Wal-Mart Stores Inc. is preparing to take the bold but risky step of expanding into Africa as it looks for better growth opportunities beyond its relatively stagnant home base in the United States.
The retailer's move to snap up South African chain Massmart Holdings Inc. for about $4.6-billion (U.S.) would give the Bentonville, Ark.-based discounter a toehold in one of the world's fast-growing consumer markets.
But the acquisition would also be a gamble for Wal-Mart, because it would be stepping into untested territory where no other major multinational retailer has gone previously.
And South Africa, while growing faster than other markets, was still hit by the recession and suffers from unemployment, crime and a highly unionized work force that has staged sometimes violent strikes.
The deal, unveiled Monday, would see Wal-Mart pick up a retailer with about $7-billion of annual sales in 290 stores, most of them in South Africa and the remainder in 12 other African countries.
Similar to Wal-Mart, Massmart runs low-cost stores with large volumes of general merchandise and an emerging discount food business.
"South Africa presents a compelling growth opportunity for Wal-Mart and offers a platform for growth and expansion in other African countries," said Andy Bond, executive vice-president at Wal-Mart and a former chief executive officer at Wal-Mart's Asda chain in Britain.
"South Africa possesses attractive market dynamics, favourable demographic trends and a growing economy," Mr. Bond said.
Neil Currie, an analyst at UBS, agreed: "We believe that South Africa represents an attractive growth market." In a research note, he said part of the allure is the country's food retailing business is making a transition toward more formal stores. As well, South Africa has a relatively strong infrastructure and a well-developed legal system.
Still, the stakes are high for Wal-Mart. While the discounter is making faster gains in its international markets than at home, it has also stumbled in some of those markets. It was forced to shut its German division in 2006 after eight years in that country, one of Europe's most heated discount-merchandising landscapes.
It is struggling in both Japan and Britain, said Wayne Hood, retail analyst at Bank of Montreal's capital markets unit. In Britain, it faces tough competition in powerhouse rivals such as Tesco, and lost market share partly because it was slow to embrace smaller-format stores, he said. "They're not exactly hitting it out of the park in every international market they go into," Mr. Hood said
Wal-Mart has fared better in Canada than in its core U.S. market but has still been challenged by cautious consumers in segments beyond the staples of food and consumer goods.
Wal-Mart's African proposed acquisition appears to be pricey, at first glance, Mr. Hood added. While the return on capital is attractive, the rate of future growth is difficult to predict, he said. In Massmart, Wal-Mart would inherit unfamiliar specialty chains, most notably a home improvement retailer. It's unclear whether Wal-Mart would keep it or spin it off to a specialist retailer such as Home Depot.
Wal-Mart spokesman Kevin Gardner said it's too early to speculate on the specialty segment. "We are continuing to deploy our strategy to accelerate growth and improve returns in our international business and this region of the world fits with our focus on large, high-growth markets," he said in an e-mail.
He said Mr. Bond's background at Asda and Wal-Mart would help him oversee its folding the African retailer into Wal-Mart. Mr. Bond worked for Asda before it was swallowed by Wal-Mart in 1999 "and therefore had a key role in Asda's very successful integration in Wal-Mart's systems," Mr. Gardner said.
Wal-Mart has focused in past years on expanding in developing markets, with its moves into China, Chile and Brazil helping it offset its business in softer, more mature markets, led by the United States. Last year, its international sales rose 11 per cent to $100.1-billion, while its U.S. business rose a mere 1.1 per cent to $258.2-billion in sales.
In Africa, Wal-Mart would honour pre-existing union relationships, it said. And the U.S. discounter, which operates more than 8,500 stores under 55 different banners in 15 countries, plans to keep Massmart's current management team "as a key strength of the Massmart business," Mr. Gardner said.