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Wal-Mart Takes Its Time on Expanding in Africa; Massmart subsidiary builds slowly from base in South Africa, even as continent's consumer class grows Wexler, AlexandraAuthor Information. Wall Street Journal (Online); New York, N.Y. [New York, N.Y] 09 Feb 2017: n/a.

JOHANNESBURG--After some costly stumbles on its march into developing markets, Wal-Mart Stores Inc. has adopted a different strategy for Africa: taking it easy. When the U.S. retail behemoth bought a $2.4 billion majority stake in South African retailer Massmart Holdings Ltd. in 2011, it trumpeted the potential of the continent's burgeoning consumer class. At the time, Massmart had 26 stores outside its home market; in the five years since, it has added only 13 of its signature large destination-type outlets.

In that same span, by contrast, rival Shoprite Holdings Ltd. has opened 182 of its mostly smaller, grocery-centric stores outside South Africa, for a total of 375. Some analysts and investors wonder whether Massmart's slow expansion means Wal-Mart is losing interest in its African venture. But Guy Hayward, who took over as Massmart's chief executive in June 2014, says the modest pace is part of "a very deliberate strategy" and not a sign of weakness.

"If being sort of Steady Eddie is described as a criticism, I'm happy to be criticized," said Mr. Hayward, a South African native who joined Massmart in 2000. In August, Massmart announced plans to open five new stores in Africa beyond its home market through 2017, while Shoprite set out to add 46 stores outside South Africa in the 12 months to June 2017. Mr. Hayward notes that its outlets--most of which bear its Game and Builders Warehouse brands--average about 3.5 times the sales of a typical Shoprite store.

Some retailers who rushed into African markets have paid a steep price. Woolworths Holdings Ltd., an upmarket retailer of groceries and clothing in South Africa, closed its three Nigerian stores in late 2013, citing high rents, a lack of shopping malls and intense bureaucracy. In 2011, Pick n Pay Stores Ltd. entered Mozambique and Mauritius, but exited both markets two years later, citing unprofitability and differences with its respective franchisees.

More broadly, recent sharp fluctuations in African currencies--a result of the commodities crisis--have jolted businesses including retailers, especially because loans in many African countries are dollar-denominated. And inflation, a malady in various economies on the continent, has cut into the buying power of middle-class consumers. Wal-Mart's slow but deliberate approach to Africa diverges from past strategies in developing markets, where aggressive expansions hit hurdles. Last year, Wal-Mart closed 115 outlets in Latin America, leaving its store count in the region at roughly 4,000.

In China, the company has slowed store growth, and in June sold its Yihaodian website for a stake in local online retailer JD.com Inc. A five-year U.S. investigation into possible foreign bribery has dogged Wal-Mart in Mexico; and the probe, which is related to store openings, has also pointed to possible misconduct in Brazil and in India.

Wal-Mart, which didn't respond to requests for comment on its African strategy, has said it is cooperating fully in the various investigations. But the company's efforts to improve compliance have slowed expansion in some markets, according to a former employee familiar with the situation. Massmart's Mr. Hayward concedes that the chain's approach in Africa is partly born of necessity.

Sketchy land registries, sudden changes to local laws and property owners holding out for a bonanza are only a few of the hindrances to doing business. "The rule of thumb is probably about three years from first meeting a developer on a dusty piece of land to opening the stores," the 51-year-old CEO said. "This is their once-in-a-lifetime payday and valuations are crazy." Massmart was burned a few years ago in Zambia when the government overhauled its regulations on debt financing, undercutting plans to open several stores in the country. "All the papers we signed collapsed with that," Mr. Hayward said.

Despite these holdups, the retailer's go-slow strategy for the continent may be bearing fruit. Massmart's overall sales for the six months to June 26 grew 8.7% from a year earlier to 42.3 billion South African rand ($3.14 billion), while sales outside of South Africa jumped 23%, good for nearly a 10th of the total. Still, in a sales update last month, the company reported a continued decline in non-South African sales growth during the year to Dec. 25.

Massmart is scheduled to report its full-year earnings on Feb. 23. The plodding pace of store openings raises questions about Wal-Mart's commitment to its African adventure. Indeed, the last time the company mentioned Massmart in a quarterly earnings call was 2014, when Mr. Hayward's appointment as CEO was noted. "Wal-Mart bought them for their African strategy, [but] the rate of expansion, the rate of growth continues to baffle everyone," said Unathi Loos, an analyst at Investec Asset Management in Cape Town.

"As South African investors, the biggest concern is that one of these days, Wal-Mart will say, 'We're out of here.'" In 2015, Massmart opened a mall-based store under its Game brand in Nairobi, Kenya--the company's most recent foray into a new market. "It's doing OK--the shopping center itself is battling a little bit," Mr. Hayward said of the outlet's first year of operation. Massmart's supply chain and marketing remain largely independent of Wal-Mart.

But Mr. Hayward says Massmart is pursuing initiatives where its parent company can lend expertise, such as online shopping and "click and collect" capabilities in a part of the world where such activity is still uncommon.

"Wal-Mart leaves us alone. They're not over my shoulder, there aren't daily phone calls, there's no pressure to grow for its own sake," Mr. Hayward said. "They view the Massmart-in-Africa story as a decades long story." Sarah Nassauer contributed to this article.

Questions

1-What challenges do retailers in Africa currently face?

2-What are the advantages and disadvantages for Wal-Mart to have expanded in Africa using the slow and steady approach?