ABC on what Wal-Mart bid means for producers

The world’s largest retailer, Wal-Mart Stores, has made a US,25 billion (R29,2 billion) bid for South Africa-based Massmart, a regional management group with large-scale wholesale and retail interests.

Assets such as Makro, CBW and Shield make Massmart’s Masscash division the largest food wholesaler in the country. Given Wal-Mart’s reputation for aggressive pricing, South African food producers, processors and retailers want to know what a successful bid would mean for their businesses.Farmer’s Weekly asked Agricultural Business Chamber (ABC) CEO Dr John Purchase and economic intelligence and finance manager Lindie Stoebel for their opinions.

Why does Wal-Mart want to buy Massmart?
Lindi Stroebel: In the long term I suspect Wal-Mart is going to try to enter Africa using the expertise that Massmart has on the African market. If you look at the spread of supermarkets internationally, the major chains originated in western Europe and north America, and from there spread to surrounding countries and then eastern Europe and the Far East. In Africa the development was totally different. Aside from Spar, all the chains are local. Some of the other international chains have attempted to get into the African market, but have failed because they don’t understand the customer and consumer expectations of what retail should be. Shoprite has spread all over Africa because they understand how Africa trades and what the consumer’s needs are.
 
Can the local retail environment accommodate a new player of this size? Is there a chance we could see some of our major retailers struggle?
John Purchase: Yes, I think the retail space can accommodate a sizeable player such as Wal-Mart as it will essentially be taking over existing business with a fairly certain market share and established clientele. Whether other players will drop off is very difficult to predict, but Wal-Mart may very well up the competition and local businesses will just have to adapt to survive, which I’m sure they will do. The greater competition it may bring is not necessarily a bad thing.Lindi Stroebel: The local retail industry is very concentrated, consisting of five big role players – Spar, the Massmart group, Woolworths, Pick n Pay, Shoprite and Checkers. It’s dangerous to have a concentrated industry. Another strong competitor will force the others to be on their toes.

In South Africa, supermarkets have been criticised for playing a too dominant role in the establishment of food prices and the way they negotiate with suppliers. So, in that sense, if Wal-Mart comes in and provides better supply chain options for farmers, then the other retailers will start looking at how they do things.
In terms of food marketing, I think Wal-Mart will enter the market aggressively.John Purchase: It may be that that their supply chains can provide products at cheaper prices, but only time will tell how sustainable an aggressive market entry will be. Wal-Mart is big, with a strong brand. It will be a novelty in South Africa, and entering the market at hugely discounted prices may attract inquisitive consumers.

Is this bad or good news for local products?
John Purchase: South Africans, generally speaking, are loyal to their brands and I’m not too sure Wal-Mart will be able to enter very aggressively and sustain that for a lengthy period of time.Lindi Stroebel: The manufacturers and the agri-businesses are just part of the value chain, and Wal-Mart will just be another buyer of their products, so it’s not really a threat for those companies. It’s more at the retail level that Wal-Mart might cause changes.

Isn’t there a chance Wal-Mart might undercut local producers and processors by using its overseas suppliers and famously efficient supply lines to bring in produce and processed food products?
John Purchase: I do not have detailed information on this. However, to ship in a lot of products from abroad, especially from the US, is expensive and cost-prohibitive.Lindi Stroebel: If they use the same supply chain structures and distribution systems they might be a big threat, though this would apply more to appliances rather than food staples and processed foods. Some of the food products they use in the US they import from Argentina, so maybe they’ll look at using those supply chains, but I doubt it. I think they’ll take over existing supply chains here and just improve them to the standards of the US systems.

Could there be opportunities for South Africa’s commercial farmers?
John Purchase: Yes, depending on how Wal-Mart develop their supply chains and with which agro-processors they prefer to do business. Opportunities throughout a number of value chains, also for producers, could very well arise. – Sean Christie