#73 Vuvuzelas for Bentonville
Wal-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.
November 11, 2010 @ 7:09 am
It seems Wal-Mart is making the same mistakes in regards to its international expansion efforts as it has in the past. Wal-Mart is again focusing on potential profits without the slightest regard to anything else. Wal-Mart should focus its efforts on a more systematic approach to its international market selection. How will consumers in Africa respond to Wal-Mart’s low price/high volume sales strategy which has eliminated many smaller stores in the United States. Will Wal-Mart change its cultural to adapt to the behaviors of consumers in Africa? Wal-Mart’s previous expansion efforts into countries such as Germany and Korea indicated that Wal-Mart’s strategy for success in the United States is not easily transferred to other countries. These failures in other countries indicate that Wal-Mart is unwilling to change its approach to international expansion. Wal-Mart needs to address how it approaches this expansion into Africa. For starters it should take a more humble approach. Wal-Mart should determine how its product fits into African society. This means Wal-Mart needs to determine if large discount stores that essentially wipe out smaller stores will be a success in Africa. Consumers may not appreciate the detrimental effects Wal-Mart has small independent stores. If this approach is not going to work then Wal-Mart may need to change the product if offers in Africa to a more localized store that blends into society as opposed to conquering society. Either way, Wal-Mart should empower its managers and employees to adapt to the local conditions in Africa. This means Wal-Mart’s distribution, selling, and marketing strategies should be in line with local customs and traditions. If Wal-Mart is able to change its mindset to allow its stores to adapt to local expectations then it might have a chance for success in Africa.
November 12, 2010 @ 2:37 am
Interesting topic and quite groundbreaking news for both Wal-Mart and Africa. My biggest concern right off the bat, like you pointed out, would be knowing that Wal-Mart’s competitive strenghts are very centered around their suppliers and logistic channels, and the challenge that this will bring forth to uphold in Africa. The lack of sufficient infrastructure would appear to be a major issue. However, on the flipside, maybe this will turn out to work in their favor when establishing the brand over there; engaging in CSR and utilizing their massive financial strenght to help improving the infrastructure and thus build goodwill. Win-win situation if at all possible.
Second concern would be disposable income vs. cost of production. Wal-Mart is used to low margins and high volumes but will this be pushing it? It will most definitely be interesting to follow the development on this.
November 12, 2010 @ 3:39 am
Great comment about low margins vs. high volumes!
November 12, 2010 @ 10:34 am
Wal-Mart has many successful examples of going international, however, it also had few failures happened, such as Germany and South Korea. Now, Wal-Mart is entering the African market, hopefully it will not repeat the same mistakes.
I did some research about why Wal-Mart had failed in South Korea and the consequences were similar with Germany. In the past, Wal-Mart considered to enter countries based on their potential profits conditions, such as demand and powerful economic scale, but it neglected the diversity of cultures and customers. Wal-Mart did not really approach to customers and suppliers in Germany and South Korea because Wal-Mart was confident that its strategy would success in every country, but the result showed that it was not attractive for them as well. At this time, Wal-Mart is going into African market because of the similar reason and of course this is the main reason that a company wants to invest in the country. How to penetrate its products to African market will be the major point for Wal-Mart.
In short, Wal-Mart should think deeply about its strategies and also experiences from failure countries when enter other market. If Wal-Mart is willing to change its mindset, adapt other countries’ cultures and approach customers’ preferences, it is possible to have a success business in Africa.
November 23, 2010 @ 4:40 pm
What is interesting now is that Wal-Mart is rethinking its full buyout of Massmart. It is unclear whether it’s internal or external, but it has been widely speculated in the recent press that Wal-Mart executives have received criticism by its shareholders and Massmart by theirs. The press contends that Wal-Mart shareholders have advised executives to concentrate on resolving the problems with its US business rather than consider a full buyout and recommended a more than 50% purchase. In addition, South Africa’s vocal labor unions have denounced Wal-Mart as being unfair to workers and are threatening with labor strikes. We can only wait and see how this plays out, but it appears that Wal-Mart may be running into some of the problems it had in Germany – the Labor Unions. It sounds like the vuvuselas are now playing a sour note!
September 6, 2011 @ 5:17 am
Wal-Mart is trying to enter the Africa market. I think that it is bad idea because Wal-Mart will make same mistake as it did in Germany and Korea. In all two of these countries outsourcing resulted in millions of people losing their jobs. Wal-Mart’s low price strategy has succeeded so far in the international market with the exception of these two countries, because Wal-Mart has used the wrong strategy. It has only focused on a low price strategy and it didn’t understand Korea and Germany’s culture. Therefore, Wal-Mart failed to successfully incorporate its company into these countries; Wal-Mart has to understand that the same market strategy will not work on all countries.
South Africa is a huge market with a billion people and lots of resources, but if Wal-Mart uses the wrong strategy, it could hurt the African economy. Wal-Mart’s business strategy of “cheap prices” has made Wal-Mart one of the world’s largest retailers, but the consequences behind those low prices have affected many people and small businesses. In Africa, Wal-Mart will be taking the mom and pop stores out of business because of their low price and high products strategy. Many people will go to Wal-Mart and small store will start to disappear.
Wal-Mart needs to change its strategy to fit the local area.
November 21, 2011 @ 11:22 pm
To me, it seems that Wal-Mart is not giving up on trying to become accepted in another country and be successful as they are here in the US. Even though that they have received bad press on the treatment of workers and there “too low” pricing allowing for other companies not to compete, Wal-Mart still continues to survive throughout this tough economy. With the acquisition of Massmart, Wal-Mart will enter the South African retail market. There they will have to face different cultures similar to that of the United States and also sell themselves to gain the trust as a retailer that can provide them with their needs in turn of going to other stores. The biggest issue though is being able to break through the cultural barrier and allow for the Wal-Mart stores to develop in South Africa. Also, Wal-Mart has not shown major earnings in past years, also making it more difficult for Wal-Mart to take the major risk of entering a new country to open stores.
November 16, 2013 @ 3:32 pm
In my opinion the aquisition of Massmart in South Africa is the best way to enter the African market, due to Massmart is well known all over the continent. To start in South Africa is also the best idea, because the culture is very similar to the American or European culture. People in South Africa have the purchasing power to buy the products and for the rest of the continent the Walmart concept of “Everyday low price” fits best. Customers in other countries within Africa are not able to buy premium brands and don’t need them. They just want to satisfy their needs with basic products – so Walmart can reach them by selling more generic brands and private label products.
The most important issue is that Walmart has to adapt their management, services and of course some products to the people in the target countries. Tesco does a great job in China by offering a highly adapted range of products people in china want and need. The adaption issue always was the reason for the failure in other countries of all companies worldwide. If you as a company are not able to adapt to the countries people, their culture, their wished, their needs and so on you will fail – there are lots of expamples proving that.
As mentioned the aquisiton of Massmart is more promising than transfering the American Walmart concept one-to-one as done in Germany and Chine (where it failed). Walmart can leave Massmart concept as it is, but if they want to expand with their own products they have to consider the people living in the country and all the cultural differences.
January 27, 2022 @ 6:22 pm
This is an interesting read that speaks to the complexity of business that happens behind closed doors- and how we as members of the general public can only just begin to process how wealthy and powerful these familiar brands are. I have done some surface level research to evaluate how this acquisition turned out for Wal-Mart only to find mixed results. The most recent evaluation came six years after the move in 2017. In it, CEO Guy Hayward stated, “I think we gained market share in many areas. We showed innovation and grew online nicely. We controlled costs nicely.” This has remained the truth up to modern times as Wal-Mart continues to pour resources into developing their global brand. Through Africa, they gained access to a massive untapped population and ensured another method of longevity for the brand.
In my opinion, one of the smartest decisions in this acquisition was not rebranding all of the existing locations. It saves a significant amount of money in expenses and allows the consumer base to continue shopping with a familiar brand and environment (with some none the wiser). Ultimately, this seems to have been a strong step in emerging in the African market and further globalizing the company.