Walmart Inc, the world’s largest retailer, bet on Africa in 2011, purchasing a controlling interest in South African retailer Massmart in what many investors considered a move toward dominating the continent’s huge untapped market.

It did not go as planned.

More than a decade later, Massmart’s balance sheet is burdened with debt, its books are riddled with losses, and it is drowning in commercial lease obligations.

Walmart’s African journey over the last decade has been a series of missteps, from its late entry into e-commerce to an ill-fated foray into fresh foods, exacerbated by economic headwinds and the COVID-19 pandemic.

Instead of abandoning its African problem child, as it did after failures in the United Kingdom and Germany, Walmart is doubling down with a plan unveiled in August to take full control of it.

According to nine analysts, investors, and sources with direct knowledge of Walmart’s plans, the strategy is to first build Massmart into a force capable of displacing its brick and mortar competitors, and then to win a looming battle against Amazon for the future of African e-commerce.

“Walmart plans to bring its entire e-commerce enterprise and expertise into Massmart,” said a source close to the buyout plan. “Big investment is required to keep it relevant.”

According to Reuters, delisting will allow Walmart to make direct capital injections and absorb more losses without being pressured by impatient Massmart shareholders who have not received dividends in three years.

The prize: the world’s last untapped retail market, with a billion consumers and rising household spending.

“We continue to see opportunity in Massmart and the impact the business can have, providing people across the region with greater access to goods and services they want,” Walmart International President Judith McKenna said in response to emailed questions this month.

She did not go into further detail about the company’s African strategy.

“Walmart’s entry was going to be a new paradigm for African consumers,” said the source close to the buyout. “But that didn’t happen.”

Rather, Massmart’s operations outside of South Africa faced foreign exchange risk, difficult regulatory environments, and macroeconomic volatility.

Meanwhile, competitors in South Africa have stepped up their game, according to Jean Pierre Verster of Protea Capital Management, which manages funds with exposure to Massmart shares.

“Walmart realised that other retailers in South Africa – the likes of Shoprite, Pick n Pay et cetera – are very astute retailers and they can’t just push them over,” he said.

Game, Massmart’s struggling general merchandise division that sells everything from furniture to cellphones, was slow to develop an e-commerce offering, leaving it unprepared for a pandemic-induced surge in online shopping. And rival supermarkets easily resisted its foray into fresh and frozen food.

Meanwhile, former South African President Jacob Zuma’s nine-year corruption-plagued tenure sank consumer sentiment.

By 2019, Massmart was losing money. Walmart was forced to invest 4 billion rand ($219 million) when COVID-19 struck.

Since Walmart, which leads the Fortune 500 list of the largest companies in the United States by revenue, first announced plans to acquire the South African retailer in 2010, Massmart’s share price has dropped by 60 per cent.

“The more disappointing part is not just the fact that they didn’t make it in Africa,” said Achumile Mashalaba, an analyst at South African fund manager Ninety One, which does not hold Massmart shares. “They’ve gone backwards.”

Walmart launched a 6.4 billion rand ($350 million) bid in August for the remaining 47 per cent of Massmart shares, valuing it at a premium of more than 50 per cent.

According to a source close to Massmart management, Walmart’s brick and mortar focus in the future will most likely be on wholesale merchandiser Makro and hardware chain Builders – Massmart’s two best-performing brands.

Massmart has already announced plans to expand into South Africa’s 455 billion rand wholesale and home improvement markets. Then there’s the Game ailment.

Walmart must now decide the future of Game’s loss-making South African business after beginning the process of closing stores in East and West Africa this month.

However, its biggest bet will be on e-commerce.

“Our strategy consists in creating and expanding an e-commerce offer for all three formats – Game, Builders and Makro,” Walmart said in response to emailed questions.

Due to the company’s late start and Africa’s relatively underdeveloped market, online retail accounted for only 2.2% of Massmart’s sales in 2021. In comparison, e-commerce accounted for $18.5 billion of Walmart International’s nearly $101 billion in total net sales.

Acquisitions of on-demand marketplace OneCart and delivery company Wumdrop may be beneficial. Massmart has also begun to use Walmart’s group-wide e-commerce infrastructure.

An internal Amazon.com Inc memo detailing its expansion plans, including a first foray onto the continent via South Africa, was leaked to the media earlier this year.

Several shareholders have expressed concern about Walmart’s e-commerce strategy for Massmart, citing the looming battle with its global rival.

“Amazon is coming and competition in that market is only going to intensify,” said Marlo Scholtz, portfolio manager at Sanlam Investments, a leading Massmart shareholder.

“So you need to be there and be there early.”

No comment was available from Amazon.

While Walmart trails Amazon in terms of e-commerce market share in the United States, it has outperformed the world’s largest e-commerce retailer in China and India.

Africa could provide Walmart with yet another growth opportunity. However, don’t expect a continental competition right away, according to a source involved in Walmart’s initial Massmart stake acquisition.

“Walmart needs to get South Africa right,” he said. “If it is going into Africa, it is going to go to Africa very slowly.”

The e-commerce potential of Africa is a difficult nut to crack. Logistics, from warehousing to last-mile delivery, are significant challenges in cities that frequently lack street names or house numbers. Moreover, despite the official establishment of the African Continental Free-Trade Area in 2019, intra-African trade remains difficult and costly.

While Walmart can now firmly set the direction of its South African unit, the company’s track record outside of the United States is patchy. Success stories in markets such as Mexico are offset by failures in others such as Europe, South Korea, and Japan.

“To believe Walmart will be successful in markets outside the U.S. requires believing that what’s important in the U.S. is the same thing as what’s important abroad,” said David Klink, senior equity analyst at Huntington Private Bank, which holds more than $45 million in Walmart shares.

“That’s not always the case.”

(Adapted from Reuters.com)