Mitch Slape sits clutching a large Starbucks travel cup with the word "Japan" neatly printed on it. "It holds a lot of coffee," Massmart’s new CEO says in his thick Kansas twang. His accent may be as broad as the aisles in Makro’s warehouses, but this shouldn’t be a surprise: he comes from a place which he says still has "more cows than people — and lots of wheat".
That cup says much more about Slape than his need for extra caffeine: it speaks to his corporate American DNA, refined over 20 years at Walmart, and evokes his previous secondment by the world’s largest retailer as head of its Japanese arm.
As worldly as he is, there’s no New York slick to Slape. He speaks as a dyed-in-the-wool retailer: direct, to the point but at the same time engaging.
Which, alongside cartons of coffee, will be invaluable skills as he seeks to turn the Massmart ship around. There’s a lot to fix. Even though Massmart owns brands including Makro, Game and Builders Warehouse, its share price has tumbled 63% since 2011 when Walmart swaggered into town and wrote a cheque of $2.3bn to buy control of the company for R148 a share.
Problem is, Walmart’s SA sojourn has been an unqualified disaster. With the share price now at R50.50, Walmart has lost 85% of its investment if you factor in the rand’s dive against the dollar.
It’s a rare blemish for a company that traces its roots to 1950, when Sam Walton opened Walton’s 5&10 in the backwater of Bentonville, Arkansas, the state’s first self-service variety store.
This is why Slape is here, to right that wrong. It’s the first time a "Walmart insider" has been sent out to run the retailer — the previous CEOs, Guy Hayward and Grant Pattison, are South Africans. (It’s an indictment of SA’s dismal attitude to the importing of skills that Slape’s visa took four months to be approved.)
But Slape has hit the ground running and is evidently not afraid to take brutal, painful decisions.
This week, Massmart said it would shut down DionWired, the hi-tech chain of 23 stores, and 11 Masscash wholesale stores. The move made the share price vault 14.9% as investors finally saw Massmart doing something about its poorly performing stores.
While some have speculated that Walmart may throw in the towel in SA, given the dismal return on its investment, Slape told the FM in an interview this won’t happen.
"Walmart is focused on making this business work," he says. "The best proof point is that it has asked me to come, frankly, and be here and help make this company everything it can be. Like any other shareholder, Walmart wants this business to perform, it wants it to be strong, it wants it to be focused."
Slape adds that Walmart is a "demanding shareholder", which is asking for excellence from Massmart.
It’ll help that Slape is the definitive operations man, with a yen for working in foreign markets.
"When I was in high school I was a foreign-exchange student to Japan. I never thought I would actually go back to Japan but it kind of sparked something in me that this is what I want to do. I wound up actually studying Spanish … that’s how I wound up working in a few Latin American countries," he says.
As a result, he began his career in Argentina as a store manager for Walmart, but he’s also worked in the US and South Korea, where he ran Walmart’s real estate construction programme.
SA, by comparison, is tiny in Walmart’s universe. Last year, Walmart clocked up $514bn in sales, while Massmart’s sales were just $7bn — 1.3% of that.
But Slape says Walmart’s small-town beginning means it cares deeply about the smallest components of the business.
"We’re based in Bentonville, Arkansas, which is small-town America. It is a business that thinks one store at a time. We get into detail like that where we talk about an individual store and the importance of that."
Perhaps. But it’s the world’s largest bricks-and-mortar retailer, second overall only to Amazon, which now has the mantle of the world’s biggest retailer. As the US’s largest employer, Walmart has been taken to task for a slew of issues, from predatory pricing to violating workers’ rights, including punishing them for taking sick days.
It is this reputation that threw up obstacles to Walmart’s 2011 purchase of Massmart. The deal got the nod only after Walmart promised the earth to then economic development minister Ebrahim Patel, and agreed not to shed jobs for a number of years.
But Walmart felt the pain of that deal.
Delphine Govender, chief investment officer of Perpetua Asset Management, is optimistic that Slape’s presence will kick-start the restructuring that’s needed.
"I think we will see a reshaped Massmart over the next five years … for too long perhaps, there have been slightly unimaginative ideas tried at Game; too little too late, too behind the curve. Game got rapidly dis-intermediated by online, offline specialist retailers and even supermarkets which rapidly expanded their general merchandise ranges," says Govender.
She believes Slape’s hands-on retail experience across various countries is a bonus — even if turning such a large retail ship around won’t be easy.
But to understand how to fix it, you need to understand where it went wrong.
Pattison, who left Massmart in 2012, told the FM it was clear a decade ago that Massmart had two great assets (Makro and Builders Warehouse) and two struggling assets (Game and Masscash).
"Masscash was coming under pressure from a shrinking wholesale food market and the rise of the independent wholesaler [after] the failure of Metro Cash & Carry. And Game’s format of a pure general merchandise discounter was failing globally," he says.
Massmart tried to address this by building a low-end food retailer, known as Cambridge Foods, which would allow Game to become a hypermarket providing food and clothing. "Others can judge whether that was a strategic or operational failure," he says.
At this point, you’d be hard-pressed to conclude that it wasn’t a failure.
One analyst, who declined to be named, says Massmart messed up when it went into food, since rivals were so far ahead.
"It’s definitely not something it should be going forward with, at least in such a big way," he says.
This analyst says Game is "just the epitome of everything that’s wrong with Massmart". On the shopfloor, the customer experience is poor, while the technology back-end is equally parlous.
You wonder how it didn’t notice this earlier. But Massmart’s slow puncture was also, to some extent, a symptom of a retail sector that had become complacent amid fat margins in the mid-2000s. And the growing black middle class had boosted the likes of Game and Makro for years, making Massmart believe it was invincible.
If anything, says Govender, those economic tailwinds in the "splendid isolation at the tip of Africa" may have masked "the true performance of the underlying business".
"Many retailers became complacent about their entitlement to market share. They didn’t gear up properly for competition from overseas businesses or from online," she says.
In contrast, she argues, those retailers that were "comfortable with cannibalising themselves and not being in denial about the challenges are doing well".
As Nolwandle Mthombeni, an investment analyst at Mergence, puts it, Massmart failed to implement a proper strategy at a time when there was growing competition from online channels, while existing bricks-and-mortar stores also upped their game.
Slape will have heard many of these explanations for Massmart’s slide.
His first 100 days were intense. They began by his doing something few had done before: meeting the guys in the mailroom. Then he held more than 100 one-on-one meetings with leaders of units within the business. After that, he convened "town hall" meetings in the parking area, which were broadcast to remote locations.
Diagnosing what transpired over the past decade, Slape tells the FM that Massmart wasn’t the only one to suffer in a "challenging environment".
"I think, over the years, we’ve become accustomed to operating in a buoyant environment where sales growth was there. As the economy constricted and sales growth became tougher, it caused the business to have to really step back and look at its cost structure and how do you effectively make the shape of your ‘profit and loss’ fit to the reality of a tougher sales environment."
Profit margins need to be stable, he says. In a constrained economy this becomes tricky.
"We’ve got to future-fit the business for a reality where maybe we’re not seeing the economic growth and sales growth we historically have seen."
His recovery plan has many legs. For a start, rather than treating brands like Makro, Game and Builders Warehouse as individual silos, Slape wants the brands to engage with each other.
"We are a business that, if we work together, we’re unbeatable. And if we find ways to collaborate on supplier negotiations, on cost savings, on finding efficient ways to do things, we’re able to effectively help our customers to find that benefit."
You can see this change. Makro became famous for offering "R100 deals" in stores, but this year Game launched these deals in its stores too — and had a 150% jump in sales as a result.
Since taking charge, Slape has also launched a campaign called "Every rand matters", to sensitise employees to the decisions they make every day. The principle here is, if you spend a rand, stores must generate R50 in sales to cover that expense.
"We want to create an environment where our people know they’re making the right decision because there are guiding principles ... every rand we spend here is effectively a rand we can’t invest back into pricing or innovation for the customer," he says.
Massmart has also created an "indirect spend management group" to centralise expenses like travel across the group. It hopes to get greater leverage when it comes to negotiating with real estate companies or credit card companies as a single force. Slape says the group has already managed to get reductions in shopfloor rentals.
On the corporate side, Massmart’s top team members are also now being taken to Bentonville in the US to be immersed in the "Walmart culture and expertise".
"There are things Walmart can bring to the table ... its focus on how we do cost control, and bringing those world practices in – how we approach merchandise assortment [and] how we approach the supply chain," says Slape.
This week’s announcement that 34 stores will be shut is evidence that Massmart won’t just be going through the motions any more. Certainly there will be pain: 1,400 employees could be affected — about 3% of its total workforce.
Govender, for one, isn’t surprised by the closures. She argues that DionWired had too much space, since shoppers tend to use physical stores as showrooms to browse before buying online.
"I don’t believe physical retail is dead, but it’s about omnichannel [a mix of physical stores and online working together]. One of the biggest disappointments was that Massmart took so long to adapt to this trend, when it could have done so effectively so much sooner because of its links to Walmart," she says.
Still, its swift decision to axe DionWired shows there’s little room for sentiment. And the Massmart of today is probably going to be entirely unrecognisable from the Massmart you’ll see in a decade’s time.
Even so, some analysts have called for harsher measures — like closing Game entirely or scaling it back radically.
Slape says this won’t happen.
"Game is a pretty powerful brand that resonates with customers. If you think about the recent [promotions] like Black Friday, Game really resonates with customers and there are certain categories where we are incredibly dominant, such as electronics, appliances, sporting goods."
Massmart may, however, decide to ditch its plan to introduce food into Game.
Slape also wants Game’s marketing to become "edgier".
"What we are trying to do is give Game back its personality. I think it’s got tremendous potential, we just need to get the business set straight," he says.
One brand he believes does not need to be overhauled is Builders Warehouse.
"I’ve seen retail at a lot of different places around the world and I would really rank Builders up there. In fact, recently the Builders Group hosted a group of DIY retailers from around the world to come and see its stores and the feedback we got was that it’s incredible," he says.
He speaks at length about Builders Warehouse, illustrating why he was attracted to the dynamism of retail in the first place.
"The great thing about retail is that every day you get to come in and work on improving the company ... what retail looks like today is in all likelihood going to be different 10 years from now, 20 years from now. And the most important thing is for us is to be constantly looking out at competitors, looking at other countries."
While the share price bump after the DionWired closure news suggests some believe Slape is already making the right moves, other critics will need to see more before they’re sold on his plans.
Mthombeni says Slape’s plan at this stage seems to revolve around cost-cutting, "but in terms of strategy there’s still a big gap in terms of how he’s going to change things".
Real, sustainable strategic changes must be implemented, aimed at allowing Massmart to claw back market share, boost margins and restore profitability.
Protea Capital Management CEO Jean Pierre Verster is also yet to be convinced.
"Announcing the restructuring so soon into the year doesn’t bode well for the recovery, and it will probably continue to cut costs, including labour," he says.
Verster believes reviving Massmart won’t be easy, since not only is it battling the global phenomenon of online disruption, but it is also dealing with local consumers under intense financial pressure.
Yet, he says, the fact that Walmart injected someone as senior as Slape into the business shows its commitment. "Whether it’s a long-term commitment or just a last-ditch effort to try to turn Massmart around — and if it isn’t successful, then a possible exit – is an open question. But, at least for now, it does imply that there is a commitment from Bentonville to turn the business around," he says.
Slape also needs to give some clarity over Massmart’s plan for its African business.
In 2011, when Walmart bought Massmart, much of the talk was about using SA as a "springboard" into Africa. It was a buzzword that found favour with many retailers — Shoprite, Pick n Pay, Mr Price and Tiger Brands. For many, it’s been a disaster.
Massmart is rethinking its African expansion. Slape says it may be that Massmart shouldn’t pull back from the continent, but may need to do "different things to be successful over the long term in Africa".
"If we’re going to be the best retailer we can be, we may need to add a few more components to our Africa expansion strategy," he says.
One additional component, which it would do well to upgrade in SA, is its digital arm. "There’s no question that retail of the future is going to be online and we’ve got to be a bigger part of that," he says.
Investors, who’ve suffered through a lost decade alongside Walmart, won’t want to wait around long to see improvements.
Slape is aware of this. "We’re going through the process now of working with our executive committee, with our board and thinking through all of the things that we’ve got to do," he says. On January 30, Massmart will "lay out what it is we’re going to be doing".
If Slape succeeds, it’ll be a boon for all investors — not just Walmart.
One of those who believes he can succeed is John Biccard, a veteran "value-orientated" fund manager at Investec. Today, Massmart is one of the top three shares which Biccard holds in his value fund.
In a note last month, Biccard said the share price "severely undervalues the group’s strong retail brands and the recent intervention by Walmart with respect to management will bear fruit".
And, another thought: "Massmart’s share price is currently 85% lower in US dollars when compared to the price Walmart paid 10 years ago — would it not make sense for Walmart to buy out minorities?"
Biccard is one of many who believe Massmart is now deeply undervalued and could, good fortune or proper management permitting, make real money for believers.
Of the seven analysts who cover the company, three rate it a "buy", three a "hold" and one a "sell". On average, they expect the share price to rise 14% in the next year.
If Slape’s recovery strategy takes off, it’ll be intriguing to see whether Walmart stays.
At this point, says Govender, it would make no sense for Walmart to sell.
Reviving Massmart will be tricky: it faces the global wave of online disruption, and SA consumers under intense pressure
— What it means
"Makro and Builders Warehouse are not broken businesses — they are legitimate retail offerings that need to be kept relevant," she says.
But, says Mthombeni, Walmart is "likely to review this [investment] in three to five years and make a decision based on the performance of the company then".
Even if Walmart doesn’t stick around, Sanlam Investments analyst Daniel Masvosvere says its apparent determination to make Massmart work is encouraging. "Whether the plan is to fix and sell or fix and hold and grow is not apparent at this point and one can only conjecture until it shows its hand," he says.
The bottom line is that Slape’s actions in the next few months are likely to determine the future of Walmart’s presence in SA.
Can he be the catalyst that ensures Massmart begins to deliver on Walmart’s ambitious goals of a decade ago?
Slape believes Massmart can deliver, even if it’s "a little deferred".
"There’s an opportunity for us still to go do all of the things that we thought were there and we still believe are there today," he says.
And he adds that he’ll stay as long as it takes — provided SA’s department of home affairs gets around to extending his visa.
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