Chilean experience shows how Walmart will benefit SA

I AM not an economist, I am a retailer. But I would like to share with you some macroeconomic numbers that I think are rather interesting. SA’s per capita gross domestic product (GDP) today is about the same as that of Chile, my home country, in 2002. Between 2002 and last year, however, Chile increased its per capita GDP by more than 40% (I have seen one reputable estimate that puts this figure at almost 50%, or $15500 today), while at the same time the retail industry more than doubled, creating many hundreds of thousands of new jobs.

I am completely confident that SA will follow the same path.

While the world economy went into a meltdown, Chile has created 750000 new jobs since 2009; a huge achievement in a country of 16-million people.

My own sector has grown from being a $5bn business nine years ago to one that is worth $13bn today. How have we achieved this? The retail boom in Chile can, I believe, be largely attributed to the increase in per- capita GDP. Of course, a rise in this important economic indicator doesn’t directly translate into more money in people’s pockets but it goes a long way — I would suggest most of the way — towards explaining retail’s recent success in Chile.

I mention these statistics not to boast about my country’s achievements but to offer South Africans some very real encouragement. There are many parallels between our nations apart from similar GDP figures. Until not that long ago we both had closed economies and authoritarian political regimes. Then we both achieved democracy — in the case of Chile in the late 1980s — and we both began to open up our economies. Tariff barriers were scaled down or scrapped. Our economies were opened up to the world. Inevitably, this meant that some companies and even whole sectors failed at the same time that others flourished but, overall, the effect, certainly in the case of Chile, was overwhelmingly positive. I tried to paint this picture recently when I testified before SA’s Competition Tribunal. What I said was that competition and being integrated into the world economy, while sometimes painful, had benefited my country enormously.

I am the CE of Walmart Chile. As such, I was telling the t ribunal about my experiences of working with the world’s biggest retailer in Chile. I told them about how Walmart had sought to enter Chile because it had a stable economy and a stable political system and because it was an emerging market. These are pretty much the same considerations with which Walmart approached its acquisition of SA’s Massmart .

I made the point in my written submission that many in Chile had been sc eptical about Walmart coming to our country — but that any fears there may have been mostly allayed.

Counsel for those wanting to attach conditions to the takeover interrogated me quite vigorously. I rather enjoyed the experience and can only hope that I gave as honest and balanced a portrayal of the situation — as I have experienced it — as possible.

Distribucion y Servicio ( D&S) is Chile’s largest food retailer. It began life as a family- owned operation led by Manuel Ibanez Ojeda in 1957 with one supermarket, called Almac. The sons expanded the business and remain involved to this day.

The modern D&S, which Walmart acquired in 2009, operates under several formats, including hypermarkets, supermarkets and convenience stores called Econo, of which we currently have about 113.

At the t ribunal, counsel wanted to know what effect Walmart’s ownership had on our suppliers. The exact number of suppliers we have added post-Walmart was meant to have been confidential, but it emerged on the record during the hearings and it is now on the public record, so I may as well repeat it here. Since Walmart took over (and bear in mind that this was barely two years ago), D&S has added 487 new suppliers. In real terms, we are talking about $25m worth of goods, almost all of which went to very small, mostly fresh-produce, producers. Many of these have enrolled in D&S’s small agriculture development project, which we launched last year and aims to help smaller farmers increase their sales and business skills. I might also mention that we are proud of being one of few companies that pays small and medium suppliers in 30 days, as opposed to the industry norm of 60 days.

Walmart’s entry into Chile has resulted in significant increases in sales and profitability for its Chilean suppliers. Since 2009, D&S has worked with local, regional and international suppliers to institute a formal plan aimed at helping suppliers become more efficient, to better manage their product ranges and to develop new products.

This initiative, called the joint business plan, has resulted in lower operating costs, better quality and increased sales for D&S, while also benefit ing suppliers.

The plan is not about D&S telling its suppliers what to do, but rather about making both D&S and the supplier responsible for the supply relationship.

A report by independent economists, which was shared with the t ribunal, made the point that by last year those suppliers taking part in the plan had already seen a significant increase in both sales and profitability.

The amount of $25m I mentioned is a fairly small percentage of overall sourcing in Chile, but consider this: in SA, Massmart buys 95% of its goods from local suppliers. In Chile the figure is 93,7%, two years after the buyout. When Walmart arrived in Chile, it already had operations in other countries in South America. In Africa this is not the case. Imagine, then, how much greater is the scope for suppliers to grow, into Africa, because of a Walmart-powered Massmart.

The Walmart takeover story, however, is not just about the local market. Since Walmart acquired a controlling interest in D&S, Walmart now accounts for exports from Chile worth $250m . Before the takeover the figure was $100m . Procurement is a two-way street, as Chile has experienced to its benefit.

I didn’t quite succeed, in my interrogation before the t ribunal, in getting across actual employment figures in Chile pre- and post- Walmart. Apart from replacing the chief financial officer, Walmart did not make any employees redundant after acquiring D&S. The numbers today are these: we now employ 39000 people, 55% of whom are women and 34% of whom work part-time. In just two years, we have added 3000 jobs, an 8% increase. Again, not a bad achievement.

The ratios of female and part-time employees have remained largely the same since Walmart took over and the company has sought to improve working conditions.

Of course, you would expect me to support Walmart’s takeover of Massmart. I cannot for a moment suggest what is best for SA. All I can say is that, based on my experience in an emerging market on a continent very different yet not entirely dissimilar to yours, we have found that Walmart is, to borrow from the company’s terminology, helping us all to live better lives.

• Cambiaso is the CEO of Walmart’s subsidiary in Chile. He testified at the Competition Tribunal on behalf of Massmart and Walmart.

Source: BusinessDay

Wal-Mart’s $2.4 Billion Massmart Takeover Bid Approved With Conditions

South African antitrust authorities approved Wal-Mart Stores Inc. (WMT)’s acquisition of a controlling stake in Massmart Holdings Ltd. (MSM), its biggest in more than a decade, on condition no jobs are cut for two years.

The companies must also ensure that existing labor agreements are honored for three years after the takeover, the Pretoria-based Competition Tribunal said in an e-mailed statement today. Wal-Mart and Massmart will also establish a 100 million-rand ($14.6 million) supplier development fund, it said.

The South African government and labor unions opposed Wal- Mart’s 16.5 billion-rand purchase of 51 percent of the nation’s largest wholesaler, saying Wal-Mart’s entry will cause a surge in cheap imports, harming manufacturers, suppliers and local rivals. President Jacob Zuma’s administration has pledged to create 5 million new jobs over the next decade to cut the nation’s 25 percent unemployment rate.

Wal-Mart, the world’s largest employer with 2.1 million workers, will expand Massmart’s South African business, adding to jobs, Andy Bond, Wal-Mart’s executive vice-president responsible for the U.K. and Africa, said on May 11 at hearings held by the Competition Tribunal. It aims to use Massmart, which has almost 300 stores in 14 African countries, to lead its expansion in sub-Saharan Africa.

“The big deal is Africa,” Chris Gilmour, an analyst at Johannesburg-based Absa Management Ltd., said in a phone interview yesterday. “The continent is the flavor of the month for investors.”

Full Reasons

The Competition Tribunal will give full reasons for its decision within 20 days, the antitrust regulator said.

The acquisition of Massmart is Wal-Mart’s second-biggest after the $11 billion takeover of U.K. retailer Asda in 1999. Massmart Chief Executive Officer Grant Pattison said on May 9 that the company plans to expand trading space by 20 percent over the next three years. Growth in floor space will boost sales by a similar margin and will also increase jobs while securing current posts, said Pattison.

The conditions imposed by the Competition Tribunal meet proposals made by Wal-Mart and Massmart during hearings held in Pretoria earlier this month.

South Africa ranks tops in Africa

South Africa was named Africa's most valued African brand at the fourth BrandFinance Global Nation Brands league at the JSE on Wednesday.

This showed the country's progress and recognised its hosting of the Soccer World Cup and its acceptance into the Brazil, Russia, India, China and South Africa (Brics) group of nations, said International Marketing Council chairperson Anitha Soni.

It was also recognition of South Africa as an important emerging country in its own right.

More at M&G...

Charlie Munger: A Spade is a Spade

Sven Richter of Rennaissance Capital on Africa

Financial Mail interview with Sven Richter, head of Frontier Markets, Rennaisance Capital:

What brings you to SA?

We have US$130m invested in Africa out of the $2,5bn managed by Renaissance. We have recently opened our third office, in Johannesburg, to complement our offices in Moscow and London. I will be managing a frontier market fund, which we will launch later this year, and I expect that African shares will make up about 50% of the fund.

So you are positive on Africa?

Compared with emerging markets in Asia the stock markets are cheap. And the fundamentals are good. Not many people know that there are more households earnings $20000/year or above in Africa than in India. Nigeria is expected to be one of the 20 largest countries by GDP in 2020.

What about stock market liquidity?

You might remember the New Star Heart of Africa Fund, which was unable to sell its underlying shares fast enough to meet redemptions in 2008. We want to avoid such a crunch in our sub- Saharan African Fund, which excludes SA. The JSE trades about $1bn/ day, the other African markets in aggregate trade $40m on a good day. Even if that increases to $100m over the next few years the fund needs to be capped at $300m so that we can be confident that the portfolio can be sold in 10 days.

What about the prospects for African unity?

I am not expecting the African Union to drive this. But it could develop from the three economic unions which represent the east, west and south of the continent. Improvements in ports and infrastructure will also help drive African development. Until now, it was more cost-effective for Nigeria to import sugar rather than bring it down from the north of the country to the coast. But as road and rail links improve, the economics of using Nigerian sugar have improved.

As Africa is 53 different countries it must add complexity.

Of course it does, but it is also a mistake to see China as one country. The contrast between rich coastal cities such as Shanghai and the underdeveloped interior is as stark as anything in Africa. There are parallels between Africa today and China a generation ago.

What companies are best placed to benefit from the emergence of Africa?

As in my days in the Templeton emerging markets team I like the consumer shares. Breweries are still a great investment. Telecoms are getting expensive and probably won’t show the growth they did in the past. Bank shares are a better way to access the consumer and there are a lot of them. Financials make up 58% of the fund.

What about natural resources?

Very few natural resources shares are listed in the region. Energy and basic materials make up less than 2% of the benchmark. Most of the listed companies in the African resources sector are listed in London, Sydney or Toronto. About 5% of our portfolio is listed in Western markets.

So what are your main stock picks?

Though it needs more rain, Kenya is looking stable macro economically. The two largest shares are Kenya Commercial Bank and its competitor Equity Bank. There are five Nigerian banks, with the largest holding in Access Bank; two Nigerian brewers; and New Mauritius Hotels, which manages 25% of the hotel rooms in Mauritius.

And does your fund invest in Zimbabwe?

Yes. There are some cheap, well-run businesses, some of which have externalized the bulk of their business, such as Seedco, a world leader in the seed business. Innscor is an excellent broad-based consumer business with a leading position in retail, milling and snacks. Other great businesses are the brewer Delta Corp and Econet, the cellphone business.

A New Class of Consumers Grows in Africa

From the WSJ:

Sustained economic growth in Africa has produced for the first time a broad middle class, one that cuts across the continent and is on par with the size of the middle classes in the billion-person emerging markets of China and India.

The rise of a middle class in the world's poorest continent is a dramatic marker for the global economy. At a time when the U.S., Europe and Japan are struggling to grow, Africa is beginning to beckon as a consumer of what other nations produce, thanks in part to a young population more upwardly mobile than ever before.

Over the past decade, the number of middle-class consumers in Africa has expanded more than 60% to 313 million, according to a new report from the African Development Bank Group. The study—one of the first efforts to document the contours of Africa's emerging consumer class—brings into focus a potentially huge and enticing frontier market for global investors.

Continue reading the full article (WSJ)

Shale Gas: Economic Potential vs Status Quo

More than a year ago we indicated the potential of natural gas extracted from shale rock and that the SA Karoo basin covered in shale rock might contain a great deal of this new source of energy. In a report in the Calgary Herald, of 18 April, Peter Terzakian referred to a very recent assessment of shale gas potential in 48 basins in 32 countries released by the US Energy Information Agency. (Read his article here)

To quote the Calgary Herald: “ The numbers are staggering: over a six-fold increase in the 1,001 trillion cubic feet (Tcf) of natural gas that was previously known to be “proven” reserves. According to the EIA report, over 6,600 Tcf of shale gas resources are estimated to be technically recoverable”. As the Calgary Herald explains “……..To put this in perspective, 1,000 Tcf of natural gas contains the equivalent energy to 166 billion barrels of oil – a staggering amount considering that the discovery of 10 billion barrels of conventional oil these days is a rare occurrence….”

We might add by way of comparison that the annual global consumption of oil is of the order of 87m barrels per day of which SA consumes about approximately 555 000 barrels per day.

The Calgary Herald produced a table of the largest 15 such shale gas reserves to point to the vast recoverable resource in China. But as may be seen below the estimate of the technically recoverable resource in South Africa at 500 TCF (none yet proven) is no small potatoes either- it is the fifth largest such resource and equivalent to 83 billion barrels.

Were this potential output of natural gas, estimated as recoverable by the US EIA, to be captured from the Karoo shale it would be very large potatoes indeed. It would be the equivalent to about 400 years of SA consumption of oil at current rates: 365*550 00 = 202.575m per annum; (83000mb/202.575mbpa) = 402 years

These numbers derived from estimates that are as objective and scientific as any should help concentrate minds at the SA Department of Mineral Resources that has placed a freeze on rights to explore for natural gas in SA until it has formulated a policy. The benefits of discoveries of natural gas in SA of anything like this order of magnitude would very obviously be transformational for the SA economy. It would offer the prospect of much faster growth in national output and in incomes, including the incomes to be received by the SA government and of the poor to whom it may be hoped a good portion of the extra income would be distributed.

There might well be damage to the environment to be traded off for these great potential benefits. Such tradeoffs can presumably be calculated and compensation offered if necessary to those negatively affected. There is too much at stake for any other approach to be adopted.

How much actual damage to be caused will continue to be disputed. However what should be borne in mind is that the damage to the environment caused by extracting other sources of energy in SA especially open cast or even deep level coal mining, would need to be brought into the calculation. Or in other words, less damage to the Waterberg traded off for damage to the Karoo.

In many countries the prospects of shale gas have been greeted like the proverbial manna from heaven. Technically recoverable gas is being converted into proven reserves and actual output at a rapid rate. The economics of shale gas are rapidly transforming the energy equation in the US. But in SA the green movement seemed to have sounded an alarm that has deafened any account of the potential benefits. That the Karoo farmers have (recently) been denied any direct benefits from the gas under their land has no doubt added to the cacophony of protest.

Shell Oil, which appears to be well ahead in the race for Karoo gas, has argued (Business Report May 3 2011 p 17) to the contrary, that the process of extracting gas from shale “can be done without significant environmental damage”. That Shell has an interest in such arguments does not make the argument invalid. Furthermore the actual experience of damage to the environment in shale basins where gas is already being extracted in significant volumes will provide very important evidence.

The negative external effects of extraction or of any minerals in the ground do not remove the necessity to actually calculate the relevant tradeoffs as best as science will allow. Without such calculations and tradeoffs, economic development itself becomes much more difficult to realize. This is a fact of economic life well enough known to the greens who have no taste for the rising incomes and especially the rising consumption power of the masses.

Such an environmental assessment would then enable full compensation to be actually paid out to those damaged directly. The great potential extra income to be generated from natural gas available deep under the Karoo shale rock is very likely to greatly exceed the damage caused to neighbors. If this is not the case then the project should not be allowed to go ahead.

The Department of Mineral Resources should however be well aware when establishing its policy that not only will natural gas discoveries on this potential scale be transformational for the SA economy, it will prove even more transforming of the energy sector of the economy. The Department should know that transformation of this order of magnitude will naturally not only be resisted by those directly in the path of discovery. Resistance would also come from those who think they may lose the race for supremacy for natural gas from SA sources because they have been slow out the blocks. The national interest in economic growth will count for little when opposed by vested interests.

Source: Investec

See also: An incredibly bullish chart on Shale Gas Reserves, Sasol to explore Karoo for Shale Gas, and Sasol buys more Canadian Shale