Wal-Mart's African Adventure Begins. Pay Attention.

Big news on the Frontier Investing front:  The biggest retailer in the world is making a bold new push into what most regard as the final frontier market.  There is plenty of doubt, but I’m going to give you the real story about how significant this move is for investors.

When Wal-Mart first announced its intentions to launch a presence in India back in 2006, many onlookers said they were crazy.  Yes, India has an estimated $250 billion retail market and is the second largest country by population, but the government is very protective of its domestic businesses and Wal-Mart at the time was fresh from humiliating defeats in both Germany and South Korea.

Once again, the critics are scoffing at the company’s latest announcement – an entry into the South African market via a takeover of the local chain Massmart Holdings.  As can be seen in the map above above, Massmart has 232 locations across South Africa.  This is one of the largest chains there, but the naysayers claim that Wal-Mart has drastically over-payed and may have done this deal just to turn our attention from their stagnating US business.  I disagree completely.

Wal-Mart will win.  Again.  The critics (like this shortsighted one on Seeking Alpha) will slink back into the shadows.

Here’s why:

What the critics and pundits failed to understand about the India initiative was that Wal-Mart is one of the most gangsta companies in the history of the world.  They are as ruthless as their customers are fat.  Fine, some of them are fat but you get the idea.  They will go to any lengths and twist themselves into whatever contortions they need to in order to build the beachhead.  And once they get a foot in the door, everything changes and the takeover begins.

In the 1990’s when Wal-Mart began establishing their beachheads in China and Brazil, there was similar talk of how the company didn’t understand the lay of the land or the culture or whatever.  Meanwhile, they’ve since opened hundreds of stores throughout both countries – there is a Wal-Mart directly facing the massive statue of Chairman Mao in the middle of Beijing, talk about a juxtaposition!

Their foray in India has not been quite as successful yet, and the qualifier “yet” is important when you consider the hoops the company is jumping through just to be there.  For starters, there is a law that says foreign retailers are not allowed to sell goods directly to the public, so Wal-Mart built a wholesale distribution center instead of their typical retail outlet.  They launched a joint venture with the big Indian wireless company Bharti and it is Bharti that owns and operates the retail stores with Wal-Mart acting as supplier and “consultant”.  See what I mean about the ruthlessness?

Indian opponents of Wal-Mart are calling it “backdoor retailing” in violation of the country’s laws.  And they are right of course, but again, Wal-Mart is straight gangster.  Besides, they’ve bought the local farmers’ loyalty as they not only pay 7% more for wholesale crops, they actually arrange for trucks to pick up the goods right from the farms themselves.  No one else in India has the scale or the logistical know-how to compete with that.  Wal-Mart still has just one distribution center in India, but having laid the groundwork over the past 2 years and established themselves favorably with the farmers, you can bet that their expansion plan throughout the massive nation is about to accelerate. 

And if the foreign retailer restriction ever gets eased or lifted?  Forgetaboutit.

So what will the South African launch mean?  A few things:

1.  If you’re an investor, you can consider this your official wake-up call on Africa.  When companies like McDonalds and Wal-Mart make a big foray into a market, they are telling you that they’ve done the homework and the population of that market is ready to join the rest of us in the 21st century.  You guys know I’m big on frontier markets, Africa growing up already and shaking off the colonial excuse is a big component of my thesis.

2.  Nothing that happens in South Africa any time soon is going to be large enough to move the needle as far as Wal-Mart stock is concerned, but it is positive to see the company embarking on the next phase of their overseas expansion now that Brazil, China and other markets have proven successful.

3.  Wal-Mart’s kicking down doors on the Dark Continent will be watched throughout the corporate world.  Other companies will be emboldened to follow their lead as evidence of traction begins to surface.  What companies might be next to venture into this high risk-high reward part of the world?

4.  You may want to get more familiar with the Johannesburg Stock Exchange and some of its ADRs here on the NYSE.  Wal-Mart’s entry is guaranteed to mean a heightened interest in these companies among analysts and equity managers in the US and Europe.

5.  To be sure, high unemployment, fragmentation in virtually all sectors of the economy and the constant threat of political unrest are serious risks for anyone seeking to do business in South Africa or elsewhere on the continent.  But we could have substituted “Russia” or “Eastern Europe” for South Africa in that sentence ten years ago and we’d have missed out on the best performing markets on the planet.

I wouldn’t bet against Wal-Mart in Africa and I wouldn’t ignore the peripheral investment opportunities that may arise because of it.

Sources:

Wal-Mart Bids $4.6 Billion for South Africa’s Massmart (WSJ)

Wal-Mart You’ve Got India Now, Don’t Bungle It (Bloomberg)

In India, Wal-Mart Goes to the Farm (NYT)

Wal-Mart Goes Shopping in South Africa, Why We Are Not Impressed (Seeking Alpha)

Tags: $WMT, $MCD