Massmart Annual Report 2008
 

Highlights

Profit before tax increased by 38,5%
Hybrid strategy significantly advanced
Successful trial of new point-of-sale and back-office system
Several small acquisitions approved
 
CBW
  • 14 CCW stores acquired in June 1998, 22 Browns and Weirs stores acquired in July 2001. Two chains combined under CBW format from July 2001
  • Now 6 stores
  • Operating in SA, Lesotho, Namibia, Botswana
  • Food/liquor/groceries
  • LSM 2 – 6
 
Jumbo
  • 6 stores acquired in April 2001
  • Now 6 stores
  • Operating in SA
  • Food/groceries/ethnic cosmetics
  • LSM  2 – 6
 
Shield
  • 378 members acquired in March 1992
  • Now 466 members representing 527 outlets
  • Operating in SA, Botswana, Namibia, Swaziland
  • Food/groceries
  • LSM 2 – 6
 

At a glance

Masscash has 65 CBW and six Jumbo wholesale cash and carry outlets trading in South Africa, Lesotho, Namibia and Botswana, and a voluntary buying organisation, Shield.
 
The high-volume, low-cost format at Jumbo stores caters to small traders
 
An employee at Jumbo packs shelves in preparation for the day’s trading (left); CBW caters for the needs of a variety of customers ranging from individual consumers to small traders and hawkers (right)
 
Westmead Cash and Carry, one of the 65 CBW stores
 

Group contribution

Group contribution
 
Robin Wright

“…Masscash works hard with suppliers to keep the cost of basic goods as low as possible, and dedicates a portion of its social investment budget to feeding schemes.”
ROBIN WRIGHT CHIEF EXECUTIVE

 

Powering ahead

During the 2008 financial year Masscash won Massmart’s Socially Responsible Division of the Year Award for its achievements in black empowerment.

Our store-based owner-manager scheme offers talented entrepreneurs the opportunity to create wealth for themselves and our Division by sharing in the fruits of real ownership. In return for store managerial skills and local customer knowledge each of the two managers of new stores we open is offered a minority shareholding at no cost. Our policy attempts to ensure that at least one of the two managers is black. So far this has resulted in four black entrepreneurs becoming owner-managers of CBW stores and 20% of all our stores becoming black managed. We expect more to follow as we open more stores.

After three years Masscash buys back a portion of the owners’ minority shareholdings, a strong incentive for performance that has made some of our managers financially secure. Where we are unable to offer store managers a shareholding in the store, those managers participate in a store profit-sharing that mimics a notional shareholding.

Feeding schemes is another area where Masscash is contributing to black empowerment. We provide mentoring to black-owned companies tendering for contracts to supply feeding schemes. Areas of support include preparing tender documents, finding warehouse space, negotiating truck rentals and scheduling labour. In return we require their stock to be bought from us.

Massbuild directorate

Grant Pattison
Chairman

Robin Wright
Chief Executive

Craig Surmon
Marketing Director

Dino Holmes
Financial Director

Jane Bruyns
HR Director

Mike Marshall
Business Systems & Process Director

Neville Dunn
Operations Director

Guy Hayward
Non-executive Director

Jay Currie
Non-executive Director

Pearl Maphoshe
Non-executive Director

Masscash divisional review

Masscash successfully integrated the Division’s various management teams and structures into a single unit this year, creating a single and stronger executive management team that is clear about the profit and growth opportunities of the various businesses. The hybrid store strategy, encompassing a store format with a combination of retail and wholesale food, delivered exceptional returns and continues to offer new growth opportunities. With the phased roll-out of a new in-store IT system continuing this year, we are confident about the Division’s growth prospects.

The Masscash brands

Masscash consists of four entities: CBW, Jumbo, CellShack and Shield. CBW and Jumbo sell food, liquor, groceries and cosmetics in bulk to individual consumers, independent general dealers, government feeding schemes, franchise members, small traders and hawkers in peri-urban and rural areas within southern Africa. Shield is a voluntary association that buys Masscash products in bulk on behalf of over 500 members who own wholesale or retail food businesses in South Africa, Botswana, Namibia and Swaziland. CellShack sells cellular products through its own wholesale and retail channels.

CBW was formed by acquiring 14 CCW stores in 1998 and 22 Browns and Weirs stores in 2001. The two chains were merged in the same year. In 2001 Masscash also bought six Jumbo stores, selling mainly cosmetics, toiletries and hair care products to individual consumers and independent general dealers. CBW now operates 65 stores in South Africa, Lesotho, Namibia and Botswana. Cell-Shack, which trades in the South African cellular wholesale market, was acquired in 2005.

Our value proposition

All our stores apply the philosophy of supplying the right range of products to satisfy local needs at a highly competitive price to low- to middle-income wholesale customers. We keep costs down by employing a no-frills cash-and-carry warehouse format coupled with unsophisticated distribution centres that supply our private label and imported general merchandise ranges. Our private label food brands, Econo and Heritage, offer our customers exceptional value and the assurance of stringent quality and safety controls.

Trading profit before tax return on sales

Actual 2008 Medium-term
target
International
benchmark
3,2% 3,0% 3,0%

Key indicators

         
Financial performance   2008 2007 2006
Sales* Rm 13 610,4 11 794,7 10 314,0
EBITA Rm 402,0 290,0 208,4
EBITA as a % of sales % 3,0 2,5 2,0
Operating profit before interest Rm 398,2 277,8 203,0
Operating profit before interest as % of sales % 2,9 2,4 2,0
Net finance income Rm 37,4 13,9 13,2
Operating profit after interest Rm 435,6 291,7 216,2
Operating profit after interest as % of sales % 3,2 2,5 2,1
Inventories Rm 1 094,5 765,0 654,1
Inventory days days 32 26 25
Net capital expenditure** Rm 91,1 59,8 72,4
Cash flow from operating activities Rm 163,4 333,7 155,0
Number of stores   71 72 69
Trading area m2 247 007 246 276 241 701
Average trading area per store m2 3 479 3 421 3 503
Number of employees   4 893 4 608 4 375
Sales per store R000 161 634 133 775 120 104
Sales per m2 R000 46 39 34
Sales per employee R000 2 782 2 560 2 356
*   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.
Shield is shown as average sales to each independently owned outlet (ie this represents only a portion of the outlet’s sales).
The above results exclude amounts relating to the discontinued operation (Furnex).

Store progress

 
Chains Number of stores at the start of the year Stores closed Number of stores at the end of the year
CBW 65   65
Jumbo 7 -1 6
    Nelspruit (Mpumalanga)  
       

Sustainability key performance indicators

Environmental  
   Electricity 55 371 027 kW/h
   CO2 carbon emissions 29 788 tonnes
Transformation (employment equity statistics)  
   Senior management 19,6%
   Middle management and professionals 39,2%
Human capital  
   Investment in staff training R2,3 million
Customer satisfaction  
   Satisfied customers 83,6%
HIV  
   Prevalence rates amongst employees 9,0%
CSI  
   CSI spend R2,9 million

Our national offices in Pinetown and Parktown provide financial, IT and HR support and negotiate supplier trading terms. However, regional support structures and store managers retain a degree of autonomy to ensure decisions on stock buying and promotions cater for local variations and needs. Several of our stores have two managers – one ensuring the store carries the right product range and the other trading with customers on the floor, and ensuring products are appropriately displayed and stocked on shelves. Our owner-managers are highly committed and motivated entrepreneurs whose performance is incentivised by store-level profit share and Group share equity schemes.

Our operating environment

Basic food and transport costs have escalated significantly this year. This has been particularly hard on the low-income consumers supplied by our wholesale customers. Many of these consumers rely on social grants, which have not kept pace with inflation. These factors did not, however, have a major impact on Masscash’s results because demand for basic foodstuffs is not price-sensitive, although the business remains concerned about the pressure higher food prices place on our end-consumers. The Massmart Group has identified food security as a focus area and so Masscash works hard with suppliers to keep the cost of basic goods as low as possible, and dedicates a portion of its social investment budget to feeding schemes. Sales of food wholesalers and retailers tend to increase in a high food inflation environment, while the opposite happens during periods of food price deflation, as we experienced in 2004.

Soaring food and fuel prices in particular led to higher inflation levels, with demand exceeding supply capacity due to:

  • Changing weather patterns caused by global warming, resulting in droughts, floods and abnormal climatic conditions in crop growing areas
  • Increased demand for agricultural crops to produce biofuels
  • Increased consumer affluence in Asia resulting in higher demand for food and meat
  • State intervention in limiting the export of rice and wheat in certain countries, such as India.

The power cuts in January this year resulted in some limited stock losses from failed refrigerators and lower purchasing volumes from perishables traders.

Financial performance

High food inflation resulted in the Division reporting higher total sales of R13,6 billion, representing growth of 15,4%, while the 52-week comparable store sales growth was 14,3%, with our annual sales inflation estimated at 13,3%.

Profit before interest of R402 million was 38,6% higher than the prior year, partially bolstered by the once-off savings from the amalgamation of the various businesses and structures within the Division. Working capital continued to be effectively managed, resulting in higher interest earnings (assisted by higher interest rates) and so profit before tax of R439 million was 44,6% above the prior year. The Division’s resultant return on sales (profit before tax/sales) of 3,2% was pleasing, with the medium-term target of 3,0% exceeded for the first time since 2004. Given that there is some inflation-linked profit and higher interest earnings, the Division’s medium-term target remains unchanged.

Net capital expenditure of R91 million was higher than the prior year’s R60 million, with some of the increase owing to the new investment in IT systems.

Debtors remained well controlled, while inventory levels were approximately R130 million higher than normal as a result of ongoing food supply constraints.

Improved efficiencies

The Masscash business model is predicated on keeping total costs as low as possible, without compromising control, efficiency or effectiveness. The management and reporting structures of CBW, Jumbo and Shield were integrated into a single unit. Jumbo’s head office in Gauteng was closed and its management functions moved to Pinetown. The move also brought about a better business focus, especially at Jumbo and Shield, which translated into a dramatic improvement in trading performances.

This year Masscash began to develop a new franchise format called Saverite, which targets wholesale customers with annual sales of between R5 million and R35 million. The programme is offered for a nominal franchise fee through Shield and our store network, with members supplied with promotional, advertising and marketing support as well as access to trade credit. Masscash offers Saverite members highly competitive prices by leveraging Group purchasing volumes, selling them our private label brands, and keeping distribution costs down through tight supply chain management.

Upgrading IT

A new in-store IT system piloted this year will fundamentally change the way we do business and is being rolled out to the remainder of our stores in the 2009 financial year. The Arch Retail Management System was tested and became fully functional at three CBW stores and all six Jumbo stores by March 2008.

This development brings several important improvements to our business. It replaces complicated and older computer formats with modern visual displays at point-of-sale terminals that are easy to use; it standardises the six different IT systems our stores previously used into one; it allows one common master file of stock data across the Division; it offers stores technical support services, which was becoming difficult with our legacy systems; and it seamlessly integrates with the Division’s accounting and finance functions. Through the stock master file, the new system provides our buyers with powerful reporting functions, thereby improving the quality of their information when negotiating with suppliers.

Masscash is also conducting a general review of our communication practices. Traditional marketing techniques, such as sending our ‘Happy Vans’ to distribute promotional material at schools and community centres in rural areas, will be supplemented with SMS, internet, e-mail and radio communication.

Risks and rewards

Masscash will maintain a consistent long-term strategy that focuses on consolidating and growing our R12 billion footprint within the South African lower- to middle-income food wholesale market worth about R125 billion annually.

A key strategy to achieve this is a hybrid model serving wholesale and retail customers in the same store. The model was piloted with the acquisition of Thaba Cash & Carry in 2007, which owned three stores in the Free State. The stores exceeded all expectations this year, with a different sales mix achieving higher gross profit margins compared to typical wholesale margins. Continuing with our strategy of consolidating this market, in August 2008 we acquired the five-store Cambridge Foods based in Durban, now subject only to Competition Tribunal approval.

Future outlook

Masscash will continue to pursue growth opportunities in the lower-end hybrid retail and wholesale market, either by acquiring existing outlets or by opening new stores at suitable sites with high traffic volumes, or converting CBW and Jumbo wholesalers into hybrids.

Over the longer term, opportunities are expected to arise in several southern African countries. We are constantly scouting for prospects in new markets to consolidate and grow our position as southern Africa’s leading wholesaler and retailer of basic goods.