Food manufacturers in South Africa will feel the consequences of Walmart’s entry into the country as the global retail giant is expected to import cheap food, therefore undermining local food manufacturers.
Whitey Basson, the chief executive of Shoprite, said yesterday that he was “very worried” about food security and the manufacturing capacity for food in the country if more food was imported.
An increase in imports is expected with the entry of Walmart, which intends to buy 51 percent of Massmart.
Basson said: “If Walmart is allowed to import all goods, then other retailers will do the same. We have to be competitive, so what you will see is imports will rise substantially.”
South Africa was not a cheap manufacturer of merchandise, he said. Some products could be imported 40 percent cheaper.
As a consequence at least some manufacturing capacity in South Africa would be lost, meaning that if at some point food could not be imported then food security would be at risk.
Basson specifically referred to pasta and long-life milk, saying that both could be imported for far less than the products currently made in South Africa.
Tiger Brands, which makes Fattis & Monis pasta, is one company that could be affected. Tiger did not respond to requests for comment.
Syd Vianello, an analyst at Nedbank Capital, said: “Unfortunately Basson is telling the truth.” He said in reference to Basson’s comment that at least one pasta factory would go out of business: “When a factory closes it will never reopen. That capacity is lost forever. So the country becomes more reliant on imports.”
But Vianello said importing was not without its challenges. In the case of pasta, four weeks of stock would need to be imported at a time, which meant Massmart would need more warehousing and distribution capacity. Imports were also dependent on ships docking on time and functioning railways.
Local suppliers could deliver three times a week if necessary and stock holdings would be lower as a result.
“Walmart will import, but it will import more general merchandise than food,” Vianello said. For example spades would definitely be brought in from China and retailed at a quarter of the current price. But imports of milk and pasta would happen over a longer period as Massmart did not have the warehouse and distribution capacity to handle the quantities it would need to import in order to substitute local supply.
But Vianello added that the rand would have a corrective function, because if imports started pouring in, the rand would weaken and at some point it would be cheaper to produce South African products.
He added that Shoprite already imported frozen chickens from Brazil and some pasta because it earned a greater profit margin on these products, just like Walmart intended to do.
“Walmart will annihilate local retailers and manufacturers with the imports of cheap general merchandise, but it is going to need bigger distribution networks and more food stores in South Africa to do the same on food.”
Chris Gilmour, an analyst at Absa Investments, said it was likely that Walmart would import a lot of food and Basson made a good point about food security as greater imports would affect smaller producers and jobs would be lost.
“But that is the way Walmart operates. It has the ability to import food from around the world. It’s not a devious plan.” – Business Report