Tag: Walmart

Walmart in decline

The “Oracle of Omaha”, Warren Buffet, has dropped Walmart from his portfolio like a ton of bricks, pronouncing ominously that a retailer in decline is difficult to turn around.

Buffett’s Berkshire Hathaway investment vehicle sold off $900-million of Walmart stock in the last quarter, or about 90% of what he had left after years of slowly reducing his holding in the biggest big-box of all.

Pundits the globe over are seeing Warren Buffett’s rejection of Walmart as symptomatic of a broader malaise in traditional retail, embattled as it is by rocketing online sales.

“It is a big, big force,” he pronounces in doom-laden tones, “and it has already disrupted plenty of people and it will disrupt more.”

He avers that many businesses have worked out neither how to cash in nor how to counter it, a view which no doubt informed his Walmart decision.

Brick and mortar retailers had better figure out, and fast, how to compete with the online version or the carnage will continue.

Source: www.tradeintelligence.co.za

If you have $3,3 billion lying around, why not buy a start-up? That is exactly what Walmart is doing.

The retail giant is buying two-year-old e-commerce start-up Jet.com in an attempt to invigorate its online sales division. Walmart is dropping a lot of money on this deal, but it hopes to get a lot in return.

What are the deal’s details? Erika Morphy gives us the background:

Walmart is buying Jet.com, an e-commerce site for the tidy sum of $3,3-billion, $3-billion of which will be in cash, to augment its own online sales operations.

Jet.com’s customer base does not align with Walmart’s customers, which could be a point in the deal’s favour only a fifth of Jet.com buyers have purchased from Walmart.com in the most recent six-month period.

Millions of people have bought items from Jet.com, but it may not be a household name for everyone. So what do we know about the e-commerce site? Jason Del Rey fills in the blanks:

Jet sells more than 12-million products A little less than a third of its sales volume comes from items that Jet stores in its warehouses and sells directly to customers.

Jet has a discounting model, dubbed the Smart Cart, that rewards customers with greater discounts as they add more items to their order.

It also gives customers additional discounts if they forfeit the right to return an item, or [if they] pay with a debit card. Four million people have made a purchase on Jet since it launched.
But what is Walmart’s impetus for buying Jet? Turns out, this is part of a larger trend.

Nandita Bose has some insight into Walmart’s purchase:

The deal follows a five-year e-commerce acquisition spree in which Walmart has already bought 15 start-ups, seeking the talent and technology to make it a dominant player online and narrow the massive gap with market leader Amazon.

Walmart’s online division has underperformed against Amazon, posting its slowest growth in a year as it struggled to gain traction with consumers, especially millennials.

So if the Jet purchase helps Walmart catch up with Amazon, this deal could turn out well for both companies. But they aren’t the only ones happy with this deal. It promises to pay out nicely for at least one Pennsylvania family. Anita Balakrishnan has the details:

Walmart’s acquisition of Jet.com was potentially a flush exit for early employees and its familiar big-name investors but it was also a probably huge windfall for 10 people who – like Pennsylvania’s Eric Martin – won significant equity in the company.

Martin won 100 000 shares in Jet.com as part of a contest aimed to get users to refer the most family and friends to the site.

That means he’ll likely get some slice of Jet’s $3,3-billion price tag, along with a handful of other contest winners, who each got 10 000 shares.

By Rebecca Link for www.computerworld.com

As speculation gains traction that Walmart is selling off its anchor shareholding in its African partner Massmart, industry pundits are concerned that finding an investor with enough funds to take over may prove difficult.

At Walmart’s AGM in Fayetteville, Arkansas, this week, shareholders in the world’s largest retailer may stew over the health of the US economy, the technology threats posed by online giants such as Amazon, and its African investment. – which, after five years, is struggling to maintain momentum.

When Walmart bought a majority shareholding in Massmart, the owner of Makro and Game was trading at R148, costing the US retailer $2.5-billion.

Now the stock is trading about 23% lower since the deal was approved by anti-trust authorities in March 2012.

In January this year, the share was trading as low as R83.20 – a 48% decline in value since the takeover.

The group had to scale back on its growth strategy having opened 11 new stores in Africa from the 27 they had in 2012.

Earlier this year, Barclays plc announced it will sell off its stake in its African business, showing the waning investment sentiment for the continent.

Meanwhile, Walmart’s share price has increased more than 17% despite lukewarm growth in its home market.

Massmart’s performance in Africa has been further dampened by the struggling South African economy.

Sébastien Delsemme, a consultant analyst for Kantar Retail, says: “We have heard from various sources Walmart have identified Africa as part of the divestment in their current portfolio – among others.
“The problem [will be] finding an investor with enough funds to take over.”

Delsemme described the sell-off speculation as “just rumours”. However, the speculation has foundation in precedent.

In 1999, Walmart bought into South Korea, to exit seven years later. Similarly, it pulled out of Germany after eight years.

Poonam Goyal, senior retail analyst at Bloomberg Intelligence, says Walmart had also been struggling in the UK because “they don’t have the price perception of being low-priced – some of the other retailers have taken that perception away from them”.

She adds: “It’s not certain that Walmart will even chase the demand because it’s an unprofitable way to chase it.
“So while they like to be lower-priced, they don’t like to be giving up their margin entirely, which is what some of the grocers are doing in the UK.”

Walmart’s overriding strategy is “to not just be a competitor, but to own the market. They want to be the main player.”

But in the local retail space, Walmart and its partner Massmart have not been able to steal market share from competitors such as Shoprite and Spar.

Although Massmart may not meet Walmart’s expectation in terms of returns, “Walmart does tend to be long-term oriented with its retail investments”, says Chuck Cerankosky, MD of Ohio-based Northcoast R esearch.

“It spent a lot of time repositioning Asda years ago and it might be going through a bit of that again in the UK. So maybe there is work to be done at Massmart and they just haven’t made it a top priority because there obviously has been a lot of effort made to improve the performance here in the US.”

According to Walmart’s 2016 annual report, the company has 6 299 stores operating outside the US, including 346 in Japan. It has 408 stores in 13 African countries.

However, Joseph Feldman, a senior MD at Telsey Advisory Group in New York, says that although he hadn’t heard anything specific from Walmart about a possible sell-off, “Walmart is more of a harvest story as opposed to a growth story”.
He adds: “It’s not a growth story the way a 10-store retailer has potential to go to 500 stores. Obviously Walmart is a mature business that has been able to generate positive traffic.
“Walmart wants to stay the course and emerging markets makes sense given the nature of what they sell and how they sell it. They are trying to help people live better and save money with people living better.”
But entering a market through a partnership “almost makes it easier to exit”, Goyal points out.

“It’s really about the return – whether they can get the returns on investment that they expected from that market, and whether the partnership is working well for them and there’s room for them to at some point move up the chain and become number one.”

Walmart was not available for comment at the time of publication.

By Palesa Vuyolwethu Tshandu
This article was first published in Sunday Times: Business on 05/06/2016

Walmart may sell stake in Massmart

Massmart may have escaped a sell-off this year by a whisker, but pressure is mounting and Walmart may in future alter its view that the South African retailer is a strategic asset worth holding onto.

A top analyst has warned that US retail giant Walmart could lose its patience and sell its 51% controlling stake in Africa’s second largest retailer, Massmart, if the Johannesburg-based general merchandiser fails to turn around its lukewarm performance by 2018.

Shamil Ismail, an analyst at Primaresearch, has suggested that Walmart, which paid $2.5 billion to acquire Massmart in 2011, has a history of pulling the plug on its offshore investments that misfire and that Massmart was in danger of being dumped by the US retailer if it does not turn the corner in the next two years.

Ismail’s ominous prediction is not baseless. In January this year Walmart announced the closure of 269 stores, of which 115 were in Latin America.

This massive scale-back sent shockwaves through the markets and triggered speculation that Africa could be the next target of Walmart’s pull-back – not an unlikely scenario in light of the recent announcement by British lender Barclays Plc that it was intending to sell down its stake in its African business significantly.

“The closure of these stores follows a review that took into account a number of factors, including financial performance and strategic alignment with long-term plans,” wrote Ismail in a research note.

Ismail believes Massmart, which currently operates 38 stores in 13 countries outside South Africa, would not have passed the financial performance muster as the retailer’s earnings have largely been flat over the past nine years.

“We have noted Walmart has failed in and exited two countries – South Korea (1999-2006) and Germany (1998-2006) – and the tenure of these holdings was seven to eight years. With the 2011 entry into South Africa, applying the same time frame would suggest that Massmart may have until probably 2018 to turn around its performance, in our view,” he wrote.

Walmart failed to crack the Russian market after spending eight years trying to find a suitable local acquisition target. It also has not managed to get into the Indian market. In Japan, it is scaling back by closing 30 of its 373 outlets in that country.

“We have noted Walmart has failed in and exited two countries – South Korea (1999-2006) and Germany (1998-2006) – and the tenure of these holdings was seven to eight years. With the 2011 entry into South Africa, applying the same time frame would suggest that Massmart may have until probably 2018 to turn around its performance, in our view”
Massmart may have escaped a sell-off this year by a whisker, but pressure is mounting and Walmart may in future alter its view that the South African retailer is a strategic asset worth holding onto for a very long time.

“In light of recent developments, with the substantial weakening of the rand and the announcement that Barclays Plc will sell off its stake in its African business, we believe there is a heightened risk that Massmart’s anchor shareholder Walmart may consider a similar move,” notes Ismail.

A fall in Massmart’s share price and a sharp depreciation in the value of the rand against the US dollar have conspired to eat a big chunk of the value of Walmart’s stake in Massmart. The US retailer acquired the 51% stake in Massmart in October 2011 at a share price of R148 and at an exchange rate of R6.76 to the US dollar, costing the US company $2.5 billion to consummate the transaction.

According to Ismail, Walmart’s investment in Massmart has faltered. On January 21 this year Walmart’s stake in Massmart hits its lowest value (peak diminution) in US dollar terms when it was reduced to $545 million, a whopping 78.2% reduction from the original price it paid to buy into the South African retailer. This means the “peak diminution” or the stake’s rock-bottom value was reached at a share price of R83.20 and rand/dollar exchange rate of R16.55.

Since January 21 both Massmart’s share price and the rand have recovered, helping to boost the value of Walmart’s shareholding in Massmart.

At the time of going to press, Massmart’s share was trading at R124.50 while the rand was quoted at R14.42 against the US dollar, implying the two key ingredients that drive its valuation had lifted the stake’s value to $964 million. Still, the value of the stake is 60% lower than Walmart’s initial investment of $2.5 billion.

As Walmart was concluding its acquisition of Massmart in 2011, established South African retailers were lying in wait to give the foreign invader of their home turf a proper baptism of fire.

From the word go, the likes of Shoprite and Pick n Pay – both powerful merchants of fresh meat, fruit and vegetables – played rough with Walmart after the American giant signalled its intention to get into fresh food retailing through Massmart-owned Game stores, a specialist general merchandiser known for selling household goods ranging from soap to electronics.

“In South Africa Massmart is known to achieve the highest retail trading densities (sales per square metre), indicating we generate higher sales out of fewer stores. For example, the ratio of Game stores to specialist grocery competitors is about one to 33, which is consistent with the ratio of stores outside of SA”
They have prevented Game from adding fresh food in shopping malls, where they have a presence, citing clauses in leases they signed with mall owners that give them exclusive rights to sell food.

Pick n Pay and Shoprite have used the courts to have the exclusivity leases enforced.

Massmart has sought the help of competition authorities to ban the “anti-competitive” exclusivity leases. Walmart never saw this counter punch coming. Game is selling fresh produce in about half of its 110 stores.

The feud over food, plus slow growth in the South African economy, has pegged back Massmart’s performance. The retailer’s first-half earnings to December 2015 dropped by 26% to R364 million while main rival Shoprite lifted its half-year earnings 12% to R2.2 billion.

Brian Leroni, Massmart corporate affairs executive, said the general merchandiser is planning to open five stores outside South Africa, where Massmart stores are known to generate three times the turnover of a South African store.

“In South Africa Massmart is known to achieve the highest retail trading densities (sales per square metre), indicating we generate higher sales out of fewer stores. For example, the ratio of Game stores to specialist grocery competitors is about one to 33, which is consistent with the ratio of stores outside of SA,” said Leroni.

Shoprite wants to increase the number of its supermarkets in oil-rich countries like Angola and Nigeria, where it has noted the sharp drop in oil prices has not led to a slump in consumer spending. Shoprite plans to open 168 stores between now and June 2017, of which 58 will be outside South Africa.

By Andile Ntingi for www.getbiz.co.za

Makro aims for sustainability

Since the Walmart deal, Massmart has struggled a bit, as Africa, with currencies shaky and commodities down, has failed to deliver immediately on the promise, and as ill economic winds buffet the local consumer.

Their 2015 results were not all that. But they’ve stuck to their guns in key areas, and this should make for steady improvement in the medium to long term.

One of these areas is sustainability, as embodied by the new Makro, the first to make use of renewable energy, in Carnival Mall, Jozi, where solar panels will produce 1-million kWhs of electricity every year, only a little of which will be consumed by the LED bulbs which make up 100% of the store floor lighting.

Daylight will be harvested, and refrigeration will be provided by high-performance CO2 plants.

How the BTS season is shaping up

Other than the winter holiday season, back-to-school (BTS) and back-to-college (BTC) are, together, the largest retail event of the year. In 2015, the National Retail Federation (NRF) anticipates that combined BTS and BTC spending in the US will reach $68-billion, of which BTS accounts for approximately $25-billion, says Ruth Hamer, director of Digital Marketing at Marketyze.

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