Massmart Annual Report 2008
 

Highlights

Significant improvement in stock efficiencies
Four new stores opened
Massbuild head office removed
Builders Express incorporated into Builders Warehouse
 
Builders warehouse
  • 5 Builders Warehouse stores acquired in February 2003, 3 De La Rey stores acquired in June 2005, rebranded to Builders Warehouse
  • Now 22 stores
  • Operating in SA
  • Home improvement supplies/tools/building materials
  • LSM 5 – 10
 
Builders express
  • 14 Servistar stores acquired in June 2005, rebranded to Builders Express
  • Now 18 stores
  • Operating in SA
  • Home improvement supplies/tools/building materials
  • LSM 5 – 10
 
Builders trade depot
  • 34 Federated Timbers stores acquired in June 2005, rebranded to Builders Trade Depot
  • Now 28 stores
  • Operating in SA
  • Building materials/tools
  • LSM 5 – 10
 

At a glance

Massbuild has 68 outlets, trading in DIY, home improvement and builders’ hardware, under the Builders Warehouse, Builders Express and Builders Trade Depot brands in South Africa.
 
Builders Warehouse in Zambezi follows the big box retail format, offering a variety of customers a comprehensive range of competitively priced products under one roof
 
Garden Centres are an award-winning addition to the Builders Express and Builders Warehouse DIY range
 
The lighting, colour and ambience enhance the shopping experience at Builders Express (left); Massmart/Umsobomvu Youth Development Fund pays for skills training for unemployed youths with entrepreneurial potential and pays for the start-up costs of micro enterprises. Massmart also provides rent-free retail space at its stores. The Hot Dog Café was the fund’s first project (right)
 
A staff member mixes paints using the latest computer-aided system at Builders Warehouse
 

Group contribution

Group contribution
 
Aubrey Cimring

“A key contributor to our financial results was a focus on improving stock efficiencies, which resulted in Builders Warehouse closing on a lower stockholding level this year…despite opening a new store.”
AUBREY CIMRING DEPUTY CHIEF EXECUTIVE

 

Hot Dog Café and The Coffee Shop

Massbuild played a leading role in getting Massmart’s Hot Dog Café concept off the ground, which became the model for The Coffee Shop franchise launched this year.

The Group donated R2 million to the Massmart/Umsobomvu Youth Development Fund, a programme established in 2005 that identifies unemployed youths with entrepreneurial potential from previously disadvantaged backgrounds, and offers them the chance to hone the skills they will need to run their own small businesses. The fund pays for skills training and start-up costs for micro enterprises, and Massmart provides rent-free retail space at its stores.

The fund’s first project was the Hot Dog Café. Selected cadets who completed training courses at a test kitchen in Pretoria were given a R60 000 soft loan to start their fast-food businesses, managed by a franchise operator. Dog Café was piloted at selected Builders Warehouses, with beneficiaries generating an average annual turnover of R750 000 and taking home R120 000 after deducting running costs and loan repayments. There are currently 17 Hot Dog Café franchise owners operating outside selected Game, Jumbo and Builders Warehouse stores, employing a total of 50 people.

The same model was used for creating The Coffee Shop concept, which will see a chain of small restaurants serving prepared food, snacks and beverages at Builders Warehouse stores throughout South Africa. The Coffee Shop was launched this year at the newly opened Builders Warehouse in Nelspruit. Cadets at the fund’s training kitchen in Pretoria are already vying for the chance to run the next franchise when the newest Builders Warehouse opens its doors.

Massbuild directorate

Grant Pattison
Chairman

Aubrey Cimring
Managing Director (Builders Warehouse)

Alex Rymaszewski
Store Development Director

Fred Cresswell
Managing Director (Builders Trade Depot)

Llewellyn Steeneveldt
Managing Director (Builders Express)

Guy Hayward
Non-executive Director

Jay Currie
Non-executive Director

Massbuild divisional review

Massbuild simplified management structures this year, significantly improved the control of operating costs and introduced new, innovative product ranges. This resulted in a respectable increase in sales of 14,4% to R5,7 billion and a 14,0% increase in profit before tax to R433 million. Our simpler, leaner division is well poised to gain market share of the growing home improvement market.

The Massbuild brands

Massbuild operates three complementary brands: Builders Warehouse, which operates large home improvement stores in major urban areas; Builders Express, a chain of smaller neighbourhood home improvement stores; and Builders Trade Depot, building contractor outlets strategically located in industrial sites in peri-urban and urban areas.

Massmart acquired five Builders Warehouse stores in 2003, bought and rebranded three De La Rey stores in the Western Cape in 2005, and now operates 22 Builders Warehouses in seven provinces. Builders Warehouse follows the big box retail format, offering home owners, DIY enthusiasts and building and maintenance contractors a comprehensive range of competitively priced products under one roof, with a large garden centre display and builders’ commodities yard.

Builders Express was formed in 2005 when Massmart bought and rebranded 14 Servistar stores operating in the Eastern Cape and KwaZulu-Natal. Massbuild now operates 18 home and garden centres in four provinces that cater to home owners. They have a strong focus on convenient locations, aesthetically pleasing displays, customer-friendly store layout and personalised service and advice.

Builders Trade Depot was created when 34 Federated Timber stores were acquired and rebranded in 2005. Six smaller stores have since been closed and Massbuild now operates 28 outlets catering mostly for medium- to large-sized contractors and tradesmen engaged in building, maintenance and renovation projects. It focuses on servicing the needs of construction entrepreneurs who need trade credit, telephonic ordering, and want bulk goods delivered from low-cost depots.

Builders Warehouse and Express are both pioneers in introducing retail principles to the home improvement sector and attaching garden centres to hardware stores. The clean, friendly and uncluttered look and feel of our stores offers customers a shopping experience traditionally not associated with the sector.

Trading profit before tax return on sales

Actual 2008 Medium-term
target
International
benchmark
7,6% 9,0% 10,0%

Key indicators

         

Financial performance

  2008 2007 2006
Sales* Rm 5 662,9 4 948,3 3 892,8
EBITA Rm 390,1 363,0 290,4
EBITA as a % of sales % 6,9 7,3 7,5
Operating profit before interest Rm 390,1 363,0 290,4
Operating profit before interest as % of sales % 6,9 7,3 7,5
Net finance income Rm 42,9 16,8 6,4
Operating profit after interest Rm 433,0 379,8 296,8
Operating profit after interest as % of sales % 7,6 7,7 7,6
Inventories Rm 852,5 829,3 602,4
Inventory days days 77 86 80
Net capital expenditure** Rm 138,8 101,2 105,6
Cash flow from operating activities Rm 265,6 277,5 191,4
Number of stores   68 64 65
Trading area m2 309 633 294 039 287 914
Average trading area per store m2 4 553 4 594 4 429
Number of employees   6 625 6 400 5 125
Sales per store R000 83 278 77 317 59 889
Sales per m2 R000 18 17 14
Sales per employee R000 855 773 760
* 2008 is a 53-week period.
** Net capital expenditure is defined as capital expenditure less disposal proceeds. The ratios have been calculated using year-end balance sheet figures.

Store progress

Chains Number of stores at the start of the year Stores opened Number of stores at the end of the year
Builders Warehouse 21 1 22
    Nelspruit (Mpumalanga)  
Builders Express 15 3 18
    Robindale (Gauteng, Johannesburg)  
    Lambton (Gauteng, Johannesburg)  
    Wonderpark (Gauteng, Pretoria)  
Builders Trade Depot 28 28

Sustainability key performance indicators

Environmental  
   Electricity 65 442 917 kW/h
   CO2 carbon emissions 31 775 tonnes
Transformation (employment equity statistics)  
   Senior management 20,4%
   Middle management and professionals 33,2%
Human capital  
   Investment in staff training R7,9 million
Customer satisfaction  
   Satisfied customers 91,5%
HIV  
   Prevalence rates amongst employees 3,7%
CSI  
   CSI spend R0,8 million

A high service dimension is common to all our stores. Most departments are advice driven, and product training takes place in almost all our outlets every day. Our biggest challenge in this area is to retain our staff, whose skills leave them in high demand as supervisors or contractors in the building and home improvement industry. Sales representatives from both Builders Trade Depot and Builders Warehouse are constantly on the road to build and strengthen relationships with contractors, helping us keep abreast of customer needs.

Our operating environment

Our business is vulnerable to a tightening consumer environment because our products and services are discretionary purchases. The external events influencing Massbuild this year were higher interest rates and municipal rates, which have added to the cost of home ownership; accelerating inflation in fuel and food; and initially a slowing increase in house prices, which have begun to decline. Significant increases this year in the price of steel and copper, both used extensively in our products, also put pressure on sales. Bureaucratic delays in development approvals and bulk service provision by local authorities also had an impact on building contractor demand.

These conditions were, however, offset by several factors. The housing shortage in South Africa means demand will continue growing, which also translates into a growing market for essential maintenance and renovation products. The same is true for construction and maintenance in the commercial, industrial and essential services sectors. A growing middle-class, achieved though economic growth, transformation and job creation, will provide a longer-term underpin for the housing market.

Electricity supply problems this year did not pose an operating risk as most of our stores are equipped with generators. During the power outages we saw increased sales of all gas products, generators and other emergency items, and have since added uninterrupted power supply units to our product range. Sales have since tapered off as customers tend to purchase these products during the crisis, not beforehand.

Financial performance

The Division reported total sales of R5,7 billion, representing growth of 14,4%, while the 52-week comparable store sales growth was 9,0%, with our annual sales inflation estimated at 7,5%. Sales growth declined from quarter to quarter.

Profit before interest of R390 million was 7,5% higher than the prior year. Working capital management improved and profit before tax of R433 million was 14,0% above the prior year. Although below our medium-term target of 9,0%, the Division’s return on sales (profit before tax/sales) of 7,6% was pleasing given the economic environment.

With four new stores and two major refurbishments, capital expenditure of R119 million was higher than the prior year’s R101 million.

Improved efficiencies

A key contributor to our financial results was a focus on improving stock efficiencies, which resulted in Builders Warehouse closing on a lower stockholding level this year, compared to 2007, despite opening a new store. In the last six months we dramatically reduced unprofitable or unpopular ranges, which resulted in lower stock levels and higher interest earnings for Builders Warehouse. The introduction of a computerised automatic replenishment system at Builders Warehouse also played a leading role and up to 40% of our sales now go through auto-replenishment, a figure we expect to double within two years. We also introduced planning units in our merchandise departments, with financial modelling used to improve buying decisions and minimise errors.

Supply chain improvements are ongoing. As the Division was built through acquisition, Massbuild has a highly fragmented logistics network. In addition, the home improvement and building materials industry continues to be fragmented, with most suppliers set up to deliver to hundreds of locations. In the last three years we have established distribution centres and logistics channels for our direct imports. Supplier performance was monitored and improved through delivery time and order-fill rate surveys. Massbuild gains invaluable insights from other Massmart divisions in making efficiency gains in this area.

Major savings were made this year through labour-planning improvements. The number of staff, measured by ‘full-time equivalents’, has reduced every month since January 2008 owing to a continuous reduction in required overtime across the stores. This was done by matching store staffing more accurately to customer requirements, thus reducing unnecessary overtime.

Our value proposition

Massbuild’s major innovation has been to introduce retail principles to the home improvement and building materials sector.

This was illustrated by our new Builders Warehouse opened in Nelspruit this year, and three new Builders Express stores launched in Wonderboom, Pretoria, Lambton, Germiston, and Robindale, Johannesburg. These stores aim to give effect to the term ‘retail theatre’, where lighting, colour and ambience enhance the shopping experience, signage is clean and bold, and product displays enticing. Our garden centres won awards this year for their use of colour and light.

Several of our private brands, including Mastercraft hand tools and Builders Pride paint, have become household names, with our customers assured of stringent quality control and best supplier practices. Our private label decorative and contractor paints, locks and decorative handles performed exceptionally well this year.

Risks and rewards

Finding affordable sites in the right locations for our new stores is becoming increasingly difficult. Local authorities’ bureaucracy can hold up approvals and the provision of municipal services. In line with Massmart policy, we always ensure we comply with all regulatory requirements before opening stores and only partner with reputable, experienced developers.

Future outlook

There are opportunities for all our brands to grow, both by store growth and through the introduction of new merchandise categories that we do not yet offer our customers. We therefore expect to open two new Builders Express and five new Builders Warehouse stores in the next two years, with the first planned for Gauteng in the 2009 financial year. During the same period we expect to open two new Builders Trade Depots, the first in Soweto, which will become our new Builders Trade Depot flagship offering the best retail and wholesale practices implemented in this chain.