The Walmart - Massmart merger has raised a number of concerns, but it should go a long way towards portraying South Africa as an investment friendly country
Officially, it’s called a merger. South African trade unions call it a take over.
By whatever name, the biggest South African business deal of the year got the official stamp of approval in June 2011, after eight months of deliberations. The Competition Tribunal did set some conditions, but these are deemed reasonable and should not present a stumbling block for the parties in question.
The deal is worth an estimated R16.5 billion. This amount gives Walmart a controlling stake of 51 percent in the South African entity, at R148 a share.
The American retail giant Walmart has more than 8613 retail units under 55 different banners in 15 countries. Its annual turnover is over $400 million, which is considerably more than the entire South Africa’s gross domestic product (estimated at $338.7 in 2010, according to Wolfram Alpha knowledge engine). Walmart employs 2.1 million people globally, about 40 percent more than it did six years ago.
Massmart, which was founded in 1990, owns several chains: Game for general merchandise, Builders Warehouse for construction and home improvement, Makro warehouse stores, and others. Massmart reported a total sales increase of 10% to 47.45 billion rand in the year that ended in June.
Massmart's divisions are focused on the high-volume, low-margin, and low-cost goods, from liqueur to TV sets. Their general merchandise offerings are very similar to what Walmart offers in the US and around the world. One priority will be to offer more food produce, a category not well represented among Massmart stores. On its side, Massmart will put Walmart in the building supply business, and the latter will probably look to apply this line of merchandise to other markets.
The bulk of Massmart’s 288 stores are in South Africa, although it also operates in 13 other sub-Saharan countries, including Botswana, Ghana, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Tanzania and Uganda. For Walmart, the deal is not only about gaining a foothold in South Africa, the continent’s biggest economy, but also a channel of expansion into Africa.
Currently Massmart sources about 60 percent of its products from South African manufacturers. Although Walmart has said the company would continue to use local suppliers, trade tread unions and the government are worried that the merger could lead to more imports, undermine local suppliers and – directly or indirectly – lead to job losses.
That is why some conditions were formulated for the merger. Walmart and Massmart need to set up a R100 million fund to help small suppliers meet their procurement needs; to promise not to have any merger-related retrenchments for two years; and to continue to recognise the main staff union (the SA Commercial Catering and Allied Workers Union, SACCAWU) for three years after the merger.
These conditions are essentially what Massmart and Walmart proposed at an earlier hearing, so they should have no problems meeting them.
Trade unions deem the conditions too lenient. They described the 100-million deal as a “cheap bribe, a joke and an attempt to pull the wool over our eyes”. The SACCAWU representatives think that the deal is a purely public relations exercise to divert attention from Walmart’s track record of procuring goods from whoever is in the world is the cheapest, regardless of the conditions of the workers producing those goods. Nor are the trade unions convinced that the merger will lead, as promised, to increased job opportunities either. Massmart said that the new merged entity should create 2000 to 3000 jobs in the next few years.
The trade unions are also unhappy because they did not get a firm commitment about the re-employment of 503 Massmart workers retrenched in what they say was the part of Massmart’s operation to make itself more appealing to Walmart.
However, there is no doubt that South African consumers stand to benefit from the merger. Walmart has used its bulk buying power to cut prices in the US and other countries. Local competitors like Pick ‘n Pay and Shoprite are closely watching the next move of the new big player in their arena, and will probably have to respond with price cuts when forced to do so. And since the new Walmart-Massmart entity plans to improve its online offer, the budding South African ecommerce industry will probably be affected too.
It is also certain that the approval of the merger has sent positive message to investors. South Africa does have a reputation of throwing red tape into the wheels of foreign business (as do many other countries the world over). However, since local population saves very little, the country needs foreign investment to finance its economic growth. The Walmart-Massmart merger should go a long way towards portraying South Africa as an investment friendly country.
South Africa stands to benefit additionally from Walmart’s African expansion appetites. And the increased competition may not be an altogether bad thing. It is to be hoped that bigger exposure to international suppliers will make the local producers more competitive, both locally and internationally.