LITTLE ROCK — Richard Twesigye says he shops at Massmart Holdings Ltd.’s Game store in Kampala, the Ugandan capital, because the quality is better than at the local market. Like millions of other Africans, he can afford it if the prices are a little higher.
“These stores are high class,” Twesigye, a 61-yearold businessman, said while shopping at the chain store. “In ordinary stores there are a lot of counterfeits, but these big stores care about their reputation.”
It’s people such as Twesigye, members of Africa’s burgeoning middle class, who prompted Wal-Mart Stores Inc. on Sept. 27 to propose purchasing Massmart, the continent’s third-largest retailer, for $4.6 billion. With 288 stores in 14 African countries, purchasing Johannesburg-based Massmart would enable Wal-Mart to profit from one of the world’s fastest-growing retail markets.
Bentonville-based Wal-Mart offered to bid $21.56 a share for Massmart, South Africa’s second-largest listed retailer, a premium of 9.8 percent over its share price at the time. The company is examining Massmart’s finances.
“The base work has been done, all they need to do is leverage that,” said Evan Walker, an analyst at Johannesburg-based RMB Asset Management.
Africa’s population reached 1 billion last year and after economic growth averaging 4.9 percent from 2000 to 2008, the number of families with an income of more than $20,000 a year has exceeded India’s, according to a report by McKinsey& Co. Inc. With China investing in African mineral and infrastructure projects and the continent’s population rising by more than 2 percent a year, that market is set to expand.
“It will be to their own detriment if companies ignore Africa,” said Celeste Fauconnier, Africa analyst at Johannesburg-based Rand Merchant Bank, the investment banking arm of FirstRand Ltd. “We are seeing massive growth in the population, an increasing middle class and people having more access to money.”
Consumer spending in Africa rose at a compound rate of 16 percent between 2005 and 2008, driven by economic and population growth and migration to cities, New York-based McKinsey said in its June report. McKinsey estimated that the number of consumers earning more than $1,000 a year will rise by 221 million within five years.
Sub-Saharan Africa’s economy will expand 5.5 percent next year, 2 1/2 times faster than developed countries, according to the International Monetary Fund. Per-capita income in Sub-Saharan Africa was $1,096 last year, according to the World Bank.
The FTSE/JSE Africa General Retailers Index is up almost 50 percent this year, ahead of the almost 9 percent increase in the FTSE/JSE Africa All Shares Index.
South African companieshave spearheaded retail investment in the continent. Shoprite Holdings Ltd., South Africa’s largest retailer by market value, began expanding abroad in 1995 and now has 71 stores in 16 African countries, according to the company’s website. Rivals Pick n Pay Stores Ltd. and Woolworths Holdings Ltd., also Cape Town-based, both announced plans this year to expand their African operations.
Pick n Pay may accelerate plans to cut costs and improve efficiency before Wal-Mart’s arrival, the company’s Chief Executive Officer Nick Badminton said last week.
In Mozambique, Anita Guambe, a 45-year-old housewife, stopped asking her husband, a taxi driver, to buy food for the family on his regular trips to South Africa after Shoprite opened a store in the capital, Maputo.
“The entry of big chains is welcome because most of their products are of high quality and they are well packaged,” especially compared with the unhygienic street markets where the poor have to shop, Guambe said.
Wal-Mart, the world’s largest retailer, will face challenges in the world’s poorest region. It will need to maintain a supply chain in a continent where roads and railways are unreliable, property rights are often weak and security isn’tguaranteed, said Paul Theron, managing director of Johannesburg-based Vestact Pty Ltd. It manages more than $145 million of assets for private clients.
Poverty remains rampant in Africa, with 50 percent of the population living on less than $1.25 a day, according to the World Bank. And each of the continent’s 53 countries has its own tariffs, laws and regulations.
“One must not forget that Africa is lots of different countries, with different cultures, different languages and different ways of doing business,” said Jeanine van Zyl, retail analyst for Old Mutual Investment Group of South Africa, South Africa’s largest privately owned fund manager. “Perhaps they will failif they try and do it too fast. You have to step away from markets that are not ready to be entered. The process can’t be rushed.”
NIGERIAN POTENTIAL
Wal-Mart was lured by the potential of markets such as Nigeria, Africa’s most populous nation with 140 million people.
“The focus has shifted towards these oil-based economies and commodities-based countries, which is where people have more purchasing power,” said Andrew Kingston, an analyst for Sanlam Investment Management in Cape Town.
The purchasing power of Nigerians earning between $1,000 and $5,000 a year doubled to $20 billion between2000 and 2007, McKinsey estimated. Massmart has plans to increase the number of its outlets in Africa’s largest oil producer to 20 from one over the next two years.
Wal-Mart International Chief Executive Officer Doug McMillon told investors at a presentation in Rogers on Oct. 13 that rising income levels in South Africa made Massmart a “tremendous opportunity.” South African consumers are “going to want more general merchandise, they’re going to want more food,” he said.
Over time, he said, the stores outside South Africa will “pay benefits” as the retailer learns what it’s like to operate in those countries.
The Game store in Lagos “is cleaner and not as chaotic as the market,” said Kola Oladapo, an accountant who earns $3,300 a month and shops there. “You never have to fear that by the time you walk out your wallet is missing.”
For Twesigye, the shopper at Massmart’s Game store in Kampala, the important thing is quality.
“Some things may appear expensive, but considering their superior quality, prices remain good,” he said. “At such a big store one avoids the hazards of human jam, which comes with pickpockets.”Information for this article was provided by Fred Katerere, Fred Ojambo, Sam Olukoya, Wilfred Mwakalosi, Nasreen Seria and Matthew Boyle of Bloomberg News.
Business, Pages 77 on 10/24/2010