Archive for October, 2010

#73 Vuvuzelas for Bentonville

Thursday, October 7th, 2010

vuvuzelaWal-Mart has made a multi-billion Dollar offer to acquire South African retailer Massmart Holdings. As someone who’s been following Wal-Mart’s failures around the globe, I can’t help but to think, why? And, more importantly, how? Well, what is the attraction of the African market to a company that employs about 2 million people around the globe (and, by the way, intends to add another 800,000 over the next few years), a company whose imports from China are close to US$ 30 billion which (very) roughly equates the total imports from China for whole countries such as the UK, Singapore, or Australia. So, why bother to spread the tentacles to one of the poorest regions in the world, a region that is plagued by a low level of economic activity and a high level of instability?

Well, let’s start with the fundamentals. Unlike the shares of one of its most important US domestic competitors, Target, Wal-Mart’s shares have flat-lined for about a decade. Internationally, Carrefour has outperformed Wal-Mart in many markets including China and South America. Let alone Wal-Mart’s many failures ranging from Germany to Korea to Brazil. Wal-Mart needs to satisfy the appetite of financial markets that is just too difficult to do organically. High profile acquisitions are the way towards quick revenue growth, even if it’s at the expense of the returns on investment. Acquiring a company with reach to a potential customer base of 1 billion is just too good of an opportunity to let pass for Wal-Mart. Looks like Wal-Mart simply can’t afford not to enter Africa. That’s why Wal-Mart is willing to make this one of the most expensive acquisitions it ever made (at about 13 times Massmart’s EBITDA).

So what will be the challenges ahead? First of all, converting 1 billion potential customers into actually paying customers will be a challenge. Purchasing power isn’t quite there yet for the entire African continent, and even if it were, it is difficult to imagine that consumers across Africa will uniformly embrace the Wal-Mart way. Certainly, Massmart’s presence in Botswana, Ghana, Malawi, Mozambique, Namibia, Zambia will help, but educating consumers has previously proven difficult in Germany or Korea. So why would it be easier in African nations? Further, Wal-Mart thrives on it’s tightly managed supply-chain and well-oiled logistics. How fast it will be able to replicate that in Africa is highly questionable. Localizing its offerings has been an insurmountable task for Wal-Mart in Korea, and forced the retail giant to pack up and leave again.

And what about Massmart, the target of Wal-Mart’s acquisition? Like Wal-Mart, Massmart operates low-cost, high-volume outlets in general retailing. That’s the good news. The bad news, again, is a question mark concerning Wal-Mart’s integration capabilities. In previous acquisitions, Wal-Mart didn’t do the best of jobs in managing the post-merger, cultural integration. In Germany, for instance, employee relations had gone sour quickly, ultimately leading to Wal-Mart’s departure.