Costs headache for Massmart

Source: BusinessLive

Big-box retailer Massmart is in a difficult position: its costs are growing faster than its revenue.

It has made efforts to cut costs, but for a low-margin, high-volume retailer to grow, it needs some economic activity.

The problem for it and the entire retail sector is that over the past year, there has not been much activity to speak of. The Christmas season was one of the most dismal on record. Rival Shoprite noted that parents spent more on school supplies than on toys.

In a sense, Massmart is also a victim of its own success. When times were good, it grew rapidly, but now that it has such a large retail footprint — with the overheads to match — it has to come up with a way to run this infrastructure in a more affordable manner while demand tapers off.

There are no easy answers.

It can only cut costs so far. Rolling out new stores as a way to drive growth is an option, but this has to done carefully, as there is the danger that they will not generate enough revenue to justify the increase in expenses they bring.

The only thing Massmart can do is wait for the economic winds to change in its favour. But the forecast doesn’t look promising. Retailers are looking to some kind of unspecified government action to spark a rise in activity after the May election.

Chances are that whatever the government comes up with, it will not provide the sharp impetus Massmart and the rest of the sector are looking for.

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