Game Store Lugogo closing

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End of Game Store in Uganda: The external maneuvers behind the move

Kampala, Uganda  | THE INDEPENDENT | News of the impending closure of the Game Store at Uganda’s biggest all merchandise shopping point; the Lugogo Shopping Mall in Kampala, has added more cold wind on an already chilly business environment in the country.

The Game Store has been the anchor of the Lugogo Mall which has been the number one shopping point for the Ugandan capital’s A-class. It opened its doors in 2004 with a reported investment of US$11 million and had since been seen as proof of international confidence in the Ugandan economy.

News of its closure has been a dampener because it follows the not far off closure of other big name foreign stores such as Shoprite, Uchumi, Nakumatt, and Tuskys in the last five years.

Their departure, which leaves elite shoppers with limited choices away from the small domestic supermarkets, has been sometimes wrongly blamed on a toxic business environment. According to deeper analysis, bigger external considerations that are rarely factored into the discussion could be causing the departures.

Game has had outlets in about 12 countries across Africa but it has faced tough times in almost all of them.  Game sales from the rest of the Africa stores had fallen by 18.6% in rand terms in the 26 weeks ended June 2021 when talk of closures first surfaced, and by 5% in constant currencies.

The continued currency weaknesses, the COVID-19 crisis, civil unrest in South Africa, and most recently inflation have been blamed for Game’s poor performance.

Speaking to the media in South Africa in August 2021, Massmart Chief Executive Mitchell Slape revealed that the rolling back of operations was affecting 14 underperforming stores outside South Africa. Other subsidiaries affected include Botswana, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania and Zambia.

He said a difficult business environment for Massmart had made it hard for the businesses to survive and necessitated them to dispose of its all merchandise stores.

“The performance and the complexity in running those businesses is something that frankly we needed to address. We’ve commenced a formal sales process, we’re currently in discussions with potential purchasers to take on those stores,” Slape said.

In August 2021, Massmart was talking of closing 14 stores in Ghana, Nigeria, Uganda, Kenya and Tanzania.

It hoped to return to black through sharpened management focus and investments in high returning assets and online. Slape said the move will result in an annual profit before interest and tax improvement of US$50.24 million

Group chief financial officer Mohammed Abdool-Samad said he hoped Game will break even in the next 12 months. That appears to not have happened prompting the current wave of closures in several African countries.

The Uganda issue

The departure of Game from Uganda was first announced in March 2021 by its parent company, Massmart of South Africa.

At the time, Massmart said it was reviewing the whole of its Eastern and Western Africa operations. In Uganda it said it favoured getting a local business partner to manage its outlets. The reasoning was that a local investor manager would have a better understanding of local market conditions.

Now it appears, Massmart has failed to find such an investor and has opted to close the store instead.

“We have therefore initiated potential store closure consultations with our staff members in the potentially affected stores,” said Neville Hatfield, Vice President of Merchandise, in a widely quoted statement.

The new move has further unsettled Game Store’s army of about 300 employees who for over a year have lived under the fear that they could be out of job at any point.

Hatfield said Massmart is firmly committed to honour its obligations to its Ugandan staff members, customers and business partners. He promised a transparent consultation process with the staff members and their representatives, to agree on the next steps.

Walmart’s offer

At the same time, Massmart’s U.S. owner, the retail giant Walmart, announced that it wanted to buy out minority shareholders and delist the company from the Johanesburg Stock Exchange.

The U.S. retail giant has signed a deal to begin buying the 47% stake in Massmart it did not already own, the companies said in a joint statement.

Massmart said Walmart had offered it US$373 million to purchase the remaining shares and to delist the company from the Johannesburg Stock Exchange.

Another report claimed to have got from New Age Alpha New York a H-Factor Score of 96.1% for Massmart, which indicates that they have a 96.1% probability of not being able to deliver on the growth implied in its share price. If you turn that around, Masmart has a 3.9% chance of delivering on the growth implied by its share price.

Given the above metric, it is clear that Massmart’s current prospects are not great. However, the deal would help Walmart restructure Massmart from an operational perspective.

Walmart’s intent on delisting Massmart from the JSE would help it bring down costs and increase much-needed investment in the ailing retailer. Given the billions Walmart has already invested, it is not in its interest to walk away from the table, especially considering how successful competitors have been in the South African retail market.

On top of this, regardless of whether the takeover occurs or not, Walmart would likely need to continue providing financial support to Massmart. Thus, from its point of view, by taking full control it will at least get the full benefit of a possible turnaround scenario. The timing appears right because of the weak rand to dollar exchange rate – Walmart would pay roughly $370 million for the transaction.

But many risks remain and it’s not a sure deal that Walmart will be able to turn around the ailing retailer, analysts say. Coupled with intensifying competition from the introduction of retail giant Amazon, Massmart’s future is nothing but uncertain, concludes an analyst.

Massmart Chairman Kuseni Dlamini said the offer seems “fair and reasonable.” News of the sale of Massmart has attracted a mild reaction, with a surge of 46% after the company announced the news.

Analysts and bankers said having invested billions into the company, it is tricky for Walmart to back out now, especially as rivals have shown the South African retail market is highly rewarding.

“Considering the support that they (Walmart) have to give Massmart in this process, they probably thought well… why shouldn’t we get the benefit of it and let’s just go the whole hog and take the rest of the shares out,” Sasfin Wealth senior equity analyst Alec Abraham is quoted to have said.

The offer would allow Walmart to cut costs, invest more capital and turn around Massmart which has been posting losses and losing market share to bigger local rivals.

‘Ordinary shareholders are hereby advised that Massmart and Walmart entered into an implementation agreement on 31 August 2022, in terms of which Walmart indicated its firm intention to make an offer,’ the companies said in the statement.

The two boards are of the view the proposed transaction would enable Walmart to continue its ‘overweight’ support as a long-term shareholder and allow Massmart shareholders to realise value, they said.

Since buying its stake in 2010, Walmart had tried several strategies to make Massmart a go-to retailer in South Africa but failed to do so due to competition from strong local rivals such as Shoprite, Woolworths and Pick N Pay.

“The proposed transaction is a strong reaffirmation of Walmart’s commitment to Massmart and to South Africa,” the statement said.

Walmart will buy the shares using its cash reserves and has set a tentative date of 31 December to complete the process, it said, adding that more details will be published on 23 September.

Walmart acquired a 51 percent stake in Massmart in 2010 for $2.3 billion, an investment that was seen as an outlay to use South Africa as a base to grab a share of the so-called ‘Africa growth story.’

Since then, however, it has struggled in the face of very competitive and highly profitable local retailers such as Shoprite and Woolworths and stymied plans to expand across Africa.

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