The demise of some Massmart stores, including electronic devices retailer DionWired, is a direct result of thriving online business.
This is according to analysts, who say online sales are growing at far higher rates than brick-and-mortar sales, causing a steep drop in business at physical stores.
The comments come after retail group Massmart announced yesterday that over 1 400 employees will be retrenched from its stores, DionWired and Masscash.
A total of 34 DionWired and Masscash stores are facing the chop.
With the announcement yesterday, Massmart has joined a long list of companies to fall victim to the poor-performing economy.
Stats SA’s April 2019 Statistics of Liquidations and Insolvencies painted a dire picture of the economy. The number of business liquidations increased by 53.1% between April 2018 and April 2019. The number of insolvencies increased by 30.1% between March 2018 and March 2019.
Saturated space
Lulama Qongqo, investment analyst at Mergence Investment Managers, says multiple factors resulted in Massmart getting to this point.
“The retail space in SA is saturated and online is becoming more prominent in the electronics space. Management at Massmart seemed to also have been in limbo post the acquisition by Walmart. They expanded in categories they aren’t necessarily strong in, and they also didn’t play to their strength in wholesale.”
In 2011, the Competition Tribunal approved the merger of Walmart and South African retailer Massmart, whose other businesses include Game, Makro and Builders.
“They [Massmart] don’t have a pronounced revenue growth deterioration problem per se; their costs outpaced their revenue growth and that has negatively impacted them,” she explains.
Qongqo says until late last year, there was very little support from Walmart after it bought the majority stake – this may be due to the corruption investigation by the Department of Justice and Securities Exchange Control.
Walmart reached a settlement with authorities in the US after a more than seven-year investigation into the company’s compliance with the US Foreign Corrupt Practices Act. Walmart was charged for its anti-corruption internal controls in Brazil, Mexico, India and China prior to April 2011.
Qongqo also points out the South African population is becoming more tech-savvy, finding it more convenient to buy electronics online.
“Retailers with poor customer service, limited ranges and/or massive stores that are a pain to navigate are likely to lose market share to online retailers.”
Senior equity analyst at Sasfin Securities, Alec Abraham, says Massmart’s decision “speaks to the changing marketplace in wholesale and, in the case of retail food, I think Massmart’s late entry against very strong incumbents played a part in Masscash’s underperformance”.
Further, he says the mooted closure of DionWired shops is “more a function of some consumer electronic purchases being displaced by online and DionWired’s poor online execution”.
Abraham continues: “With the ongoing almost non-existent volume growth in the market, consumers getting poorer over multiple years, the poor outlook for the drivers of retail spending and the impact of online retail, we have seen and will continue to see retailers reviewing their store estates and expansion plans.”
Despite the job losses announcement, Massmart stocks have been performing well since yesterday on the Johannesburg Stock Exchange, with the share rising as high as R5.34 in morning trade.
Abraham cautioned on this: “The retrenchments will come at a cost in the short-term, so the share price was just a knee-jerk market reaction to the news.”
Alienating customers
Arthur Goldstuck, MD of World Wide Worx, says Massmart’s move was expected.
“This should not come as a shock or a surprise. Firstly, it was widely known that DionWired was feeling the impact of weaker consumer demand due to a stagnant economy.
“Secondly, Massmart CEO Mitch Slape specifically came to South Africa to turn the group around, and his track record included a stint as COO of Walmart Japan, where he closed more than a quarter of their stores,” he notes.
In December, Slape told the Sunday Times that Game and DionWired had lost their way in how they reach the customer.
Goldstuck says: “This is particularly apparent at DionWired when one looks at the pricing relative to the cost of the same products at Takealot, and relative to the financial stress consumers are feeling.
“As beautiful as the stores are, and as stunning as the merchandising can be, it is an alienating experience to walk through a store and feel one cannot justify spending the money required to obtain these products.”
He notes that when doing an instant comparison with prices at online stores like Takealot, the consumer does not feel inclined to go back to a store that seems overpriced.
“As a result, stores like DionWired sometimes feel like ghost towns,” says Goldstuck.
He predicts this is likely to continue in the retail space.
“It is a global phenomenon in the retail space, and it is one that has been under way for some time in South Africa, and will continue for some time. Brick-and-mortar stores are competing poorly with online, do not seem to grasp the power of comparative shopping via smartphones, and have not come up with effective omni-channel strategies,” explains Goldstuck.
Commenting on DionWired, he says: “It's not that people are spending less on gadgets, but rather that they are becoming more price-sensitive in their purchase of gadgets. Especially as new generations of products emerge at higher prices, consumers are looking for more cost-effective options. The message to all players in this space is that consumers want both quality and value-for-money.”
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