still implementing a turnaround, but the brand seemed to be a “part of the business that just doesn’t gain traction”.
“Potentially they will have to make a hard choice about Game. I can’t see America [Walmart] continuing to fork out cash to keep bailing out Game.”
Treherne said Makro had always been Massmart’s “shining light” and was such a strong operator that it could probably be spun off from the group.
While the Builders unit had also improved, competition in the DIY and building market was on the rise, he said.
Massmart’s wholesale Cash & Carry business also suffered during the review period, with sales 6.3% lower year on year at R19.1bn.
The performance was largely the result of lower sales to the hospitality, restaurant and catering sector which continued to be “significantly impacted by the negative consequences of the pandemic”, Massmart said.
Masilela said although the prospects for Cash & Carry are better than for Game, it was also a division the group should consider selling.
Treurnicht said Massmart could make something out of Cash & Carry, but the problem was “we don’t know how long the catering and tourism industry is going to struggle”.
Shoprite, meanwhile, reported in an update on Thursday that total merchandise sales rose 10% to about R91.1bn in the six months ended January 2.
Its core business, Supermarkets RSA, registered sales growth of 11.3%, which was “achieved notwithstanding the impact of the civil unrest which severely impacted 189 stores and resulted in additional stores not directly impacted being closed for precautionary reasons”.
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