Messmart’s pink elephant in the room

Every time you feel like your share portfolio is on fire and that you made bad mistakes with your money, just remember that Walmart bought 51% of Massmart shortly after FIFA had left our shores for R148 per share. At the time, the rand was trading between R7 and R8 to the US dollar.

Fast forward to 2022 and Massmart is below R38 per share with the rand having depreciated to around R16 to the US dollar. This ownership experience makes Nathi Mthethwa’s flagpole look like a genius-level investment.

Great businesses like Makro and Builders have been masked by the pink elephant in the room, Game. It truly is an awful business that I believe has little chance of a turnaround. I had the great misfortune of going into a Game recently and I lasted just a few minutes, assaulted by noise and colour and a completely incoherent product strategy.

It’s clearly not just me who feels this way, either. Sales growth has been tepid, with Massmart group sales from continuing operations up just 3.1% over the past two years. This excludes the cash and carry businesses that they somehow managed to convince Shoprite to acquire.

This is why I just cannot resist the name Messmart.

In the 19 weeks to 8th May, the retail group saw sales drop by 0.2%. This includes the impact of the unrest and the subsequent impact on group stores. With that stripped out to make numbers more comparable, sales were up 2.3%. Weighted average sales inflation across the business is around 3.6%, so that is negative real growth.

In Makro, historically one of the jewels in the crown, sales were up 6.7% overall and 9.7% on a comparable basis, as Makro in Pietermaritzburg has still not reopened. Notably, sales in general merchandise (the critical category for gross margin) fell year-on-year as consumers moved towards non-durable items. I would also once again argue that Takealot is eating Makro’s lunch, a point that Massmart seems to miss in each earnings release by blaming everything but online competition. Compared to the corresponding period in 2019, sales in Makro are up 6%.

In Builders, we’ve seen the DIY sales theme run out of steam completely. Sales fell 3.9% overall and 3.4% on a comparable basis, mainly due to the base effect, though sales are only 5.9% higher than pre-pandemic levels. The slow recovery in commercial construction and people returning to the office rather than investing in their homes is impacting sales.

This brings us to Game, which must have earned itself a spot in the corporate bar at Walmart where executives throw darts at the logo for fun. Total sales fell by 3.7% and comparable sales fell 0.9%. The group still talks about “positive sales performance trends”, whatever those might be. It’s even worse in Rest of Africa, where those Game stores experienced a 12% drop in sales based on stock availability issues during supply chain challenges. If you only work on the Game stores that Massmart actually wants to keep, sales increased by 1.9%. The rest of the Game stores experienced an 18.9% drop in sales.

Bottom line: the Game format is a failure and Massmart keeps throwing good money after bad.

The update also gives information on Cambridge, which Shoprite is buying. With sales down 18.6%, I cannot understand why Shoprite doesn’t just wait for the format to die instead. There’s no need to buy up the competition when the competition is gently going out of business.

In case I haven’t made it extremely obvious, I don’t own shares in Massmart.

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