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WALMART’S AFRICAN EXPANSION 1 Karen Robson and Stefanie Beninger wrote this case under the supervision of Professor Sudheer Gupta solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2013, Richard Ivey School of Business Foundation

Version: 2013-11-19

As the first decade of the 21st century drew to a close, Walmart had expanded through North America, South America, Europe and Asia. Looking forward, Walmart executives set their sights on expanding into yet another continent: Africa. Africa contained six of the 10 fastest growing economies from 2001 and 2010.2 The tremendous potential of Africa was obvious; the question for Walmart was whether its strategy for entry into South Africa was sound.

COMPANY BACKGROUND

Sam Walton founded the first Walmart store in 1962, with the goal of offering “the lowest prices, anytime, anywhere.” Walmart quickly became a success: by the early 1970s, the discount variety store chain had become a publicly traded company listed on the New York Stock Exchange. By 1980, Walmart had reached $1 billion3 in annual sales. This trend of growth continued into the 1990s and 2000s; by 1997, Walmart had achieved $100 billion in sales and was the largest private employer and largest grocery retailer in the United States. In 2011, Walmart employed 2.1 million people, achieved more than $400 billion in sales and was the largest retailer in the world. Looking ahead, Walmart was poised to continue to uphold Sam Walton’s original vision of offering extremely low prices on everyday products. The Walmart Approach

At the core of Walmart’s success was its ability to offer “everyday low prices.” Indeed, since Walmart’s beginning in 1962, its strategies, systems and structures had been aligned to support a cost-based business model. One of the most important elements of this model was operating at an unprecedented scale. The sheer size of the organization allowed Walmart to provide a wide range of product offerings. The company offered extensive grocery, entertainment, home ware, apparel and health products; in total, a typical Walmart store stocked more than 100,000 types of products, which typically included more than 60 sizes and types of toothpaste.4 This wide range of product offerings enabled Walmart to build a reputation as a one-stop shop for most consumers’ needs.

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As the largest retailer in the world, Walmart was able to flex its bargaining power to demand low prices from its suppliers. In addition, its purchasing power was sufficiently high that it was able to require suppliers to use Walmart’s own inventory management system, which ensured that products were delivered on Walmart’s schedule. Walmart’s scale, in combination with its inventory management system, also allowed it to make quick alterations to the product mix. As the retailer often had multiple suppliers, it was able to secure products that only some suppliers carried. As a large buyer, Walmart also had the power to demand quick changes to its supply orders. As a result, Walmart was able to capitalize on market trends in a timely fashion. Finally, Walmart kept wages low by preventing unionization and kept fixed costs low by maintaining a “no-frills” store environment. Even in the 1960s, Sam Walton built stores with only the most basic physical amenities, configuring the buildings to allow large volumes of customers to shop efficiently without the need to rely on salespeople for assistance.5 Furthermore, these no-frill stores were typically located in rural locations where property values were low.

Challenges at Home

Despite having achieved considerable success at home, Walmart faced numerous challenges. For example, Walmart received criticism for its approach to doing business, with critics arguing that Walmart’s low wages for employees and its relentless pressure on suppliers were unethical.6 Other critics pointed to “The Walmart Effect,” whereby traditional local shopping areas or mom-and-pop shops were forced to close their doors in response to competition from big-box retailers.7 Walmart also faced issues with rising labour costs. In 2009, the minimum wage in the United States rose to $7.25 per hour, although many states and municipalities required an even higher minimum wage due to differences in their costs of living. In addition, the uncertain economic environment in the United States led to rising healthcare costs as employees, facing a future with limited job security, chose to cash in on their health benefits while they still could. As a result, Walmart found it increasingly difficult to keep its labour costs low. Another issue was that Walmart stores were not nearly as successful in urban areas as they were in rural areas. First of all, large spaces that could accommodate Walmart stores were relatively difficult to acquire in urban areas. Secondly, when suitable properties did exist in urban areas, their property values tended to be much higher than in rural areas, leading to higher overhead costs. These issues became even more serious as a trend of urbanization developed: as people downsized into smaller urban living spaces, achieving high sales in urban areas became an increasing cause for concern. Finally, the retail industry in the United States was characterized by intense competition between the key players, including Target, Tesco and Safeway. Despite Walmart’s advantages with scale, other industry players had developed highly sophisticated logistics, enabling them to better match Walmart’s prices. At the same time, the trend toward online shopping was increasing. For example, Amazon.com, also known for its scale and low-cost operations, was now a significant competitor. As a result, Walmart faced increasing pressure from competitors within the United States. As of 2011, the sales at Walmart’s U.S. stores had declined for eight consecutive quarters.8

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Walmart began its international expansion in the early 1990s, targeting its neighbours to the north and south for its first international ventures. In 1991, Walmart entered into a joint venture with the Mexican retail company Cifra. Later, in 1997, Walmart acquired a majority stake in Cifra, and rebranded it as Walmart de México. In 1994, Walmart established itself in Canada by acquiring the Canadian retail chain Woolco. In these ventures, Walmart demonstrated a pattern of obtaining control of a comparable company in an international location, and then replicating the operational practices of Walmart in the United States under Walmart’s management. After having expanded further afield in North America, in the late 1990s, Walmart set its sights on new continents. In 1996, Walmart purchased a 35 per cent stake in China’s Trust-Mart, and opened its first stores in Asia. Around the same time, Walmart entered Europe through the acquisition of Britain’s second largest supermarket chain, Asda. Both of these ventures were successful, and Walmart continued with its international expansion in Europe. However, not all of Walmart’s international ventures were successful. In 1997, Walmart entered the German market by purchasing two retail store chains, Wertkauf and Interspar, neither of which operated on a large scale or held a great deal of the market share. Walmart experienced difficulties with the German supplier networks, as it had neither the scale nor the market power necessary to dominate the retail distribution system.9 In addition, German consumers were accustomed to shopping in smaller neighbourhood stores, and the big-box store format was relatively unknown. In the years that followed, Walmart faced criticism from both the German media and its own shareholders for being unable to live up to its reputation of offering the “lowest prices anywhere, anytime.” Ultimately, Walmart exited the German market in 2006, after being unable to obtain a competitive advantage. Despite this lack of success, Walmart continued its international expansion in the new millennium. In 2002, Walmart entered the Japanese market through a 6.1 per cent investment in Seiyu, which later grew into a wholly owned subsidiary. In 2008, Walmart expanded into South America by acquiring Chile’s leading food retailer, Distribución y Servicio. As the U.S. market matured, international expansion became even more important to sustain Walmart’s growth. Having expanded throughout North America and into Europe, Asia and South America, the question facing Walmart was where to expand next. One promising opportunity was Africa.

SOUTH AFRICA

Located at the southern tip of Africa, South Africa was the only African country to be a member of the BRICS, a group of five emerging markets: Brazil, Russia, India, China and South Africa. South Africa’s membership in the BRICS signalled numerous positive attributes in terms of its economy, and, indeed, it was one of the continent’s largest and fastest growing economies. Boasting modern infrastructure and well-developed finance and communication sectors, South Africa had many attractive qualities. Not only could Walmart potentially benefit from South Africa’s economic growth but Walmart could possibly use South Africa as a springboard into other African markets.

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International Expansion

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South African History

During the period of colonization, racial segregation began: black and mixed-race people were marginalized, subjected to excessive taxation and deprived of equal rights. Even after South Africa gained its independence from Britain, the years of racial segregation had paved the way for the apartheid system. In 1948, despite significant opposition from the African National Congress and from international bodies, South Africa’s governing National Party enforced segregation via apartheid. This system of segregation between the white minority and the non-white majority continued for many years. Apartheid officially ended in South Africa in 1994, largely based on the efforts of Nelson Mandela and the African National Congress. Post-Apartheid South Africa

In 2011, the South African population was close to 52 million people, which represented an 11.2 per cent increase since 1996. The majority of the population (80 per cent) identified as Black African, with 9 per cent each identifying as Colored or White (see Exhibit 1). Most South Africans had been born in South Africa, with only 4.4 per cent of the population having been born outside the country. South Africans spoke many different languages. In addition to more than a dozen unofficial languages, the country had 11 official languages. Of the 11 official languages, those most commonly spoken were IsiZulu, IsiXhosa and Afrikaans; only 10 per cent of the population spoke English. The gross domestic product (GDP) per capita in South Africa was $11,400 in 2011, which, although high for Africa, ranked 64th in the world. In addition, the legacy of apartheid remained in the form of significant income inequalities throughout the country. Half of the population lived below the poverty line, and one-quarter of the population was unemployed. Almost 14 per cent of the population lived in informal dwellings, such as shacks in unplanned settlements. Even in 2011, these issues with respect to income, employment and living conditions favoured the white minority in South Africa. Education was free and was required for all children between the ages of 7 and 16. As a result, 75 per cent of the population obtained a higher level of education than basic primary education, and only 8 per cent of the population received no education at all. Despite the emphasis on education, South Africa experienced a fairly broad skills shortage, owing to decades of inadequate education of black people during apartheid. In addition to the challenges faced as a result of extremely high poverty, inequality, skills shortages and unemployment rates, South Africa was one of the countries most affected by HIV/AIDS. An astounding 17.8 per cent of the adult population in South Africa was infected with HIV/AIDS, a prevalence surpassed by only three other countries in the world. South Africa saw more deaths due to HIV/AIDS than any other country in the world. Despite these challenges, South Africa had modern infrastructure, including well-developed legal and communications sectors. The financial system was fundamentally sound and included relatively welldeveloped money markets, foreign exchange markets and capital markets. In addition, South Africa had a

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Like many countries in Africa, South Africa had a history of colonization by European explorers. The Dutch first colonized the area in the 1650s, using the Cape of Good Hope as a strategically located port for ships in the widespread Dutch East India Company. The Dutch remained in power until the 1800s, when the British conquered and declared sovereignty over the area.

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South Africans were highly supportive of one another: ubuntu, or the notion of humanity toward others, was a central element of the South African culture.11 South Africans often repeated the saying “I am because we are,” revealing a sense of self as part of a larger whole. Some of the most important attributes of ubuntu included harmony, continuity, reciprocity and symbiosis. Nelson Mandela described ubuntu as enriching oneself in an effort to enable the community to also improve.12 Another aspect of South Africa that had facilitated progress in recent years was a relatively stable government. The government was structured as a parliamentary democracy in which constitutional power was shared between the President and the Parliament. Since the end of the apartheid in 1994, the African National Congress had been the political party in power. In 2009, under the African National Congress, President Jacob Zuma was elected into office as the President of South Africa. Mobile phones were not introduced to South Africa until the late 1990s, but quickly became ubiquitous across the country. As of 2011, South Africa had more mobile phone subscriptions than people. Much of the surge in ownership of mobile phones was attributed to the vast numbers of black people who joined the middle class. Compared with mobile phone access, the penetration rate of Internet was much less, amounting to only 21 people in 100, and still 64 per cent of households had no access to the Internet.

Business in South Africa

South Africa was the financial and business hub of Africa, and its government was open to foreign investment of all forms and in virtually all business sectors; indeed, South Africa had almost no restrictions to foreign investment. The government viewed foreign investment as an opportunity to stimulate growth, improve the competitiveness of South African companies and obtain access to foreign markets. To facilitate foreign investment, the Department of Trade and Industry offered on its website an “Investors Handbook,” which outlined relevant information for interested investors. However, the South African Competition Act specifically required competition authorities to determine whether a merger could be justified based on public interest. These interests included, for example, how a merger was expected to affect an industry or geographical region and employment; whether a merger would affect the competitive ability of small businesses owned by disadvantaged people (that is, owned by non-white people who were excluded from seizing business opportunities during apartheid); and whether a merger would affect South Africa’s ability to compete internationally.13 Ubuntu formed the basis for South African management philosophy, which was organized around this principle of interconnectedness: employees were typically rewarded and reprimanded in groups, and personal relationships were considered essential to business partnerships. The impact that ubuntu philosophy had on workplace culture included openness, availability and loyalty to one’s workplace, in addition to mutual respect and empathy for coworkers.14 Another important element of the business landscape in South Africa was the country’s history of unionization, with an estimated 30 per cent of the South African workforce belonging to a trade union.15 South Africa had numerous large unions, including the Congress of South Africa Trade Unions (Cosatu); the Chemical, Energy, Paper, Printing, Wood, and Allied Workers Union (Ceppwawu); the General Industries Workers Union (Giwusa); and the National Union of Mineworkers (NUM). Of these, Cosatu

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modern and generally effective regulatory framework for its financial sector, owing to the Companies Act of 1973.10

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Wages for most occupations were set by collective bargaining agreements, and, as a result, South Africa had no official minimum wage. However the Minister of Labor set a minimum wage for certain occupations, including retail employees. This minimum wage varied depending on location, but was, at most, the equivalent of less than $2 per hour for a sales assistant. Cosatu and the other unions were prone to frequent strikes. The power of South African unions was exemplified in a September 2010 strike, in which Cosatu demanded an 8.6 per cent pay raise. In response, President Zuma agreed to provide a 7.5 per cent pay raise (nearly double the inflation at that time), in an effort to maintain the government’s relationship with the union.17 Similarly, South African companies were required to source the majority of their products from local suppliers; otherwise, they would be in violation of labour laws and face retaliation from the unions.

South African Consumers

South Africa had the largest retail market in Sub-Saharan Africa and the 20th largest retail market globally. Retail sales of consumer goods in South Africa totaled $125.5 billion and $132.2 billion in 2010 and 2011, respectively. In addition, the total personal disposable income in South Africa was $213 billion, with total household consumption estimated to be $240 billion. Market research on South African consumer behaviour available to Walmart revealed that spending patterns of South African consumers had shifted over the past years, largely due to the emergence of a black middle class, estimated at 3 million people, making it South Africa’s largest and fastest growing spending group.18 Additionally, as a result of th...