Mid Cap Darlings – Massmart


Mid Cap Darlings – Massmart

Published Date: 2019-09-11 | Source: INCE|Community | Author: Sifiso Skenjana

Mid Cap Darlings – Massmart

For all the gamers and gadget freaks, Game and Dion Wired has been around to help you scratch your itch.

For the food and grocery bargain hunters Makro and FruitSpot have been there, while Builder's Warehouse has been availed building and home improvement for the handymen and construction heads.

And when you leave the suburbs, going into the lower income areas you will most likely come across a Jumbo, Rhino Cash & Carry or a Cambridge store. All these are the children of Massmart, who in turn is the child of US based Walmart.

Business Model: The company is comprised primarily of four divisions, General Merchandise, Liquor, Home- Improvement and Wholesale Food, operating 441 stores across 13 countries continentally.

Historically (like their company) the business has targeted a low cost, high volume business model
Macro Landscape: The wholesale retail industry has been experiencing gradual weakness over the years bringing topline revenues have come under a considerable about of pressure. Because of its exposure to the consumer and household expenditure, persistent weakness in the economy, rising unemployment and lower inflation have also been material contributors to the said decline. Innovation by new entrants has also seen them eat away at the revenue base of wholesale retailers. Other factors driving revenue pressure in the business include accelerating digitization, intensifying competition, an evolving consumer and consumer tastes, product innovation as mentioned and disintermediation across the industries.

Results (Six months ended June 2019): Massmart experienced 8.2% increase in group food and liquor sales while durables' sales increased only 2.7% over the period. Ex SA businesses, while significantly smaller than the SA business had the better sales of the two, with an increase of 11,8%. Costs and expenses increases however seemed to outpace the sales, where the group experienced 11.8% increase in total expenses. Earnings before interest and tax was down 22.7%.

Growth Prospects: Massmart will continue coming under a considerable amount of pressure as costs mount and earnings continue on the decline. The business needs to focus on optimization their current businesses if there are to stay competitive in the current climate. Localisation strategies and management are also are sore point and some of those need to be ironed out if the business is to come back into profitability on a sustainable basis.

About The Analyst: The Mid Cap Darlings is brought to you by the Awkward Economist - Sifiso Skenjana. He has a breadth of experience in portfolio management, economic research and investment strategy and management consulting. He is founder and financial economist at AFRA Consultants. He is currently pursuing his PhD.

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