Limping Game proves a loser for Massmart
Walmart-owned Massmart has a problem child in its Game department stores, which this week again emerged as one of the main contributors to the retailer's weak growth that sent its shares crashing as much as 15%.
Profits for the retailer, which also owns Makro, fell close to 17% for the year. Contributing to the weak performance was a drop in sales to R19.7bn from R20bn in its mass discounters unit, made up of Game and Dion Wired stores. The stores reported trading profits of R32.6m for the full year to end-December, a more than 91% plunge from the R373.5m reported previously.
The report card ". that disappointed us the most is the Game result", Guy Hayward, CEO of Massmart, told investors on Thursday.
Hayward said the relocation of Game's head office from Durban to Johannesburg, which cost R116m, also had an impact on the almost 50-year-old store. The retailer said it saw a lot more opportunity in Johannesburg than in Durban. "We did that because we wanted access to a bigger talent pool and more diverse skill," Hayward said.
However,the relocation to the country's economic hub was at the expense of managerial staff who stayed in Durban. "As you can imagine, we lost a lot of corporate memory."
In recent years, Game has introduced fresh produce into its stores to try to increase foot traffic and gain some market share from rivals such as Pick n Pay and Shoprite. It's a move that analysts have criticised and has also been opposed by its competitors through their lease agreements with some of the country's biggest mall owners.
"I think that Game has struggled to move closer to being a supermarket," Evan Walker, portfolio manager at 36ONE Asset Management, said. "And it's really the strange spot because they've half moved there with some food components that I don't think are sufficient enough to entice Mrs Housewife to get up in the morning and go to a Game versus a Shoprite or a Pick n Pay."
Walker said Game had lost the relevance it used to have 10 years ago. "What I think they've done structurally wrong in that business over the years is that the supermarkets have come into their space quite aggressively in terms of general merchandise," he said.
Though Game has tried to muscle in on fresh produce, with little success, analysts say its rivals have become more efficient and central distribution has improved on products such as toys, where there is a higher gross margin.
Game ". really needs a robust South African consumer to come back and buy a lot of additional discretionary products before it becomes relevant again. A lot of the normal retailers just keep encroaching on their space for more and more of their product range," Walker said.
Hayward said the focus was to stock up on pantry-filler items such as toilet paper and dog food rather than try to be a supermarket. "Food in Game is 22% of sales, it's almost a R5bn business; that doesn't sound like it's not working to me. We're not trying to be a supermarket. What we offer is a limited range of fresh and dry foods."
As part of the company's turnaround strategy for the operations, the retailer plans on opening 43 new stores by 2021, nine of which are outside SA.
Hayward said Game stores as well as its Builders Warehouse performed better in markets outside SA.
Shares in Massmart, which is majority owned by US retailing giant Walmart,have plunged about 36% since Hayward was appointed in June 2014. Over the same time, the general retailers index is up 3.4%.
Despite the sliding fortunes of the retailer, which have also been affected by a growth slowdown in recent years, Hayward said the company's parent remains in frequent contact and is in support of the South African team.
Walmart "backs local management to make the right local decisions", he said. "They would like to see more profit, they are also worried about Game and they are helping me with that."
Of the four units in the Massmart portfolio, only its Massbuild business, owner of Builders Warehouse, and its Masscash business, owner of Jumbo, reported profit growth for the year.
thukwanan@sundaytimes.co.za..
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