Why Walmart wants to buy out and delist Massmart

RYK VAN NIEKERK: The American retail giant Walmart plans to buy out the minority shareholders of Massmart in a deal valued at R6.4 billion, and then to delist the company.

The group announced today it plans to offer shareholders R62/share, which represents a premium of 53% [on] Friday’s share price. Walmart bought its original 51% stake in Massmart back in 2011 for R16.5 billion. Massmart is of course one of the largest retailers in the country, and owns several well-known brands, such as Makro, Builders, Game and Jumbo.

The group also announced a leadership change with Jonathan Molapo taking over from the current CEO, Mitchell Slape. Walmart deployed him back in 2019 to fix Massmart.

Mitchell Slape is on the line.

Mitch, thank you so much for joining me. Where are you going?

MITCHELL SLAPE: I’m not going to go anywhere immediately. I’m going to be here through the end of the year and serve out until December 31 as chief executive officer. Jonathan Molapo, as you mentioned, is going to be taking over on January 1. My intention is to take just a little bit of a breather and maybe do a little bit of travelling here around South Africa with my wife. We haven’t [had] as much of a chance to do that over the last couple of years as we would’ve liked. What we’ll do is take a little bit of R&R and then we’ll chart our next moves from there.

RYK VAN NIEKERK: Are you based on Joburg?

MITCHELL SLAPE: Yes, I am right now.

RYK VAN NIEKERK: Let’s talk about this Walmart announcement or this Walmart offer. It’s a significant one. What is the reasoning behind it?

MITCHELL SLAPE: If you look at the trajectory of Massmart and the turnaround plan that we’ve been on, trying to turn around the business in a very challenging environment, we’ve been impacted by Covid, impacted by the civil unrest, the floods more recently, some of the challenging economic environment, [and] the inflation that we’ve been dealing with, Walmart has been every step along the way helping Massmart through the turnaround plan in the midst of these very challenging times.

We’ve reached a point where we have completed most of the turnaround in terms of the structural changes that we wanted to make, and we are now pivoting toward investment in the future.

A big part of that is in things like e-commerce, new stores, etc – and having a very financially strong and operationally strong shareholder like Walmart that can step in and back us and take the company private is an important step to achieve our growth ambitions and things like that.

RYK VAN NIEKERK: You also announced results today for the six months to the end of June. Sales flat at around R38 billion. But the headline loss increased by nearly 50% to R940 million. If you look at the other retailers in South Africa, they are performing really well. What do you think are the biggest challenges facing Massmart at the moment, and why can’t you seem to solve [them]?

MITCHELL SLAPE: Our biggest challenge in particular is we were probably the retailer most challenged in the civil unrest last year. As you’ll recall, we lost two distribution centres, including our primary import distribution centre, and that resulted in some real supply-chain issues toward the end of last year and even coming into the beginning of this year. In fact, a good amount of our merchandise that was designated for the fourth quarter last year didn’t arrive until the first quarter.

So we’ve been in the process of attempting to liquidate that merchandise and bring our inventories back into line.

But we’ve also been confronted by an environment where [there is] much higher inflation.

Customers are beginning to gravitate more towards essential food items and basic necessities and, to some extent, move away from general merchandise. That is the core of our business. We are largely a general merchandise retailer, and it’s created a little bit of a squeeze on our margins and things like that.

We’re working through it. We’ve got our inventories, I think, under control. And we’re beginning, as we move into the second half, to see some better growth. But it’s been challenging for that reason, Ryk.

RYK VAN NIEKERK: The problem child in the portfolio has always been Game. And it also saw its trading loss pretty much flat compared to the previous period.

Read: Massmart doubles down on everything but horror-show Game

What is the play there?

Why don’t you just close it?

MITCHELL SLAPE: We’re at a point now with Game where we have remodelled and relayed every Game store in South Africa. In fact, we finished that process in June this year and we relaunched the Game brand, the Game business, on July 1.

So we’ve been busy trying to get Game set for the future.

In fact, if you look at the core of the Game business, and that’s the business that excludes what it is that we’re divesting – so East and West Africa, as well as a handful of Game stores here in South Africa that are underperforming – the core of the portfolio is positive in its performance, and we’re seeing an improved performance trajectory.

So in my opinion, I think that persevering with Game, getting a clear run of trading, is going to prove over the long term to be the right decision.

And I think one of the important things to consider about that is that Game is still a very strong general merchandise retailer, and it’s going to be a strong part of our e-commerce future as a business as well. So we’ve done a lot of work, we need to see it produce. We’ve made some performance progress, but we’re not quite where we want to be yet.

RYK VAN NIEKERK: E-commerce of course is a big challenge and opportunity for all retailers. Where do you stand now with e-commerce sales, as opposed to physical sales, and what is the plan? Where do you want to be in a few years’ time?

MITCHELL SLAPE: E-commerce in this first half is running just about 3% of our total sales as a business. We believe if you look out over the next 10 years or so, we’re going to move north of 10% or better of our total sales being e-commerce sales.

Our e-commerce business is growing really rapidly. In the first half gross merchandise value was about 108% up over the prior year, so it’s an area where we’re investing a lot of money. We’re trying to grow the business, serve customers better, and it’s going to be a big part of our future.

Now, that being said, it takes a lot of investment in order to grow that e-commerce business, and that’s another reason why I think the Walmart potential acquisition of the rest of the business is an important opportunity for us to unlock that.

RYK VAN NIEKERK: What is the e-commerce sales component for Walmart? Is that a benchmark for you?

MITCHELL SLAPE: Well, obviously the e-commerce business for Walmart overall is the multi-billion, US billion, dollar business.

We are carefully benchmarking what they do and how they do it, whether it’s developing the pickup opportunities in stores, how we operationally build out and manage e-commerce, how we develop our websites and our apps – that type of thing.

But they’re a fantastic benchmark for us and I think they give us a potential leg up in the future as we continue to grow that business.

RYK VAN NIEKERK: We’ll have to leave it there. Mitch, thank you so much for your time tonight. That was Mitchell Slape, the CEO of Massmart.