Wal-Mart (NYSE:WMT), the world’s largest retailer, gained its first foothold in Africa through the approval of its $2.4 billion bid for Massmart. Under the terms of the deal, Wal-Mart bought a 51% stake in Massmart on condition that it does not lay off any workers for two years. Wal-Mart competes with other big-name retailers like Target (NYSE:TGT), Costco (NASDAQ:COST), Amazon (NASDAQ:AMZN) and Best Buy (NYSE:BBY).
Our price estimate for Wal-Mart stands at $74.46, implying a substantial premium to market price.
African Expansion Plans
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Massmart runs nine wholesale and retail chains with approximately 288 stores in 14 African countries. Wal-Mart believes that South Africa is a key market for growth and it accounts for roughly 20% of consumer spending on the African continent.
Africa could act as a crucial base for Wal-Mart to target other local countries in the region. Countries like Nigeria are gaining greater appeal due to rising affluence levels and increasing size of the middle class across Africa.
Wal-Mart intends to support plans laid out by Massmart, involving constructing 140 stores during the next three years within South Africa, and another ten elsewhere in the region. This will add to an existing 263 Massmart branches across South Africa, 11 in Botswana, 3 in Namibia, 2 in Lesotho and single sites in eight other countries including Nigeria and Uganda.
The foray into Africa could help Wal-Mart increase its market share in emerging countries. Of late, the emerging countries have been driving profits as U.S. retail sales have slowed.
However, to be successful in emerging countries like Africa, Wal-Mart needs to address the problems created by fledgling transport links and bureaucratic issues.