In one of its historically largest purchase operations, American retail giant Walmart

bought 51% of South African retailer Massmart in May 2011 by paying US$ 2.4 billion.
Massmart sells in 14 African countries, but the majority of its operations are in South
Africa (265 retail stores in South Africa versus 25 in the other 13 countries(2). The
Massmart group is based in Johannesburg and includes Game, Dion Wired, Makro,
Builder’s Warehouse and Masscash. Walmart’s revenues stand above the US$ 400
billion mark, over South Africa’s GDP of approximately US$ 350 billion. They operate in
14 countries apart from the US, have a procurement division that employs 1,400
individuals, and work with 6,000 factories all over the world but mainly from
China.(3) The transaction reflects Walmart’s clear intention of profiting from the
opportunities of a country with a sharp increase in consumer spending power and
where the supermarket buying experience reaches almost all socio-economic levels of
the population.
Local perceptions and reasons for concern
Before being cleared by South Africa’s authorities, the operation suffered ample
resistance from local groups, especially from South African Commercial, Catering and
Allied Workers’ Union that feared the aforementioned purchase would represent
important job losses and respective declines in local manufacturing and production.
They opposed the transaction arguing that the unrestrictive entrance of Walmart into
South Africa’s retail market would cause the closure of local businesses and
consequently the loss of many jobs due to the expected increase of imports by Walmart
and by its followers.(4)
Given the opposing views and relatively pacific protests of local unions and the high
rate of unemployment (close to 25% according to official figures, but 40%
unofficially(5), South Africa’s antitrust commission approved the takeover, imposing
some general conditions to protect local jobs: no job cuts will be conducted for two
years after the takeover, existing labour agreements will be honoured for the next
three years (the South African Commercial, Catering and Allied Workers’ Union will
remain as the firm’s main bargaining partner) and US$ 14.6 million will be oriented
towards creating a fund to develop local suppliers.(6) Even after these conditions were
established, some union leaders manifested their discontent, stating that there was no
guarantee that Walmart was going to respect these contractual clauses.(7)
At the same time, the ruling African National Congress is being pressed by its
radicalised youth wing to adopt a more protectionist stance. Three Government
departments (the Economic Development Department, the Department of Trade and
Industry and the Agriculture Department) and the shopworkers' union, Saccawu, have
lodged an appeal with the South African competition tribunal asking it to review its
initial decision. The unions estimate that as many as 4,000 jobs could be lost from
industries such as general merchandise, and in food and beverage production if
Massmart were to shift some of its procurement from local to imported sources. The
unions are presenting the example on how Walmart has stoked controversy in the US
with allegations of anti-union policies, overpriced health insurance, predatory pricing
and poor relations with staff, some of whom, it is claimed, have been paid below the
minimum wage.
Walmart indirectly responded to these questionings by showing a clear interest in
investing in Africa’s largest and most developed market and by explicitly
communicating its intention of expanding to other economies. For example, they
indicated they plan to buy most of its fresh food locally, leveraging from South Africa’s
offering and from their global sustainable agricultural practices. They stated they will
open 54 new stores (net) over the next three years and add 6,300 new hires to its
27,000 existing employees.(8) Walmart has made clear they will respect local
regulations and will exploit the opportunities the local market offers in a responsible
way. Still, its detractors remain worried about the retail giant’s purchase power and the
effects of massive and cheap imports over local suppliers and other retail players.
The South African Government has already voiced its concern over the merge,
mentioning that the sheer scale of Walmart’s international operations made
Government’s intervention necessary. Walmart’s revenue is estimated to be US$408
billion – larger than South Africa’s GDP. In 2004, Walmart, if it was measured as a
country, would have been China’s 8th largest trade partner and would have a GDP
larger than 75% of countries worldwide. Walmart’s procurement division employs more
than 1500 employees sourcing from over 6000 factories across the world (though
largely from China).(9)
Many still see Walmart as an enormous corporation that has been criticised in the past
for its “easy hire-easy fire” approach and for not promoting enough the female
workforce; things have changed, however, and Walmart has made important
improvements in employment and in eco-friendly policies.(10) For instance, over the last
years, Walmart has significantly focused on climate change issues by implementing
zero waste corporate initiatives, and has also launched relevant sustainable agriculture
policies, including supporting farmers and their communities, producing food that
consumes fewer resources and creates less waste, and helping develop eco-
conscience.(11) If implemented in South Africa, this type of programs could have a
positive impact in the local market by encouraging a more efficient allocation of
resources, by sending a positive signal to the investment community and clients, and
by indirectly pushing other players to adhere to the industry’s best practices. Some
local stores like Woolworths and Pick ‘n’ Pay have timidly started to show some
sensibility towards green policies, but many of them still fly numerous products from
different parts of the world, contributing to global warming and pollution problems.
A brief comparative analysis of Walmart’s influence in other emerging markets
If we consider conditions in emerging markets to be somewhat similar (in terms of a
less structured government vision and strategy, a less unionised workforce, rapidly
growing internal demand and also an over-reliant dependency on imports for many
consumer goods) then we can try to use Mexico’s and Brazil’s example as what could
possibly happen in South Africa.
Walmart in Mexico (Walmex) provides access to a larger market, but it puts continuous
pressure on its suppliers to improve their product's appeal, while forcing them to accept
relatively low prices relative to product appeal. Simulations of various models (such as
the one from the US-based National Bureau of Economic Research) show that the
arrival of Walmex separates potential suppliers into two groups: those with relatively
high-appeal products choose Walmex as their retailer, whereas those with lower appeal
products do not (and in effect, cannot, as lower appeal products have a low frequency
of purchase). For the industry as a whole, the associated market share reallocations,
adjustments in innovative effort, and exit patterns increase productivity and the rate of
innovation.(12) Another positive impact of Walmart’s presence in Mexico is that the retail
sector modernised its warehousing, distribution, and inventory management. The
profound changes in the retail sector, initiated by Walmex and partially diffused to
other retailers, have resulted in a significant decline in distribution costs faced by
Mexican suppliers while the spectacular expansion of Walmex’s retail network has
allowed its suppliers to reach a larger segment of the Mexican market. Overall, the
high-quality firms have sold more and become more productive in response to Walmex’
investment in Mexico, while low-quality firms have lost ground in both dimensions.
Walmex had succeeded for two main reasons: one, because it started out being so big;
by the mid-1990s Walmart had gradually acquired 62% of Cifra, the largest retailer in
Mexico; second (and of critical importance), Cifra brought with it a thorough
understanding of the Mexican consumer.
Walmart entered Brazil in 1995, raring to replicate its success in Mexico. The country
was still emerging from decades of hyper-inflation and economic mismanagement.
However, a price war soon ensued between Walmart and Careffour, and Walmart saw
its business waver; it also made the mistake of not making big acquisitions until 2004.
However, even as it bought Bompreço in the country’s north-east, and Sonae in the
south, its sales have suffered as it has tried to convert them to its trademark “everyday
low prices.” Walmart’s unchanging cheap prices contrast with the more dynamic “high-
low” strategy of discounts and mark-ups, and Brazilians have not got used to the
American way.(13)
Columbia Business School Professor Nelson Fraiman argues that “Large firms like
Walmart have gone to countries like Brazil and failed — the same way they’ve gone to
countries like Korea and failed, the same way they’ve gone to countries like Germany
and failed — mainly because of not understanding the local culture. The U.S. can
become better at learning about the people and working together as equals, rather than
imposing a series of systems and procedures that work here, but don’t necessarily work
there.” “Little details are what usually kills American companies that forget to pay
attention.”(14)
If Walmart is able to leverage on its experience in other developing nations like Brazil
and Mexico and adapt is good governance and operational practices to South Africa’s
market, it could solidify its position in the global retail market, but most importantly in
emerging Africa. This won’t come without its challenges though. Walmart will need to
be clever in managing and training a comparatively less educated workforce when
compared to the US and even to some developing countries, and in ensuring optimal
productivity levels. It will have to comply with the particularities of local laws (including
the Black Economic Empowerment Act), adapt to the local culture and to successfully
replicate its model on African soil in order to extract the most out of its operation in this
continent.
Moving towards a coherent regional strategy
The incursion of Walmart in Africa, initially through South Africa but with expansion
plans to other countries of the region,(15) not only denotes the importance of the
emerging middle-class consumer market for global corporations and its expected
growth, but also sends a positive signal to the investment community regarding the
openness and possibilities of doing business in the continent.
Walmart also plans to open two stores in Nigeria, according to Nigeria’s Ambassador to
the United States, Prof. Ade Adefuye, who mentioned in June 2011 that representatives
from the famous retail store had visited him at the Nigerian Embassy in Washington DC
as regards the plan to open the retail store in Nigeria. “It is an indication of the growing
confidence in Nigeria’s economy,” Adefuye stated, adding that he was currently
engaging with the leading US store on the conditions and requirements that would have
to be met to do business in Nigeria.(16) Walmart is also planning to enter Senegal,
Angola and the Democratic Republic of Congo.
A win-win move?
The somewhat measured and appropriate intervention of the local antitrust authorities
when local opposition was high helped dissolve any doubts regarding potential
government intervention or inadequate popular measures that could end up affecting
the entire deal and perspectives for future operations.
Libertarian Ludwig von Mises Institute is also optimistic about Walmart: “Walmart is one
of the great shining examples of what a market economy can achieve. If I were to give
a tour of the United States to visitors from a socialist country, who are used to
experiencing chronic shortages of almost everything, Walmart would be one of the first
places I would take them. It is a perfect symbol of one of the most remarkable things
that we have — an enormous variety of high quality, low cost products that are
available to virtually everyone throughout the United States.”(17)
While increases in productivity will cause a net gain to the economic system, they also
cause a shift in the points of the economic system where human labor is most valuable,
changing the landscape of the job market. Some jobs disappear, while some jobs come
into existence for the first time.
Also, Walmart could help boost the local SME growth; by allowing small producers to
deliver their products locally (using Walmart’s modern distribution systems) and have
them distributed nationwide, Walmart can help small producers to become viable
competitors of the larger players. Producers will weigh the larger market size versus the
lower quality-adjusted price they receive when deciding whether to use Walmart as a
retailer.
Additionally, the entrance of a global player like Walmart in South Africa, although
criticised by local unions and other players, could help “raise the bar” in terms of
productivity, service delivery, transparency and price-efficiency (prices are expected to
go down) within the industry, forcing local players and manufacturers to become more
competitive and creative in order to survive in an open and free market. The presence
of Walmart will also give producers incentives to engage in process or product
innovation. making product improvements allows suppliers to escape the mandatory
price cuts from one year to the next that kick in when producers do not upgrade their
product. Similarly, suppliers can obtain higher prices by introducing new product
varieties. If that is the case, the most benefited will the local consumer.
NOTES:
(1) Contact through Micaela Florez-Arraoz and Vas Musca through Consultancy Africa
Intelligence’s Industry and Business Unit (industry.business@consultancyafrica.com).
(2) The Economist, ‘The beast in the bush: a hungry predator stalks Africa’,
http://www.economist.com.
(3) Business Live, ‘Walmart-Massmart merger poses risk to SA’,
http://www.timeslive.co.za.
(4) ‘South Africa Clears Walmart Deal’, http://dealbook.nytimes.com.
(5) Conway-Smith, E., ‘The symbolism of Walmart’s South African deal’, 2011, The
Globe and Mail, http://www.theglobeandmail.com.
(6) Ibid.
(7) Ibid.
(8) The Economist, Ibid.
(9) Gus Lubin, ‘South Africa tells exactly why it is terrified of a Walmart-Massmart
merger’, 3 August 2011, http://articles.businessinsider.com.
(10) Kent, P., ‘What fate awaits Walmart in Africa?’, 2010, http://marketingweb.co.za.
(11) Ibid.
(12) National Bureau of Economic Research, ‘Supplier Responses to Walmart’s Invasion
of Mexico’, July 2011, http://www.nber.org.
(13) Barney Jopson, ‘Walmart seeks bigger share of Brazil, August 14, 2011,
http://www.ft.com.
(14) Stacy Blackman, ‘Why Walmart Failed in Brazil’, 23 February 2010,
http://www.bnet.com.
(15) ‘Walmart “raring to go” in South Africa’, 2 June 2011, http://www.southafrica.info.
(16) ‘Walmart in Nigeria’, 30 Jun 2011, http://www.punchng.com
(17) Paul Kirklin, ‘The Ultimate pro-WalMart Article’, 28 June 2006, http://mises.org.