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8 May 2016

STRATEGIC MANAGEMENT

The impact of Wal-Mart’s entry into
South Africa and how incumbents
should respond

Individual Assignment
MBA Weekday Part-Time

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1 WALMART COMPANY BACKGROUND
Wal-Mart, founded in 1962 by Sam Walton, is the World’s Largest Retailer
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Wal-mart is known for its aggressive pricing strategies that
attract thousands of customers into stores around the world with the slogan:
“Everyday low prices”
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(Appendix 2)
Table 1: WALMART BUSINESS MODEL INNOVATION
Customer Value Proposition
 Dropping prices so that consumers can live
within their budget
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9% in 2010
Resource Velocity
 HIGH

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Sourcing directly from manufacturers
through its wholly owned sourcing agency
International Produce LTD (IPL)
CPFR program improves efficiency
Collaborative planning, forecasting and
replenishment program reduces inventory
carrying costs for both retailer and its
suppliers



Technology infrastructure and information
management
Example: Electronic Data Interchange EDI
with over 3,600 vendors in order to receive
orders and interact with Wal-Mart
electronically
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Key Resources

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

Key Processes

Wal-Mart owns and operates its own
logistics function, as opposed to
outsourcing it
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3 Billion
(Appendix 1)
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The
Group’s wholesale stores include: Makro, Game, Dionwired and Builder’s Warehouse
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Massmart’s business model is very similar to Wal-Mart’s, however its keys processes and
resources are not of the scale and efficiency of Wal-Mart’s
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The business model is only
one of the synergies between the 2 companies
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You can’t just waltz into Africa as if it’s
Amarillo” Craig Johnson (Customer Growth Partners, Company President)
Table 2: PESTEL

Political

Implication on Business
South Africa’s two main labour unions,
COSATU and SACCAWU are vehemently
opposed to Wal-Mart’s acquisition of
Massmart
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The Unions called on all South
Africans to “support a campaign against
the Walmartisation of the retail sector”
(Business Report, 2010)
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Wal-Mart could meet with Unions
to discuss the impact of the
acquisition with them, however this
Wal-Mart’s acquisition could erode wages scenario is highly unlikely
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Massmart achieved a level 4 Black
Economic Empowerment (BEE) rating,
scoring 66
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Economic

The acquisition will be advantageous to
the South African economy, in terms of
Foreign Direct Investment (FDI)
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The acquisition has already been
approved by South Africa’s Reserve
Bank
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South-Africa’s currency (ZAR) is currently
overvalued, which further makes imports
more attractive to Wal-Mart
The acquisition could also lead to
Unemployment in the retail industry as a
whole, as competitors re-act to Wal-mart
/ Massmart lower cost structures
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Technological

When Wal-Mart acquires a retailer, it has
to convert the existing corporate culture,
which proves to be difficult
Africa poses significant challenges in
terms of poor infrastructure

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Wal-mart will need to commit
resources to a HIV/AIDS CSR
programme
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A gap exists between classes and
broader communities
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As Wal-mart’s business model is
South Africa is very culturally diverse with based on low prices, the disparity in
11 official languages
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Massmart is known for its Corporate
Social contribution to South Africa, and as Wal-mart must retain Massmart’s
an employer of choice
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for its exploitive labour practices and
disregard of human rights
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However infrastructure such as
electricity, water etc could
potentially prove a problem in
Africa

Environment
and
Sustainability

Wal-Mart launched a sustainability
programme in 2005 with 3 goals: Be
supplied 100% by renewable energy,
Create zero waste, sell products that
sustain people and the environment
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Wal-mart’s triple bottom line will
need to be assessed by all
stakeholders, relative to their
rhetoric
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Legal

The acquisition poses a threat in terms of
Anti-Competitive behaviour/practices by
Wal-Mart against incumbent South
African retailers Shoprite, PicknPay, Spar,
Metcash and Woolworths
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Wal-Mart will also have to comply with
South Africa’s new Consumer Protection
Act (effective 1 April 2011)
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Competitors

Customers’
Needs

BIG SWEET
SPOT!
Wal-Mart Massmart
COMBINED
Capabilities

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The acquisition is currently being
assessed by South Africa’s
competition commission, and a
decision is expected at the end of
May 2011
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PORTER’S 5 FORCES ANALYSIS
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Incumbents constantly battle for market share
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8% of the industry's total revenue, followed by
Pick’nPay 21
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8%, Spar 11
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8% and Woolworths 9
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“The only way Wal-Mart
could see to get an edge, was for it to buy its goods in volume, directly from the
manufacturers”
Wal-Mart sources goods globally directly from manufacturers, through its wholly owned
sourcing agency International Produce LTD (IPL), in order to secure the best possible
discounts, which can then be passed onto Customers
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By spreading its
system of distribution to all its Suppliers, Wal-Mart aims to reduce costs for both suppliers
and customers i
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on both sides of the supply chain
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The US
multinational has become so powerful, it dictates to its suppliers at what price it’s prepared
to buy goods
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3 Bargaining power of Buyers – MEDIUM PRESSURE
The bargaining power of customers largely depends on the level of their disposable income,
level of education, lifestyle measure (LSM) and geographic location
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Convenience shopping,
exemplified by Woolworth’s is a growing trend in the middle to high income consumer (LSM
8 – 10)
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There is an increased demand for “in-house” or private brand labels which are seen as
providing good value in tough economic times
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That said, the consumer is able to readily shop at a competitor, and there are essentially no
switching costs between changing stores
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South
Africa’s internet use is still in its early days, and is used in majority by middle and upper7|Page

income consumers
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There is essentially no switching cost for customers choosing between food retailers, and
there are a number of food retailers from which they can decide to purchase from
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5 Threat of new entrants –HIGH PRESSURE
Wal-Mart’s entry into Africa and South Africa will in all likelihood be the catalyst for more
international retailers to follow suite, seeking significant growth prospects of emerging
markets to bolster their financial performance
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In this regard Wal-Mart’s acquisition gives it first mover advantage
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Its entry
resulted in it assuming the market leader position
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There’s always a challenger
coming along” Sam Walton (Wal-Mart, Founder)
“South Africa presents a compelling growth opportunity and offers a platform for growth
and expansion in other African countries
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“Its part of their (Wal-Mart’s) international expansion strategy, they want to enter
markets that show a great deal of promise of developing a strong consumer sector”
Chuck Cerankosky (Northcoast Research, Analyst)

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South African retailers acknowledge that they’re experiencing both financial and operating
problems (mentioned below)
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“The already intense competition in the food retail industry could get
cutthroat”
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Fitch goes on to say that Wal-Mart will
have “significant advantages in terms of buying power and economies of scale”
Massmart as a result of the acquisition will be able to take on the likes of Shoprite and
PicknPay
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Strategies that may
be employed include forming alliances with local suppliers, innovating and streamlining
their technology and operations to work effectively and efficiently
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Other strategies such as
focusing on the informal and lower end market as a channel should also be considered
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It caters to the broad middle to lower-end
consumer
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“Shoprite is prepared to go to war on prices
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Shoprite intends
quadrupling its global sourcing department
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We added 41 new supermarkets, more than
any of our competitors, and we continued to extend and upgrade infrastructure,
distribution capacity and IT systems
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“With centralised distribution you need very
few deliveries each day compared with dozens under a supplier-serviced model
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2 Picknpay
PicknPay is South Africa’s 2nd largest supermarket retail chain
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“Competition is going to be tough…Wal-Mart is a big, big gorilla
but it is not unbeatable” Nick Badminton (Pick ‘n Pay CEO)
PicknPay is under pressure to contain its costs
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The company is building distribution centres in order to centralise this
function, upgrading technological infrastructure, and attempting to regain lost market share
through rolling out new stores
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PicknPay’s response to Wal-Mart’s entry will be to re-engineer the
business, in order to make it a world class player
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2 Million subscriptions in
only 4 weeks
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It has already lost the upper LSM customers to
Woolworths, and lower LSM customers to Shoprite as a result of its re-branding exercise
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3 Spar
Spar has 1 400 outlets in South Africa, Botswana, Namibia and Zimbabwe
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Spar targets high-income customers
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We are preparing
ourselves and there are parts of our business which need to be improved more urgently for
its arrival” Wayne Hook (Spar CEO)

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Spar’s response has been to grow its diversified “Build-It” and “Tops” stores
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Spar’s has focused on its
distribution centres, which has given it an edge over local competitors
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4 Metcash
Metcash has extensive franchise retail interests in South Africa, and also operates in Malawi,
Namibia, Lesotho and Swaziland
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Metcash recently announced that it will be closing
down 51 of its 138 stores due to financial distress
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There are approximately 400 Woolworths’ stores in
South Africa
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It is HIGHLY niched store, and will probably be least affected by Wal-Mart’s entrance, as
they serve completely different market segments
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7%
Woolworths has also adopted the cardholder loyalty programme trend
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It will force
retailers to operate more efficiently, and to pass these savings onto consumers
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Strategically Wal-Mart should continue with its low cost
leadership strategy, this will enable it to capture significant market share
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The Competition Commission’s hearings are due to end on Monday 16 May 2011,
and a ruling is expected in around 2 weeks
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REFERENCES
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Friedman T, The World is Flat, Penguin Books, London
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deloitte
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pdf
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namibian
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na/index
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The Economist, 2011, “The beast in the bush” available at
http://www
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com/node/18185732
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Ntloedible M, 2011, 2010 Annual Retail Food Sector Report, Global Agricultural
Information Network
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The New
York Times, available at
http://www
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com/2010/09/28/business/global/28walmart
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Busrep, 2010, “Wal-Mart set to spark price war” available at
http://www
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co
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Vallie A, 2011, “Shoprite set for price war with Wal-Mart”, available at
http://www
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co
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aspx?id=135116
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2011, “Spar gets ready to bare knuckles for Wal-Mart, 12 May 2011 p12

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Figure 2: Source - Global Powers of retailing report

Appendix 2: Porter’s Generic Strategy Matrix
(Wal-Mart holds a COST LEADERSHIP position)

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Appendix 3: Rationale for the 51% stake acquisition
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Wal-Mart’s US Sales growth is slowing:
2010’s growth was a paltry 1
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9%

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Massmart’s African footprint offers Wal-Mart a Gateway to Africa’s emerging market
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Full acquisition would have destroyed Massmart’s brand equity, customer loyalty
goodwill created over time
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“Wal-Mart really negotiates great prices for consumers and is going to bring down the
cost of producing food” Grant Pattison (Massmart CEO)
“South Africa presents a compelling growth opportunity and offers a platform for growth
and expansion in other African countries” Andy Bond (Wal-Mart Executive)

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