Wal-Mart’s Massmart Profit Falls on Weak South Africa Spend

Massmart Holdings Ltd., the South African food and goods wholesaler owned by Wal-Mart Stores Inc., said the country’s retailers may face headwinds into next year as higher interest rates and prices sap consumer confidence.

Earnings excluding one-time items declined 26 percent to 364 million rand ($34.3 million) in the 26 weeks through June 29, the Johannesburg-based company said in a statement today. At constant exchange rates, profit fell 5.7 percent.

“In wholesale, it was very tough going, obviously reflecting the lower-income group that was struggling,” Chief Executive Officer Guy Hayward said by phone. The company will close some of its 77 wholesale stores.

South African retailers are struggling as high unemployment and inflation force shoppers to cut down on major purchases. Retail sales were unchanged in June, the worst performance since December 2009. These factors “seem likely to persist for 2014 and possibly 2015,” said the company, which owns cash-and-carry chain Makro and do-it-yourself specialist Builders Warehouse.

The South African Reserve Bank raised its benchmark interest rate for the second time this year on July 17, cutting disposable income for borrowers. Africa’s second-largest economy shrunk in the first quarter of this year because of a five-month strike at the world’s largest platinum producers.

Difficult Environment

“We were also feeling the effect of the mining strike, which we believe probably has a bigger effect on the economy than is fully appreciated,” Hayward said.

Sales gained 10 percent to 35.8 billion rand and continued the same growth increase in the weeks until Aug. 24. The dividend for the period was unchanged at 1.46 rand a share.

Given the difficult consumer environment, particularly in the lower to middle-income level, Game South Africa’s comparable sales grew by 0.4 percent, Hayward said, referring to the company’s chain of household-goods sellers.

Massmart has been prevented from expanding its fresh-food product line in some malls as other retailers including Shoprite Holdings Ltd. used exclusivity clauses in lease contracts to block the sale of certain types of perishable food. Massmart will “shortly lodge a formal complaint with the Competition Commission against each retailer who has filed legal action,” the company said.

“The behavior by the retailers just feels intuitively anti-competitive, it’s going to reduce choice for customers and it’s going to entrench the dominance of those other retailers,” Hayward said.

Massmart shares fell 1.9 percent to 131.88 rand at the close in Johannesburg, trimming this year’s gain to 1.5 percent. The stock declined the most in more than eight years on Aug. 20 after the company said first-half earnings decreased by as much as 29 percent.

Hayward became Massmart CEO on June 1, taking over from Grant Pattison, who resigned after seven years.

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