• Thursday, May 23, 2024
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Anxiety over Wal-mart, Massmart merger


Hopes of plum returns on investment and the expectations of lower prices to consumers touted in the Wal-Mart and Massmart merger and acquisition transactions appear to have fizzled out 12 months after, in the face of current market realities.

The R16.5 billion deal, regarded as the largest merger and acquisition transaction in Africa, showed that Massmart operating profit for 26 weeks up to December 2012, declined by 17.7 per cent, while headline earnings also fell by 21.2 per cent, creating anxiety in the Nigeria Capital Market.

Capital Market Analyst, Joshua Omokeinde confirmed the anxiety in the Nigerian investment community when he said “a huge array of investors in Nigeria, mesmerised by the Wal-Mart brand, were angling to have a stake in the world renowned retail outlet directly, or through Massmart and or its Nigerian affiliate, Game”.

It was a dream come true therefore, when Wal-Mart took the bold initiative to venture into Africa through the merger deal with Massmart Omokeinde emphasised.

According to Massmart, Africa’s third largest retailer, while briefing its shareholders on the lackluster performance, the company said that for the first 14 weeks of year 2013, total sales were up by just 10.3 per cent and comparable sales increased by 10.3 per cent, indicating a slower sales trend in South Africa.

The disappointing performance impacted negatively on the share price of Massmart which suffered a decline by 3.3 per cent, regarded as its biggest one day loss since June 2011.

Market analysts have attributed the poor performance to the disconnect between Wal-Mart’s promises and what it has delivered.

Wal-Mart, the Arkansas-based retailer on its entry into the South African market had promised to introduce low prices as some kind of relief for squeezed consumers. However, faced by grim market reality, the world renowned retailer was quoted as saying that “if current sales trends continue”, it would be difficult to meet the objectives of growing trading profit.

South Africa based First Avenue Asset Management portfolio manager, Mathew Warren, gave a hint that some background changes were being made, which are yet to translate to improved sales.

According to Warren, Massmart’s supply chain has been overhauled with new distribution centers with investment in information technology to back up the physical operations. These, he said are some of the innovations brought in by Wal-Mart in the merger and acquisition deal.

Warren envisaged a ‘fierce battle ahead ‘, which would put substantial pressure on the incumbent competitors. This development, he explained would ultimately benefit the consumer.

Absa Investments analyst, Chris Gilmour, one of the deal’s staunch supporters said he was optimistic that the landscape would change in about two years time when he said Wal-Mart would have ‘revolutionised retail’.

Similarly Theresa Heath, an analyst at Stanlib observed that Wal-Mart has not been as price disruptive as generally expected.

Sanlam Investment Management (SIM) Head of Equity research, Roy Chapman, spoke in defence of Wal –Mart business ethics, saying that the renowned retailer has brought ‘retail intellectual property’, to Massmart’s business and that it would translate to a change in culture overtime.

He added that the full effect of these changes designed in Wal – Mart ways would be felt in South Africa and indeed much of Africa when it adopts a more aggressive market presence in the African market.