Reference no: EM133524485

Case Study: Makro and Game owner still reeling from July unrest as it continues to count losses Sales in Massmart stores declined by 1.3% in the 48 weeks ended on 28 November. The retail giant blames the decline mainly on store closures following the July unrest. Massmart lost two large Makro stores, while another 41 stores suffered significant damage because of the unrest.

The damage caused by the July unrest have caused serious setbacks for Makro and Game stores owner, but thankfully Black Friday sales lived up to last years' records despite some stores remaining closed because of the extensive structural damages they suffered. Massmart - which also owns Builders Warehouse and Cambridge Foods - extended Black Friday into a four-week-long Black November event as it did in 2020. It said during that period, sales at comparable stores, which include stores impacted by the looting, amounted to R9.2 billion. This was broadly in line with last year's Black November event. But the retail giant noted that stores damaged by the looting - and which remained closed or operated at limited levels impacted its 2021 sales. Massmart highlighted two Makro stores in Pietermaritzburg and Springfield that remained closed, as well as damaged Game stores. The unrest resulted in Massmart losing two large Makro stores, while another 41 stores suffered significant damage. Massmart previously reported that it would cost around R2.5 billion to replace lost stock and repair properties damaged during the July unrest. The company estimates that it will suffer an accounting loss of about R650 million even after receiving an insurance payout from Sasria. The group has so far received an initial insurance payment of R435 million from Sasria, excluding VAT. The state-owned insurer also approved another R565 million, excluding VAT, which will be the final payout that Massmart will receive some time in 2022.

More unrest-related losses

Massmart recorded R75.3 billion in sales for the 48-week ended on 28 November 2021, a 1.3% decline from comparable sales in the same period in 2020. But Makro and Builders still did well will their total sales increasing by 8% and 8.1% respectively compared to the same period in 2020. On the other hand, Game continues to drag the group, alongside the Wholesale Cash & Carry business, which is suffering because of lower sales to the hospitality, restaurant, and catering sectors. Game's total sales of R13.6 billion were 8.4% lower than the same period in 2020. Massmart has largely attributed the overall decline in group sales to the unrest as some stores remain closed until December. But it was also hit by the liquor trading restrictions. Over and above disruptions caused by store closures, Massmart said it also suffered supply chain disruption since looters ransacked two of its distribution centres in KwaZuluNatal. Because of this, the retail giant said it had sub-optimal stock levels in key categories, specifically home-electronics and appliances. Massmart estimates that it lost around R450 million in trading profits because of store damages between July and December 2021. So far, it has received an initial business interruption payment of R100 million excluding VAT from its private insurers not related to Sasria. The group added that because it expects most of its insurance claims to be settled in 2022, it has to incur the relevant losses on its income statement in 2021. However, its US parent company, Walmart, has agreed to give it a R4 billion loan to help optimise Massmart's balance sheet in the short to medium term. (Fin 24, 2021)

QUESTION 1 Critically evaluate the short, medium, and long-term risks that companies like Makro and Game have suffered and / or likely to suffer if the unrest events persist.

QUESTION 2 In meeting its objectives, organisational risk management is also concerned with planning to deal with loss situations and to recover from losses. Discuss how businesses like Makro and Game can implement contingency and emergency planning.

QUESTION 3 Companies like Makro and Game are thinking about implementing further controls to mitigate against risk like the unrest they experienced. With the use of an appropriate diagram and examples, advise these companies on how they can go about determining if controls are cost effective, so they do not go overboard with implementing controls that are not cost effective.

QUESTION 4 Elaborate on the ERM process and discuss the four strategies in terms of the 'risk response strategy' as applied to companies like Makro and Game when faced with such risk. Evaluate which strategy / strategies they used based on the case study