Wal-Mart Takes Its Chances in South Africa (WMT)

Just two months ago Wal-Mart Stores, Inc. (NYSE: WMT) revealed that it had made a non-binding offer of $4.6 billion to acquire South Africa’s Massmart Holdings Ltd. Almost immediately resistance surfaced from labor unions and the South African government.  The country’s labor unions based their objections on Wal-Mart’s history as a labor-bashing behemoth. The government wanted to retain Massmart’s listing on the country’s stock exchange.

Wal-Mart and Massmart have now agreed on a deal that would allow Wal-Mart to acquire 51% of Massmart for $2.32 billion. Massmart would thus be able to keep its listing on the Johannesburg Stock Exchange. As for the labor unions, their position remains unchanged. The Financial Times noted that Massmart’s CEO said that “Walmart had committed to honour existing union agreements and create jobs.”

Massmart owns 288 retail stores in sub-Saharan Africa, most in South Africa, but with a presence in 13 other countries. The company’s stores include general merchandise outlets, home improvement and construction stores, and warehouse stores.  While Massmart is best known for its general merchandise outlets, Wal-Mart hopes to leverage its buying power to increase the sales of food in the African stores.

By acquiring a majority stake, as opposed to 100% ownership of Massmart, Wal-Mart gets essentially everything it wanted at half the price. The company’s decision pleased the South African government, Massmart shareholders, and Wal-Mart executives who are searching for ways to grow Wal-Mart’s $400 billion revenues.

A reasonable question for Wal-Mart is why the company thinks it can succeed in South Africa when it has had so much trouble in Japan, Germany, and South Korea? Wal-Mart’s low-price model didn’t get much traction in Japan, a highly-developed retail market where consumers are willing to pay higher prices for better quality goods.

The company did even worse in Germany, where it ended up selling all its stores in 2006 and departing. The company’s foray into South Korea did no better, also leading to the sale of all its stores in 2006.

The difference this time could be that Wal-Mart is entering an under-developed retail market where consumers might be more tuned in to low prices than to premium quality. Indeed, growth in China and Mexico have contributed strongly to Wal-Mart’s revenues and profits. The company’s success in China may, in fact, be the impetus for Wal-Mart’s move into Africa. China and the African nations have a lot in common in terms of the experience consumers in these countries have with retail stores.

Paul Ausick