April 16 (Bloomberg) -- As Wal-Mart Stores Inc. plotted an Africa strategy, buying Massmart Holdings Ltd. two years ago was just the right vehicle. With 377 stores across the continent and a strong position in South Africa, Massmart offered the Americans a firm foothold in a fast-growing region.
Today, Wal-Mart is reconsidering the strength of Massmart’s biggest store brand -- Game -- if not the wisdom of spending $1.8 billion for 51 percent of the company in 2011. As the world’s largest retailer expands in Africa, Massmart may drop the Game brand in favor of Wal-Mart for stores outside of South Africa. That’s because many Africans are put off by what they perceive as South Africa’s swagger.
“In Nigeria, people want to believe they are the gateway to Africa, in Kenya they want to believe they are the gateway, so an American brand is often more welcomed than a South African one,” Chief Executive Officer Grant Pattison said over coffee in Massmart’s Johannesburg headquarters. “You can put it down to regional competition, but we will look at using the Wal-Mart name, or a name local to that country.”
Massmart, with stores in 12 countries, first moved outside its home market in 1993 when it opened a big-box store under the Game brand in Botswana. The company now operates 14 Games, 13 CBW stores selling food, liquor and cosmetics wholesale, and one outlet of its Builders Warehouse construction goods brand on the continent outside of South Africa.
The economy of sub-Saharan Africa will expand 5.3 percent this year, higher than the 3.6 percent expected worldwide, the International Monetary Fund estimates. Nigeria, Africa’s most populous country, is forecast to grow 6.8 percent this year, according to its National Bureau of Statistics. By 2030, Africa’s 18 biggest cities will have combined spending power of $1.3 trillion, consultant McKinsey estimates.
“Africa doesn’t want to feel like it’s being colonized by South Africa,” said Wayne McCurrie, a portfolio manager at Momentum Asset Management in Johannesburg. “There is definitely an allure in developing markets for American brands.”
Some analysts question the wisdom of abandoning the Game brand, which is known outside of South Africa for offering a wide range of goods in a region where consumers often schlep from store to store for their daily shopping. Other South African companies such as supermarket chain Shoprite and mobile phone provider MTN have successfully expanded northward, said David Shapiro, a director at Sasfin Securities in Johannesburg.
“Choosing the Wal-Mart name over its own Massmart brands may be risky,” Shapiro said by phone.
Wal-Mart hasn’t had a smooth ride as it has grown abroad. The company last year began investigating allegations that executives in Mexico paid more than $24 million in bribes to speed expansion there, and it’s also probing operations in Brazil, India and China. Wal-Mart last month said it expects to continue incurring costs related to its investigations of possible bribery in its international operations.
In the U.S., customers and store workers say the company is struggling to keep shelves full. That has coincided with a decline in the retailer’s U.S. workforce even as Wal-Mart has added hundreds of new stores.
Pattison says Wal-Mart offers Massmart advantages that extend far beyond its name. In Africa, where Massmart’s biggest selling items include maize meal, oil and flour, the South African company is looking to Wal-Mart’s U.K. supermarket chain, Asda, as it seeks to increase its produce offerings.
With little experience in produce, Massmart has tapped Asda’s know-how in ensuring a steady supply of fruits and vegetables and keeping them from spoiling before consumers can buy them. “As we expand our fresh line, we are learning from Asda,” said Pattison, 42.
Massmart’s sales in the fiscal year through June 25, 2012, rose 15.6 percent to 61.2 billion rand ($6.7 billion), versus 12 percent growth in the year through June 2011. Net income jumped 40 percent from a year earlier to 1.17 billion rand in the 2012 year. Sales in South Africa make up 92 percent of revenue.
Since Sept. 23, 2010, the last trading day before the Wal-Mart deal was made public, Massmart’s shares have advanced 47 percent versus gains of 80 percent for Shoprite Holding Ltd. and 69 percent for the FTSE/JSE Africa General Retail Index. Pick n Pay Stores Ltd. has declined 5 percent in the period. Massmart traded at 197 rand as of 3:24 p.m. in Johannesburg.
Massmart says it’s planning several new stores in countries where it’s already present. And it is setting up Game outlets in Angola and Kenya, new markets for Massmart. Profit at Game stores outside South Africa is growing faster than sales, Pattison said, without offering further detail. Wal-Mart declined to comment beyond Pattison’s remarks.
Massmart’s drive north comes as retail sales in its home market are sluggish. The slowdown in consumer spending in South Africa -- which in the final quarter last year contracted for the first time since 2009 -- will crimp profits for storeowners.
Expansion in Africa can be slowed by a lack of infrastructure and difficulties in securing property, Pattison said. Those hurdles, as well as problems with corruption, a reliable legal system, and currency stability in some countries have to be assessed when planning stores, he said.
In places where “you can sign a lease, you can be profitable and competitive without taking a bribe, and the country has a relatively stable currency,” Pattison said, “modern retail can be successful.”
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