In March 2012, American multi-national retail corporation Walmart ⁽²⁾ completed its acquisition of a 51% stake in South African retailer Massmart ⁽³⁾ for US$ 2.4 billion, one of the largest merger and acquisition transactions seen in Africa, heralding the arrival of the world's largest retailer to the continent. The move gave Walmart a presence in Africa, which for the first time forms part of its current growth strategy, which focuses heavily on international expansion.⁽⁴⁾ For some, this signals great progress for Africa, as industrialised countries are seen to demonstrate significant interest in sectors other than natural resources. The recognition of Africa's expanding consumer market is itself a further step for the continent's growing economy. For others, public interest concerns were raised by the threat of Walmart edging out local suppliers in favour of imported products, a move which would have ramifications both at an individual level and in the context of long-term domestic economic growth.

This CAI paper examines the positive potential of the development of a local supplier programme by Walmart-Massmart, considering the challenges and benefits to both the private investor and the wider domestic economy. In embracing the possibilities offered by commercialising the local supply chain, Walmart has the chance to lead by example and show other investors that there is much to be gained in promoting local relations.

Controversy over the takeover proceedings

Both the government and the South African Commercial Catering and Allied Workers Union (SACCAWU) launched an appeal against Walmart's acquisition of Massmart on the basis of public interest concerns. Primarily, the Departments of Trade and Industry, Agriculture, Forest and  Fisheries, and Economic Development and SACCAWU all expressed concerns about potential job losses which would result from the transaction. Further concerns included the possibility that Massmart's existing trade union relationships would be negatively affected, and that local procurement practices would be significantly reduced.⁽⁵⁾ Despite the challenges, and after lengthy deliberation, the Competition Appeals Commission approved the deal in a move which served to soothe investors after concerns that the government objections had sent out negative press regarding South Africa's growing reputation as an international investment destination.⁽⁶⁾ In light of the concerns raised by the appellants, the transaction was made subject to various conditions: There must be no retrenchments as a result of the merger for two years, those workers who have been retrenched must be reemployed as and when possible within the merged entity, Walmart must honour any existing union agreements, and finally, Walmart must establish a programme aimed exclusively at the development of local suppliers to ensure that some procurement continues at a local level.⁽⁷⁾

For the purposes of this paper, the focus will be on the condition regarding the establishment of the local supplier programme. This particular condition attracted further criticisms from the appellants that the proposed level of ZAR 100 million (US$ 11 million) for the fund to establish the programme was inadequate.⁽⁸⁾ The court therefore requested an expert panel to be established to analyse the appropriate financial level and purpose of the fund. The commission of experts comprised representatives from the government (who appointed leading international economist Joseph Stiglitz), SACCAWU and Walmart, who were tasked collectively to try and set out the best means by which small and medium-sized suppliers could participate in Walmart's global and domestic value chain.⁽⁹⁾ What followed was a lengthy debate including wildly conflicting opinions as to the level of funds that would be required to ensure that local suppliers did not lose out in light of Walmart's significant global purchasing power. Stiglitz and the SACCAWU representative fought for the fund to be increased from ZAR 500 million (US$ 56 million) to ZAR 2 billion (US$ 225 million) over a period of 5 to 10 years. In contrast, Walmart's representative argued for a much smaller and more focussed fund, citing the risk of waste and corruption if large sums were involved, but likely also having corporate expense in mind.⁽¹⁰⁾

In October 2012, following the submission of the expert report, the court ruled that Walmart should contribute the sum of ZAR 200 million (US$ 23 million) to a supplier development fund over a period of five years. In issuing his decision, the appeal judge emphasised that the size of the fund was less significant than the core objective, which was the integration of local small, micro and medium-sized enterprises into the global value chain of Walmart.⁽¹¹⁾ Massmart Chief Executive Officer, Grant Pattison, agreed with the court that the focus on upgrading skills was more important than the quantum of monies invested, a predictable response given the obvious saving to the corporation. He went on to comment that Massmart's “immediate objectives now are to continue to help South Africans save money and to identify and act on opportunities that will deliver positive economic outcomes as a result of Walmart's entry into South Africa.”⁽¹²⁾ The practical steps that Walmart will take to realise that positive impact and make good on this statement remain to be seen.

Challenges and opportunities

Despite the criticisms and concerns flagged during the takeover proceedings, there are economic benefits which will result from this transaction. According to Deloitte, the inflow of funds as a result of the acquisition will have a positive impact on the South African economy.⁽¹³⁾ Introducing the world's largest retailer is likely to foster the growth of the Massmart enterprise as additional stores are opened and more extensive product lines are introduced. This in turn should generate jobs and boost the consumer market. In addition, Walmart is an international retailer whose advanced procurement processes and established relationships with global suppliers create a strong purchasing power. This will enable the newly formed corporation to source significant discounts previously unavailable, which will be passed on to the South African consumer.⁽¹⁴⁾ The consumer will also benefit from a greater range of choice and produce, particularly given that Massmart's stated intention is to focus on food sales, which it aims to double in the next five years. Such expansion will provide new opportunities for agricultural smallholdings to participate in the Walmart global supply chain.⁽¹⁵⁾ So we see corresponding benefits to all of the South African economy, the consumer and local businesses.

Although workers' unions and government may have been disappointed by the level of the fund, its creation must be welcomed, not only as a benefit to local smallholders but also a step in the right direction within the investment market. Although Walmart may not have invested in smallholder relations to such an extent without the conditionality imposed by the court, the fact that it is now obliged to indicates a positive trend towards greater recognition of the value of the local supply chain. The benefits of utilising local business may not just be a corporate profile raising exercise but, in the context of meeting food demand and given increasingly volatile food supply and climatic uncertainty, the local supply chain may become a commercial essential. Tina Joemat-Pettersson, the South African Minister of Agriculture, Forestry and Fisheries, has highlighted the growing pressures on food security: “The full impact of rising food costs is felt by the poorest among us and to circumvent this situation, we have to start producing our own food.”⁽¹⁶⁾ As demand for food increases globally, businesses including Walmart need to confront the challenge of expanding their supply base, particularly in the context of the retailer's stated aims to provide more choice of produce. The public interest concerns surrounding competition between local suppliers and established procurement relationships have focussed primarily on protecting local suppliers against the threat of cheap imports. However, an important factor which appears to have been left out of these discussions is the long-term benefit of engaging these local businesses. This paper focuses particularly on how the opportunities presented by the local supplier programme might manifest.

Realising the potential of commercialising the local supply chain

In light of increasing constraints on land, water and productivity, the concept of contract farming schemes between multinational corporations and smallholders is increasingly prevalent and attractive. Known as out-grower schemes, these contract relationships have the opportunity to offer training and resources to farming communities in return for control over supply and quality.⁽¹⁷⁾ While it is not obvious for multinational corporations to engage with smallholder businesses (many agricultural setups in Africa work from less than three hectares of land so the quantity of produce is limited), the fact that agriculture in Africa continues to be dominated by smallholder farms has led to the increasing use of out-grower schemes in an effort to confront this challenge effectively. For private corporations, the use of contract farming schemes can be particularly beneficial where products which are the subject of local demand are not otherwise easily available. In return, corporations can offer management training and improved technology which can result in improved quality and productivity. Local sourcing can minimise production and transaction costs (import tax is no longer payable) while enabling corporations to stimulate and respond to local demand. Control over crop production minimises exposure to fluctuating commodity costs and provides increased control over quality.⁽¹⁸⁾

An example of a very successful scheme by a multinational company commercialising local smallholdings is that of SABMiller in Mozambique. In 2012, SABMiller became the first brewer to produce commercial-scale beer from cassava, a widely grown but little used crop in many parts of Africa. SABMiller has combined appeal to the local consumer market by using a domestic African staple as the foundation for its product, as well as benefiting the wider community by commercialising a crop which previously had little market exposure. The venture has created over 1,500 jobs for smallholder farmers in Mozambique and has the potential to be rolled out across many other markets on the continent. The product forms part of SABMiller's strategy to create a good quality beverage using locally sourced material for consumers who otherwise would not be able to afford alcoholic drinks.⁽¹⁹⁾ The company is therefore stimulating local demand in a way that correspondingly gives back to the community. Andy Wales, senior vice-president of sustainable development at SABMiller, recognises the dependency of the venture on local value chains but also the commercial advantages for both SABMiller and the local community: “Beer is a local business and our success is inextricably linked to that of the communities in which we operate. So we work to build value chains that drive economic growth and stimulate social development. By doing this, we can generate long-term returns for our business while also creating wealth for our local communities.”⁽²⁰⁾

If Walmart takes note of this success and applies the supplier fund constructively to assist local businesses to recognise market preferences, manage their work-force and develop organisational know-how, these businesses have the potential to grow exponentially in a way that is mutually beneficial. While the smallholdings will be rewarded with increased production and revenue, Walmart and other investors will have the opportunity to source quality affordable produce locally. This in turn will allow Walmart to reduce or even eliminate long distance supply costs, while boosting the domestic economy in the longer term. As part of the local supplier development programme, Walmart is now introducing a direct farming project in South Africa and aims to source 30% of its fresh produce via this project, connecting some 1,500 farmers to the group's value chain by 2016. The projects have commenced already with Walmart establishing contract schemes with farmers in the Limpopo region, whereby the corporation purchases produce as well as providing training, mentoring and assistance with finance and business. Mncane Mthunzi, who is leading the scheme at Massmart, said: “The farms in the Ofcolaco will be the first to deliver fresh produce to our stores, including butternut and green beans that have been specifically grown for Massmart. It is encouraging to know that we are creating a demand pull that is incentivising participating smallholder farmers to place more land under production and to grow high demand fresh produce.”⁽²¹⁾

Conclusion - Walmart has the opportunity to lead by example

The African market is likely to continue to attract foreign investors interested in its natural resources but, as the Walmart example has shown, interest may also develop in its consumer market. Although the African continent continues to grow steadily, many of its natural resources are non-renewable. In order to maintain continuous growth, an increased focus is needed on sustainable development, both in the context of these natural resources and other agricultural projects. Walmart is poised now to combine both investing in the consumer market with contributing to the development of effective and durable agricultural models through contract farming schemes. While Walmart has acknowledged that their success in Africa will be measured not only by their commercial achievements but also by their socio-economic impact, the corporation should not underestimate the commercial advantages to be found in developing the local supply chain. Protecting it should not simply be a gesture which demonstrates sympathy with public interest concerns. If proactively managed, the local supply chain may also be of genuine commercial benefit to Walmart, as well as a solid foundation for the domestic and wider economy to increase the attractiveness of Africa to further investment and success. Walmart should take the opportunity it has now to embrace the local supplier initiative, realise its potential and reap the long-term rewards. The wider investment market should observe their progress closely.

Written by Lucy Hathaway ⁽¹⁾

NOTES:

(1) Contact Lucy Hathaway through Consultancy Africa Intelligence's Industry and Business Unit ( industry.business@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Gaylor Montmasson-Clair and was edited by Nicky Berg.
(2) Walmart runs chains of large discount department stores and warehouse stores. The company is the world's third largest public corporation, according to the Fortune Global 500 list in 2012, the biggest private employer in the world with over two million employees, and is the largest retailer in the world. See Walmart’s website, http://www.walmartstores.com.
(3) South African retail giant Massmart is the third largest distributor of consumer goods in Africa, the largest retailer of general merchandise, liquor and home improvement equipment and wholesaler of basic foods. Massmart operates over 300 stores in South Africa and 12 other Sub-Saharan countries. See Massmart’s website, http://www.massmart.co.za.
(4) ‘Head of Walmart tells WFU audience of plans for growth over next 20 years’, Winston-Salem Journal, 29 September 2010, http://www.journalnow.com.
(5) Garden, M., Balkin, J. and van den Bergh, K., ‘Massmart / Walmart merger’, ENS, May 2011, http://www.ens.co.za.
(6) Motsoeneng, T. and Roelf, W., ‘Walmart wins final go ahead for Massmart deal’, Reuters, 9 March 2012, http://www.reuters.com.
(7) Garden, M., Balkin, J. van den Bergh, K., 'Massmart / Walmart merger', ENS, May 2011, http://www.ens.co.za.
(8) Motsoeneng, T. and Roelf, W.,'Walmart wins final go ahead for Massmart deal', Reuters, 9 March 2012, http://www.reuters.com.
(9) ‘SA names Stiglitz for Walmart study’, IOL, 10 April 2012, http://www.iol.co.za.
(10) Visser, A., ‘Stiglitz calls for £2bn Walmart jobs fund’, Business Day Live, 12 June 2012, http://www.bdlive.co.za.
(11) Visser, A., ‘Judge reduces Massmart supplier fund’, Business Day Live, 10 October 2012, http://www.bdlive.co.za.
(12) ‘Statement Massmart, welcomes Competition Appeal Court ruling’, Polity, 10 October 2012, https://www.polity.org.za.
(13) Naidoo, K., Moodley, E. and McPhee, S., 'Will Walmart's acquisition of 51% of Massmart benefit ordinary South Africans?', Deloitte SA Blog, 21 July 2011, http://deloitteblog.co.za.
(14) Naidoo, K., Moodley, E. and McPhee, S., ‘Will Walmart's acquisition of 51% of Massmart benefit ordinary South Africans?’, Deloitte SA Blog, 21 July 2011, http://deloitteblog.co.za.
(15) Clearly larger industrialised farms will also have the chance to participate but the focus of the South African Government and SACCAWU appeal (and the focus of this paper) is concern for the smaller units which are less likely to have the resources to keep up with the level of production which may be required as Massmart expand. African agriculture also continues to be dominated by smallholder farmers.
(16) Leach, A., ‘Massmart kicks off local procurement programme’, Supply Management, 6 August 2012, http://www.supplymanagement.com.
(17) ‘Africa: Commercialising smallholder production’, This is Africa, 18 December 2012, http://www.thisisafricaonline.com.
(18) Felgenhauer, K. and Wolter, D., ‘Outgrower schemes: Why big multinationals link up with African smallholders’, Organisation for Economic Cooperation and Development, http://www.oecd.org.
(19) Thorpe, L., ‘SABMiller: Cassava helps create unique beer - and 1,500 jobs’, The Guardian, http://www.guardian.co.uk.
(20) ‘Africa: Commercialising smallholder production’, This is Africa, 18 December 2012, http://www.thisisafricaonline.com.
(21) Leach, A., ‘Massmart kicks off local procurement programme’, Supply Management, 6 August 2012, http://www.supplymanagement.com.