Zimbabwe was a 'nuisance value' for Massmart

Massmart's withdrawal from Zimbabwe was the best thing the group could have done as its operations there were adding nuisance value to the group, according to a retail analyst.\r\n

The consumer goods distributor confirmed that it had sold its two Makro Zimbabwe stores to retail group OK Zimbabwe.

"Zimbabwe hasn’t been consolidated for years; they’ve never received dividends from it and it has actually become nuisance value. Massmart’s two stores were doing maybe a turnover of 100 million rand a year. It took up far too much of their time," the retail analyst told BusinessLive.

Last year, CE Grant Pattison indicated that the group might disinvest from Zimbabwe if the controversial indigenisation bill was implemented.

"The thing that we need from the Zimbabwean government is to agree whether that’s [the indigenisation bill] law or not. If the indigenisation bill is left as is we’ll have to pull out," Pattison told a national Consumer Goods Council of SA annual conference in Johannesburg last October.

Investors have been wary, given the uncertainty over the bill, which states that foreign firms investing in Zimbabwe must cede 51% of their shares to indigenous locals.

Massmart also revealed that it had terminated its acquisition of building materials business Pupkewitz after failing to reach agreement with Namibian authorities.

In line with its African expansion strategy, the consumer goods distributor last year announced the buy-out of Namibia-based hardware chain Pupkewitz Megabuild.

Pattison told BusinessLive during a conference call that the group had started discussions 12 months ago to acquire Pupkewitz and had reached agreement to buy the business, subject only to Namibian Competition Commission approval.

"They came back to us and said we would need to have a local ownership, we negotiated with them the level of local ownership and the type of local ownership but we were not able to reach agreement with them," he said.

Pattison added that because of the time period that it took, the deal went out of its effective dates, and therefore automatically lapsed.

Pupkewitz Megabuild is one of southern Africa’s largest building supply chain operations and has been providing building products and building supplies since 1925.

Earlier in the day, the group reported diluted headline earnings per share (HEPS) of 343c from a previous 336c and an interim dividend of 252c was declared, unchanged from the previous period.

Operating profit before foreign exchange movements was up 12.7% to R1.26 billion, while revenue was up 13.4% to R27.48 billion.

The company said that, while its sales growth for most of the six months to December 2010 was strong, the softer sales growth over Christmas, and in the eight weeks since then, suggested that the South African economy may not yet be in a sustainable recovery.

Once again, rand strength masked the performance of the group’s African businesses, depressing rand earnings and resulting in a foreign exchange translation loss of R79.5 million.

Massbuild, which includes Builders Warehouse, performed well in a difficult market, recording an 18.6% increase in total sales, while Massdiscounters recorded sales growth of 14.4%. The division comprises the 97-store general merchandise retail discounter Game, which trades in SA, Botswana, Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda and Zambia; and the 12-store hi-tech retailer DionWired.

The group said two Game stores were converted into Game Foodco in the Western Cape and were trading above expectations, with a third Cape store scheduled to be converted shortly. This is in line with the group’s fresh-food strategy and it plans to open 220 stores over the next eight years.

The group’s Masscash division fared less well; divisional comparable store sales increased by 4.2% with estimated deflation of 1.3% and total sales increased by 12.5% and trading profit before tax decreased by 15.5%.

"As we have seen in previous economic cycles, food deflation made trading challenging. While volumes increased and trading margins were maintained, growth in comparable sales was below cost increases with the resultant pressure on profitability," said Massmart.

It added that, with a 25% exposure to commodities, the wholesale division was particularly adversely impacted, but its performance was buffered slightly by the results from the retail division and its new acquisitions.

"They say there was no inflation, there was deflation – margins went down because of deflation and costs went up. And in a wholesale business where your margins are very low, if your costs are rising and you’re not getting turnover growth – your profits go backwards," the analyst told BusinessLive. "I suspect in the back of my mind that their retail business struggled – I don’t know if it’s true – but I suspect," he added.

Pattison said a significant amount of time and resources had been committed to the Wal-Mart transaction.

Global giant Wal-Mart in November last year made a R16.5 billion cash offer to acquire 51% of Massmart at R148 per Massmart share – a smaller stake than the initial 100% offer in September, but one that will see Massmart retain its listing on the JSE.

"The approval by Massmart shareholders on January 17 2011 and the recent positive referral by the Competition Commission give us confidence that the transaction is seen as positive for all stakeholders," he said. 

The transaction remains subject to approval by the Competition Tribunal, which is hearing the matter on March 22 – 24 and will hand down its decision within 10 business days following the conclusion of the hearing.