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Massmart says local procurement makes commercial sense

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Competition Tribunal Hearing update

Massmart CEO Grant Pattison has spelt out Massmart’s approach to procurement, demonstrating that the decision to source goods locally or to import them drew on far more than a simple price comparison and explaining why local procurement made good business sense. In so doing, he highlighted the folly of placing too much emphasis on foreign procurement strategies to the exclusion of a strong local supplier base.

“Local procurement is being, and will continue to be, pursued by Massmart and Wal-Mart because it makes commercial sense to do so,” said Pattison in his witness statement, submitted as evidence in the Competition Tribunal Hearings into the merger between Wal-Mart Stores and Massmart Holdings Limited.

According to Pattison, Massmart’s current patterns of procurement are primarily determined by economic considerations, such as innate competitive advantages in production, the strength of local preference for domestic brands, the minimum quantities that can be viably imported, the magnitude of transport and storage costs, the degradation of product quality in transit, the importance of security of supply, and the extent to which local servicing and support are required.

“As the acquisition of Massmart by Wal-Mart will not have a material impact on these fundamental economic determinants, the basic procurement patterns currently seen within the Massmart business are unlikely to be changed significantly by the proposed transaction,” he said.

Massmart’s commitment to procuring from historically disadvantaged and SMME suppliers was also emphasised.

“As the industry leader in BBBEE, Massmart scores 12.55 points out of a maximum of 20 for preferential procurement; and 15 out of 15 for enterprise development on its latest BBBEE scorecard. Self-evidently, this is something on which Massmart places substantial importance. Nevertheless, while corporate social responsibility cannot be ignored by firms operating in South Africa, local procurement in the wholesale/retail arena is commercially justifiable as profit-maximising conduct in its own right,” he said, adding that the tangible commercial benefits delivered by a strong BBBEE scorecard would continue to influence the procurement and commercial practices of Massmart after the acquisition by Wal-Mart.

Pattison said he would be very surprised if Wal-Mart adopted a procurement strategy that differs substantially from Massmart’s. “In my view it would be illogical for Wal-Mart to pursue low prices at all costs or to bypass the South African supply chain – it makes far more sense from a commercial perspective for suppliers and retailers to build a mutually beneficial and sustainable relationship. This will certainly not be the case if Wal-Mart attempts to bypass the South African supply chain, or to squeeze prices to the degree of unsustainability.”

In any event, were it Massmart’s strategy to move towards sourcing more of its products internationally post the implementation of the proposed merger (which is unlikely to be the case), this will not have a significant negative effect on the South African manufacturing and supply sectors for the simple reason that the wholesale / retail sector in South Africa is a mature and competitive one, characterised by a number of alternative channels to the market.

Pattison’s conclusion was that based on the above, the opposing parties’ focus on local procurement targets was misplaced.

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