Fantasy M&A: Takealot Should Get Its Head In The Game
Naspers' e-commerce darling might hold the answer to fixing Massmart's problem child.
A bit of levity is needed…
The world is going through a lot right now. Amidst a pandemic, people are having to contend with job losses, natural disasters and freak accidents. It's not great. So, for today’s post, I want to dive into fantasy.
Inspired by Not Boring's excellent post on Google and Slack, I decided to find two companies I feel should get hitched. Welcome to Tilted's first installment of Fantasy M&A. I'm going to free myself of plausibility, and I invite you to do the same, as we explore why Takealot should acquire Game.
Let’s set the scene.
Simply put: Massdiscounters (the division that houses Game and the now-shuttered DionWired) has consistently been Massmart's worst-performing division.
Massdiscounters recorded a R560.6m trading loss in 2019, citing margin pressure and rising costs. Comparatively Masswarehouse, home of Makro and The Fruitspot, recorded a R1bn trading profit.
“Game has lost its way,” Massmart CEO Mitchell Slape admitted at the start of his tenure. Though it has charted a turnaround strategy, Massmart must be wary of its ability to regain market share in South Africa's fiercely competitive retail industry.
All is not lost though. Game still has strong brand credibility:
1 in every 3 large appliances purchased in South Africa is sold at Game.
1 in every 3 TVs purchased in South Africa is sold at Game.
Game sells the most laptops of all retailers in South Africa.
Most Google-searched retailer during Black Friday 2019. (stats from Massmart presentation)
Clearly Game still appeals to a couple of key demographics: middle to higher income workers and homeowners. However, many of these are once-off purchases. In a depressed economy with low consumer confidence, Game will need to build strength in broader, repeat purchase categories.
Since its launch in 2011, Takealot has become South Africa's largest e-commerce retailer. Although no financial information has been explicitly released, some estimates put Takealot's annual turnover as high as R9 billion. Recent estimates put Takealot's revenue market share between the mid-teens and approximately 29.5%.
Takealot has had an uphill climb towards profitability but, in 2019, CEO Kim Reid stated that Takealot would be profitable "within two years". Naspers recently disclosed that Takealot achieved its first-ever profitable month in the company's history in December 2019. With 9 years of runway, the e-commerce giant has been able hone in and perfect its logistics and supply chain management and, at a time when it really matters, it's finally paying off.
Introducing Gamealot: an acquisition that would be a win-win for all parties involved. Massmart's share price is down 57% year-on-year. That, coupled with years of poor performance, means Takealot would most likely be able to acquire Game at a fairly low valuation. At the right price, Massmart should be willing to play ball. Makro is clearly its favourite child anyway.
In our Fantasy M&A world, Gamealot would benefit all three of Takealot's main segments: Takelot's core e-commerce business, Superbalist and Mr D Food. It promises fun for the whole family!
The Case for Takealot
This acquisition would mirror Amazon's 2017 acquisition of Whole Foods in the straightforward sense that it's a pure play e-commerce giant acquiring a struggling retailer with a sizable brick-and-mortar footprint. However, the context and substance is quite different.. The purpose of Amazon's acquisition was to get a foothold in fresh produce and grocery retail, whereas the rationale behind Takealot acquisition would be to strengthen and grow its already dominant online market share in everything but fresh produce and grocery retail.
Takealot’s main focus is in homeware, hardware and electronics. It hasn't shown any interest in online grocery retail, and for good reason. Selling fresh food generally comes with low margins and high wastage. Selling it online? Forget about it.
It’s a lesson that Game had to learn the hard way. After winning a Constitutional Court battle over selling fresh food in 2016, Massmart announced this past January that it was pivoting away from fresh and frozen food towards clothing and appliances to shore up profitability.
Takealot’s biggest strengths is that it was a first mover when everyone else was stagnant. As COVID-19 took hold, Takealot clearly had the head-start. Many of South Africa's biggest retailers didn't have an online shopping offering as sophisticated as it had. Many didn't see the need to.
However, now that online shopping is experiencing a boon, many retailers have stepped up their online efforts. Soon, South Africa's online shopping market may become just as concentrated as its physical retail market. The pandemic won't last forever either. Foot traffic to malls will increase, online shopping will decrease and retailers with stronger brands and customer relationships will catch up.
Along with a multi-platform approach, Takealot will need to improve on three fronts to scale and properly compete: efficiency, data and brand loyalty.
One of the biggest expenses for e-commerce retailers is shipping. That's why Takealot requires R450 minimum spend before it grants free delivery: the profit made from selling the product needs to justify the cost of delivery.
It's also why Takealot launched 45 click-and-collect stations across the country. If customers can pick up or return the package themselves, Takealot saves on couriering it to them. Gamealot could reduce shipping costs even more.
'Buy Online, Return In-store' models have been popular for a number of years. Gamealot could introduce another click-and-collect avenue, along with a return in-store policy. A customer could opt to pick up their package from their nearest Game store. Another opportunity? A customer returning a product wouldn't need to go online to find a new one, a salesperson could simply direct them to Game's in-store catalogue.
Takealot would also be able to use Game's expansive retail footprint to fulfill orders more quickly. As Amazon has proven, nothing drives customer satisfaction more than minimising the waiting time between ordering and receiving. In metropolitan areas, Takealot may even be able to use stock at Game stores to do same-day or next-day delivery. Conversely, customers in a Game store that can't find what they're looking for could be directed to Takealot's website by staff. Consolidation, not cannibalisation.
Data is king. The more you know, the better you can act.
Neither Takealot nor Game has a loyalty programme. Not only do loyalty programmes incentivise customer loyalty, they provide the retailer with important data about customers' shopping habits. By launching a loyalty programme akin to PnP's Smart Shopper and Checkers' Xtra Savings, Gamealot can better understand customer shopping habits and provide better, focused promotions. A loyalty programme also assists with brand loyalty.
Game has also struggled with stocking the right range of products for its customers. Takealot’s extensive investment in machine-learning should be able to help Game refocus the assortment on growth and high-margin categories.
There is nothing especially unique about Takealot's product offering. It sells the same products you could find anywhere else, just all in one place. It aggregates all your favourite products, but doesn't create any of your favourite products. If it wants to make sure customers return to it for their basket of goods, and not similar aggregators like Makro or Clicks, it will need a unique range of products that can't be shopped elsewhere.
There's a reason Woolworths Food has been able to maintain strong customer loyalty and higher margins than its competitors: private label. Along with establishing a unique brand, private labeling gives retailers more control over quality and cost. There's good reason why Takealot may have been hesitant to launch a private label offering: with the tens of thousands of products in its catalogue how would customers find it and know what it is?
Gamealot solves that. Game stores can provide visibility to private label products, offer tastings for food and demonstrations for hardware. It can do a mix of in-store and online exclusives. Gamealot would be in full control of the cost and could price products conservatively, while offering free delivery with certain private label purchases.
The Case for Superbalist
Superbalist, unlike its parent company, does have a strong private label brand. It has more than 3 000 Superbalist branded products across several categories available to shop on its website. Part of Massmart's turnaround strategy for Game is reintroducing clothing basics, a former strength of the brand. Superbalist's clothing range could fill that gap and also function as fulfillment centres for private label purchases.
Superbalist also needs a path to profitability. Although it grew revenue 44% for the year ended, it recorded a trading loss margin of 23%. Superbalist bought Design Liason a private label design and manufacturing company in August 2019, but may to turn to an old school retail strategy to drive profitability: selling wholesale.
Many of the brands it stocks have their own physical stores and online stores. Zara is pivoting aggressively to selling online too. As the e-commerce clothing space grows more robust, a physical presence may be necessary to stand out from the crowd.
The Case for Mr D Food
Food delivery is a notoriously unprofitable industry. It's a race to the bottom. Grubhub, a US food delivery company, admitted as much when it said in a letter to investors that it didn't believe "that a company can generate significant profits on just the logistics component of the business". Essentially, taking a commission fee on every sale is unsustainable, especially when the slightest increase in price sends customers running to the (ever-growing) competition.
Game recently listed with UberEats, allowing customers to purchase a limited range of products on the app. From toothpaste to baby formula, the idea is to allow customers to purchase everyday essential items without having to leave their house. It's nothing revolutionary, convenience stores were selling with Mr D Food and UberEats before the pandemic, but having Game under the same roof could be one path to profitability.
DoorDash, the leading food delivery service in the US, has recently launched DashMart, a range of 'dark stores' which will carry household essentials that will be sold on the DoorDash app. Dark stores are mini 'distribution centres' converted from former stores.
“It’s a bit like the express lane inside of a store, whether that store is a grocery store or a convenience store, or a pharmacy,” DoorDash CEO Tony Xu said. “Sometimes, you just need those things that either you forgot, or just need in high frequency.”
The upside is clear: instead of being a middle-man and only taking a commission of the sale, this would allow the Takealot group to earn both the revenue and the commission fee it charges. Game would become top of mind for both everyday items, available through Mr D Food, and large purchases, available both in-store and online.
Aaaaaaaand Back to Reality
As I said at the start, plausibility was off the table. Naspers' growth strategy for Takealot is clearly through online, or 'Etail' as it refers it, so it doesn't look like a brick-and-mortar strategy is on the horizon. Still, as I mentioned in my comparison of Discovery Bank and TymeBank, innovation doesn't mean completely rejecting already successful business models. Sometimes it can mean making them work within your aims.
It's also just fun to think about. Banking always receives the lion's share of attention, but South Africa's retail industry is innovating and changing just as fast. While Massmart looks to catch up, Takealot will need to make sure it doesn't become the incumbent that gets superseded.
As Benedict Evans explains, Amazon's success is largely due to its incessant tinkering:
Amazon is trying everything that anyone has ever tried before, and anything else that it can think of that might make sense, as well. There is no-one saying "that’s a good idea, but we’re a website so we wouldn’t do that."
Amazon’s job is "to get you the thing," not "to be a website," so what are the best ways to do it? What else might work?
Of course, sometimes "it makes no sense" is the right reaction. But when clever people do things that make no sense, it can be worth looking twice. Is this a new discovery model? A different way to change how people think about purchasing? Well, it’s another experiment.
Thanks for reading! 👋