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Johannesburg - Credit ratings agency Fitch said on Thursday that the landscape of the South African retail market is likely to change significantly with the foray of Walmart Stores into the local market.
"This is expected to lead to increased competition and margin pressure driving greater efficiencies and price benefits to consumers through increased value and choice," Fitch said.
The recent announcement by the world's largest retailer Walmart of its non-binding expression of interest to acquire 100% of the South Africa-based retailer, Massmart Holdings [JSE:MSM], could lead to a deal worth approximately R30bn.
Massmart is the leading general merchandise retailer in Africa, with 290 stores in 13 countries and is mainly involved in the wholesaling of basic food stuffs, home improvement equipment and supplies, retailer of general merchandise as well as liquor supplies.
According to Fitch, the entry of large multinational players into South Africa is likely to lead to stronger price competition, with the likes of Walmart having significant advantages in terms of buying power and economies of scale.
"Fitch expects that this will lead to some margin pressure among South Africa's large supermarket chains, which include Pick n Pay Stores, Shoprite Holdings, Spar Group and Woolworths Holdings and would also over time present a major strategic threat to smaller retailers," it said.
The ratings agency added that while Massmart was not currently considered as a direct competitor in the convenience food supermarket sector, it believes that over the medium term Walmart would place an increased focus on growing the business in the retail food segment as well as remain a key player in the bulk food market.
"Given Massmart's current footprint and product range, it is expected that the proposed Wal-Mart transaction would most significantly impact the local diversified and general retail sector over the short term. Fitch believes that due to Massmart's current limited exposure to the food retail market, it would not receive a significant advantage over other domestic food retailers in sourcing locally manufactured food items, as all of the players would tap into the same supply chain," Fitch said.
However, it added that this position was largely dependent on Walmart's intent and ability to further grow its presence in the food retail sector.
While the large supermarket chains in South Africa are largely focused on food retail, Fitch said it believes that Walmart has targeted Massmart as its operation and product range are most closely aligned, with a strong store footprint in southern Africa.
Fitch said that over time, Walmart would need to place an increased focus on rebuilding Massmart's operating margins which is substantially below the Walmart group's results and Walmart's less profitable existing international business.
"Fitch believes that should the Walmart/Massmart acquisition take place, it could trigger further foreign interest in the continent and specifically the South African retail sector as a platform for further expansion into sub-Saharan Africa," it said.
"However, in the short-term, Fitch does not anticipate much interest from the large European retailers such as Carrefour SA, Casino Guichard-Perrachon SA and Tesco," it added.
Fitch also noted that South Africa's rigid labour laws as well as strong opposition from local labour unions could prove to be a constraint on the Massmart/Walmart transaction and any other future multinational activity in South Africa.
"This is expected to lead to increased competition and margin pressure driving greater efficiencies and price benefits to consumers through increased value and choice," Fitch said.
The recent announcement by the world's largest retailer Walmart of its non-binding expression of interest to acquire 100% of the South Africa-based retailer, Massmart Holdings [JSE:MSM], could lead to a deal worth approximately R30bn.
Massmart is the leading general merchandise retailer in Africa, with 290 stores in 13 countries and is mainly involved in the wholesaling of basic food stuffs, home improvement equipment and supplies, retailer of general merchandise as well as liquor supplies.
According to Fitch, the entry of large multinational players into South Africa is likely to lead to stronger price competition, with the likes of Walmart having significant advantages in terms of buying power and economies of scale.
"Fitch expects that this will lead to some margin pressure among South Africa's large supermarket chains, which include Pick n Pay Stores, Shoprite Holdings, Spar Group and Woolworths Holdings and would also over time present a major strategic threat to smaller retailers," it said.
The ratings agency added that while Massmart was not currently considered as a direct competitor in the convenience food supermarket sector, it believes that over the medium term Walmart would place an increased focus on growing the business in the retail food segment as well as remain a key player in the bulk food market.
"Given Massmart's current footprint and product range, it is expected that the proposed Wal-Mart transaction would most significantly impact the local diversified and general retail sector over the short term. Fitch believes that due to Massmart's current limited exposure to the food retail market, it would not receive a significant advantage over other domestic food retailers in sourcing locally manufactured food items, as all of the players would tap into the same supply chain," Fitch said.
However, it added that this position was largely dependent on Walmart's intent and ability to further grow its presence in the food retail sector.
While the large supermarket chains in South Africa are largely focused on food retail, Fitch said it believes that Walmart has targeted Massmart as its operation and product range are most closely aligned, with a strong store footprint in southern Africa.
Fitch said that over time, Walmart would need to place an increased focus on rebuilding Massmart's operating margins which is substantially below the Walmart group's results and Walmart's less profitable existing international business.
"Fitch believes that should the Walmart/Massmart acquisition take place, it could trigger further foreign interest in the continent and specifically the South African retail sector as a platform for further expansion into sub-Saharan Africa," it said.
"However, in the short-term, Fitch does not anticipate much interest from the large European retailers such as Carrefour SA, Casino Guichard-Perrachon SA and Tesco," it added.
Fitch also noted that South Africa's rigid labour laws as well as strong opposition from local labour unions could prove to be a constraint on the Massmart/Walmart transaction and any other future multinational activity in South Africa.
