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The new boss of Makro and Game reports for duty. This should be his to-do list

Sep 02 2019 07:31
Helena Wasserman

The 52-year old American Mitch Slape starts his new job as CEO at Massmart’s head office in Sandton on Monday.

Described as a “Walmart old hand”, he has worked for the US giant across the world, including in Mexico, India and Japan, and also previously headed the group’s international business development.

Walmart bought control of Massmart [JSE: MSM] - which owns Makro, Game, Builders Warehouse, Dion Wired and Jumbo Cash & Carry - a decade ago. Walmart bought a 51% stake in Massmart for more than $2 billion. At current market values, that stake is worth less than a quarter of that now. 

While Massmart owns some of the strongest retail brands in the country and continues to sell 40% of all large household appliances in South Africa, the acquisition is a massive disappointment. 

Its latest results show a headline loss of half a billion rand in the past six months. The weak local economy and depressed consumer spending are biting, along with higher costs due to load-shedding and the introduction of the minimum wage. Still, some wounds were self-inflicted, including problems with implementing SAP systems and its huge failure to keep up with online retailer Takealot, which continues to eat its lunch.

Enter Slape, who clearly has his work cut out for him.

Fin24 spoke to analysts, who believe these challenges should be at the top of his to-do list:

Sort out Game

Together with DionWired, Game suffered a trading loss of almost R400 million over the past six months. By comparison, Makro made a trading profit (R336 million), as did Builders Warehouse (R250 million).

Massmart itself has blamed “weak margin management” at Game, which is increasingly relying on cut-price sales to move goods, as well as on food, which has thin profit margins. Also, Game has to pay high rentals for its store space in malls - unlike Makro and Builders, who are located in cheaper areas.

The Game stores themselves are not appealing to shoppers anymore. “The stores look dated and almost have a cheap element to it,” says Cassie Treurnicht, a portfolio manager with Gryphon Asset Management.

In addition, Game has also been hit particularly hard by the migration of its wealthier clients to online shopping, particularly at Takealot.

The Game model should be reconsidered, says Stephán Engelbrecht, a fund manager at Anchor Capital.

“What worked in the good old days of the 2000s is not cutting it any more, and Slape will have to ask uncomfortable questions about what stores remain viable, and where floor space will have to be cut.”

Game’s relatively new focus on food should also be reconsidered, Treurnicht thinks. Selling food brings logistical complexities, and increased expenses.

“We are sceptical whether the introduction of food has contributed positively to the business. One must keep in mind that food is very low margin and with sales not truly being reflected in the numbers our suspicion is that this has been a failure.”

Cut costs

This is Slape’s most important challenge, says Petri Redelinghuys, founder of Herenya Capital Advisors

Across the group, expenses were up R900 million over the past six months, in part due to diesel for generators during load shedding but also because of higher municipal rates, bad debts, employment and IT costs. This has contributed to the large R7 billion debt that the company is struggling with. 

Massmart is already working to consolidate distribution centre services across the group, and Slape brings experience in how the retailer can leverage off Walmart’s global supply chain.

"We learned very early in the process that you simply can't take a superstore in the US, pull it out of the ground and plant it in another country and expect that to be a successful strategy," Slape previously told The Guardian. While the “back end” of Walmart’s stores across the world increasingly look alike in terms of systems and logistics, the "front end" remains local. "From the customer point of view, it might appear to be a certain brand," says Slape. "But everything that is 'back of house' – systems, processes, buying – we can leverage a lot of that globally."

Build a proper online retailer

Massmart has been slow to catch the digital retail wave, in fact, over the past six months, Massmart has seen its online sales fall 14%, and it now only represents 0.8% of its total sales.

Takealot is now far ahead in the game, especially when it comes to delivering products within a day or two, says Schalk Louw, portfolio manager at PSG Old Oak.

By comparison Makro and Game have much longer turnaround times, and their sites are not as user-friendly.

“The hard truth is that Massmart’s model is dead. Fewer people now go to massive warehouse-type stores with large trolleys to load products. Shoppers now want to click and get their products delivered quickly. Massmart’s massive warehouse-style stores are clumsy dinosaurs,” says Louw.

But Massmart is a good position can take on Takealot, given that it has massive warehouses and stock that can be delivered immediately.

Slape should consider acquiring a delivery company in South Africa, to help boost its turnaround time for online shoppers, says Louw.

He should also consider repurposing some of its large stores as warehouses to support its digital business.

Rethink its approach in the lower-income market

While building a proper online business is important to capture the upper end of the market, the truth is that in South Africa the vast majority of people are not online shoppers and can’t afford high-end products, says Redelinghuys. Massmart needs to up its offering to the lower end of the market, and refocus Jumbo Cash & Carry, which has been losing money and market share.

* Takealot.com is part of Naspers. Fin24 is a subsidiary of Media24, which is part of Naspers. 

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