Introduction
The US retail behemoth, Walmart, has announced that it will open its first branded stores in South Africa (SA) before the end of the year. While the brand will be a new addition to the retail landscape, the company has been operating in SA since 2011, when it acquired a majority stake in Massmart Holdings (owner of Makro, Game and Builders Warehouse). Despite the operating prowess of its parent company, it failed to replicate the global success of the Walmart brand. This culminated in Walmart taking out minority shareholders and delisting the business in 2022.
Details of the Group’s long-term store roll-out plan were limited in the press release, with Walmart’s International President Kathryn McLay only saying:
“Walmart’s South African stores will offer a wide range of merchandise, including fresh groceries, household essentials, apparel and technology. Walmart will also offer a variety of locally sourced products. By partnering with South African suppliers and entrepreneurs, Walmart will bring its signature Every Day Low Prices and global standards to the market, while celebrating the country’s rich culture.”
The release intimated that new stores would be opened rather than the conversion of Makro or Game stores. Apart from a pared-back food offering in stores, there are strong similarities between the product assortments of Makro and a typical Walmart store. This would raise the question as to whether Walmart is looking to test the brand as a standalone entity before potentially rebranding Makro stores. Walmart has kept its cards close to its chest, saying only that it plans to “open its first branded stores in SA later this year” and that the opening dates will be announced in October.
How will Walmart’s entry impact the local retail landscape?
With limited details on the longer-term store rollout plan, it is difficult to gauge the level of investment that will be committed to the SA subsidiary. This will be key in determining the competitive threat posed by Walmart’s launch. Given the face value similarities between Walmart’s and Makro’s product assortments, the addition of the Walmart brand without rebranding existing Makro stores poses a greater threat of cannibalisation of its own business.
A key risk for foreign brands looking to enter the domestic market is the lack of brand recognition amongst the broader populace. This was very evident when Scooter’s Pizza was rebranded as Domino’s Pizza. Despite the enormous international presence and market share of Domino’s, it failed to resonate with local consumers.
We believe recognition of the Walmart brand will need to be tested before the Group targets further expansion. This largely explains statements from the company that it will be an additional brand, supplementing the domestic brands.
With very little detail on the future rollout plan, we sought similar cases in Walmart’s history to provide a potential playbook for the company. One such example is Mexico. Walmart took control of Grupo Cifra in 1997 and renamed the group to Walmart de Mexico. It kept the local brands, while simultaneously expanding Walmart and Sam’s Club branded stores in the country. The primary local brand of the company was Bodega Aurrerá, a big box retailer in a similar mould to Walmart. Interestingly, Walmart segmented the market, using the Bodega brand to serve the value/discount segment, with the Walmart brand offering a broader assortment catering more to the middle-income consumer. The only banner that was rebranded was Superama, a chain of upscale convenience stores, which transitioned to Walmart Express.
The local multi-brand plus Walmart brand strategy was followed across Chile, Brazil and Central America. Across these case studies, the default strategy was multi-brand with selective rebranding where appropriate.
Why was Walmart unsuccessful with Massmart?
The announcement of the Walmart brand opening in the country had minimal impact on listed retailers’ share prices – a very different reaction to the announcement of Walmart’s majority acquisition of Massmart in 2010. At the time, the threat of a Walmart-backed big box retailer was significant. However, the dominance it enjoyed in its home market was never replicated in SA and by the time Walmart delisted Massmart in 2022, it was effectively a turnaround project rather than a growth platform.
The conditions set by the Competition Commission were onerous in terms of employee retrenchments and local product sourcing. Together with high import tariffs and rising infrastructure constraints, Walmart’s efficiencies and global sourcing advantages were blunted. Additionally, Massmart had severely underinvested in its cold chain capabilities, limiting Walmart’s typical “everything under one roof” grocery plus general merchandise formula.
The other key factor underestimated by both the market and Walmart at the time of the Massmart acquisition was the competitive response from incumbents. Shoprite doubled down on its supply chain investments – the benefits of which can be seen in the retailer’s latest set of results – private label expansion and fresh food leadership. The shopping habits of the broader population were also an impediment to the Walmart model, as the economic weakness experienced in the latter half of the 2010s resulted in consumers reducing basket sizes and increasing shopping frequency.
Can the Walmart brand achieve what Makro and Game could not?
Having researched Walmart’s multi-brand strategy in other emerging markets (EMs), as well as the learnings from its failures at Massmart, we expect a different consumer and value proposition compared to its current brands. For the larger basket size model to work, Walmart will need to target SA’s mid-to-upper-end consumer. If this market segment is earmarked, the Makro store locations would be ill-suited to capture the demographic.
While the product assortment similarities and big box model are similar across Makro and Walmart, we expect the persistently underperforming Game stores to be the greater target for future rebranding.
This is all informed conjecture for now, and we keenly await further details in October. Competition is always positive for consumers, and if Walmart can replicate some of its global success in SA, there is potential to really shake up the local landscape. But do not underestimate the capabilities of our retailers – they have fended off the global retail giant once, and there is no reason why this time will be any different.
