Walmart in South Africa

Dr CR Rajan
 CAGE
• Ghemawat’s CAGE (Cultural, Administrative,
Geographic, Economic) affects the cost of
operating in a particular area.
• Ghemawat : argues that the more two
countries differ on these four dimensions, the
riskier the international venture.
• Ghemawat: In addition these four dimensions
of distance affect certain industries or
products more than others.
 Cultural Distance
• Ref ex 1-depicts relevant information for analyzing the cultural distance between
South Africa and the United States. Racially, the populations of the United States
and South Africa differ.
• the proportion of white and black people is reversed in these two countries.
• South Africa’s 11 national languages include English; however, English is spoken by
less than 10 per cent of the population.
• Indicates no match between the languages of Walmart’s home and host countries.
• However, the religious practices in South Africa and the United States match, with
Protestantism prevalent in 37 per cent and 51 per cent (respectively) of the
populations.
• In terms of cultural norms, the South African concept of ubuntu is important, and
Walmart’s awareness of this principle will likely determine the retailer’s success in
South Africa.
• Ubuntu itself is dissimilar from the culture of American business, where greater
emphasis is placed on individual achievement.
• Cultural distance affects industries or products
related to national identity (i.e., foods and
other consumer goods) more so than other
industries.
• As such, the different languages, ethnicities
and social norms are likely to pose a more
significant barrier for Walmart than for
foreign—owned businesses in other sectors.
 Administrative Distance

• Factors affecting administrative distance include

– colonial ties,
– shared regional trading,
– a common currency
– and political ties.
• South Africa and the Unites States do not share a common
currency, political ties or regional trading membership.
However, South Africa and the United States were both
colonized by the British.
• Having been colonized by the British and the Dutch, South
Africa has numerous close ties to Europe, which will likely
reduce the administrative distance between the United
States and South Africa.
 Admin distance
• However, possibly the most important factor with respect
to administrative distance are the South African unions,
particularly Cosatu. The case reveals that the government
of South Africa is typically pro—union. Although unions
exist throughout the United States, their prevalence varies
by industry, and Walmart itself has, throughout its history,
taken a clear anti—union position.
• Despite the administrative distance, Walmart does not
operate in a sector that is viewed as a stable, is vital to
national security or builds the national reputation. As such,
the administrative distance outlined above is unlikely to
drastically affect Walmart’s operations within the consumer
goods industry.
 Geographic Distance

• Geographic distance factors include

– physical distance,
– the presence (or absence) of land borders,
– differences in time zones
• and differences in climates.

• The United States and South Africa are far from sharing a land
border.
• As Walmart’s first venture into the African continent, the proposed
venture comes with considerable geographic distance, both from
Walmart’s home country and from any of Walmart’s existing
international locations.
• In addition, the two countries’ time zones are separated by nine
hours, and South Africa is considerably smaller in area than the
United States (at just less than half the size of Texas).
• Other geographical factors in South Africa are not altogether
dissimilar from Walmart’s home country. The climate in South
Africa is not drastically different from that of the United States.
• South Africa has a well—developed system of highways and a
communication infrastructure sufficient to support Walmart’s
operations in the country.
• The information infrastructure within South Africa (and particularly
near large cities) is well developed.
• Geographic distance has a significant impact on perishable or fragile
products, such as food items. However, because Walmart is
required by law to use local suppliers for the majority of its
supplies, it will not need to import the majority of its perishable
products.
 Economic Distance

• Factors affecting economic distance include

differences in consumer income and in the
cost and availability of resources, such as
natural, financial or human resources. Exhibit
1 in the case reveals relevant economic
information.
• Case Exhibit 1 also reveals that the per capita gross domestic product
(GDP) in South Africa is $11,400, compared with $50,000 in the United
States.
• The case also reveals that although most people in South Africa receive
more than basic primary education, serious income inequalities remain.
• Access to human resources is likely to be more difficult in South Africa.
• In addition, in the coming years, the low income levels and high
unemployment rates may constrain retail sales in South Africa.
• Economic distance mostly affects products for which demand varies by
income and industries in which labour and other cost differences matter.
• While the former is not likely to be an issue for Walmart, as it does not sell
expensive, differentiated or highly elastic goods, the latter could affect
Walmart’s operations. Labour costs are likely to be lower than in the
United States; however, a key component of Walmart’s ability to provide
everyday low prices is keeping its labour costs low.
• Although Walmart’s entrance into South Africa was
contested by various groups, the retailer has experienced
moderate success in its first foray into the world’s poorest
continent.
• Acquisition of Massmart Holdings Limited, Walmart is
operating, as of August 2013, in 383 stores in 12 African
countries, employing 28,000 employees on the continent.
As of May 2013, Massmart’s chief executive officer
announced the opening of 27 more African stores in 2013.
Numerous locations include Botswana and Mozambique.
The shares of Massmart have grown by 47 per cent
between April 2012 and June 20, 2011, when the Walmart
acquisition of Massmart was confirmed.
• Although this growth was less than the 80 per cent boasted by the
rival Shoprite, which currently leads the South Africa retail market.

• As of 2013, Walmart appears to be abiding by the conditions set out

in the acquisition agreement. Regarding its suppliers, Walmart sent
a limited number of African suppliers to its American—based
headquarters to learn more about Walmart’s approach.
• Potential suppliers are required to improve efficiency in their
systems and to make other changes, such as reinstating previously
uncommon nighttime deliveries.
• However, it remains to be seen whether the use of local suppliers
will have a positive or a negative impact on the company and South
Africa.
 MAIN LESSONS

• The historical background of a country has an immense influence on its

business practices, including influencing the reactions of a country’s people and
organizations to entry by foreign companies. When engaging in expansion
activities, firms need to consider myriad stakeholders, such as government,
consumers and other organizations such as unions. Further, numerous and
complex issues can influence the success of an international expansion, spanning
political, social and economic considerations.
• When expanding into new markets, companies may be required to change
how they do business. Even Walmart, the world’s biggest retailer, was required to
change its historical approach, such as its relationship with unions, in its effort to
gain approval to enter the South African market.
• The decision to expand internationally must be predicated by analyzing the
organization, the home country and the host country. This analysis can take myriad
forms, but —— first and foremost —— it requires a deep understanding of these
three components and how they interact with one another. Also required is an
acknowledgement that the situation can change over time
 Political and Social Systems

• Political and social systems refer to a country’s political system and

social environment. South Africa’s political power is divided
between the country’s Parliament and the President. The political
system (post—apartheid) is relatively stable. The current ruling
party, the African National Congress, has been in power since the
end of apartheid in 1994. In addition, the media is dynamic, which
serves as a check against abuse of power by businesses or
politicians.
• With respect to the social system, the case reveals that South Africa
has significant inequalities. The Competition Commission considers
whether mergers can be justified on public interest grounds,
including whether they will negatively affect businesses owned by
previously marginalized non—white people. Thus, Walmart will
need to understand the relationship between the government and
the people of South Africa. It will also need to operate without
provoking any union (and therefore government) backlash.
 Openness

• Despite some red tape, South Africa is generally open to all f Openness
• Despite some red tape, South Africa is generally open to all forms of
investment.
• The country permits greenfield investments and acquisitions in all sectors.
In the case of Walmart’s entry into South Africa ( the openness to
investment is in some ways hindered by pressure from unions).
• The requirement for Walmart to utilize and invest in South African
suppliers is intended to promote competitiveness among these suppliers.

• This requirement is likely to achieve this aim and will potentially project a
positive social image of Walmart both in the country and further afield.
• As a result of achieving a more competitive supplier market, costs would
likely be driven down and Walmart’s image will potentially improve. Thus,
this investment seems to be in the best interest of the union, the
government and Walmart itself.
 Product Markets

• Based the Massmart acquisition, Walmart faces the reality

of dealing with local suppliers for the majority of their
supplies. Suppliers are available, and sufficient
transportation infrastructure exists within the country.
• In addition, South Africa has numerous ports and airports
to aid in dealing with international suppliers.
• Furthermore, Walmart requires investment in South African
suppliers, which will benefit Walmart’s operations, as these
funds can be used to develop any missing infrastructure or
suppliers.
• Massmart’s history of success in South Africa indicates that
it likely has a solid understanding of Walmart’s would—be
consumers, which is going to be an asset to Walmart.
Walmart’s gains through Massmart
• Understanding consumers, which Walmart would gain from
Massmart
• Walmart should be able to acquire reliable information about its
competitors.

• Consumer behaviour in South Africa,

– consumers are price—sensitive and unlikely to pay for differentiated
products.
– the case reveals that Walmart underperforms in urban areas in the
United States, and secondly, that the trend toward urbanization was
developing in South Africa.
– Additionally, South Africa presents the challenge of low consumer
loyalty and high rivalry between firms, which could undermine
Walmart’s ability to secure a position as a market leader in the
country.
 Labour Markets

• The case reveals that trade unions are particularly strong in South Africa,
and that unions (especially Cosatu) typically receive support from South
African politicians, indicating strong connections between politics and
unions.
• Given Walmart’s staunchly anti—union position, this strong government
support for unions may be a cause for concern. Walmart’s ability to
downsize within the first few years is limited based on the terms of its
agreement with the South African Competition Commission.
• Recruiting managers in South Africa will be supported by the fact that
more than 75 per cent people in the country receive education beyond
the primary level.
• However, the average level of education is lower than in the United States,
which could make it difficult for Walmart to recruit employees with the
desired skills.
• That is, South Africa may have a scarcity of talent, despite its high
unemployment.
 Capital Markets

• The banking system in South Africa is well

developed and stable. Walmart would be able to
rely on local banks for its operations within South
Africa. Financial reporting in South Africa also has
reasonable transparency.
• Conclusion
• Despite potential challenges with scarcity of
labour, South Africa presents a context that looks
to be favourable overall for Walmart.
 Conclusion

• Despite potential challenges with scarcity of

labour, South Africa presents a context that
looks to be favorable overall for Walmart.
 Hofstede
• Hofstede’s cultural dimensions can give an
interesting perspective in these cases

• However the meta study has to be validated

with majority black sample