Massmart Annual Report 2008
 

Highlights

Over R10 billion in sales for the first time
Dion Wired profitable
First regional distribution centre opened
Remaining original Dion stores closed or converted
 
game
  • 26 stores acquired 1 July 1998
  • Now 84 stores
  • Operating in SA, Botswana, Namibia, Mauritius, Mozambique, uganda, Zambia, Nigeria, Malawi, Tanzania, Ghana
  • General merchandise and FMCG
  • LSM 5–10
 
Dion wired
  • 20 Dion stores acquired 31 May 1993
  • The last original Dion store closed in June 2008
  • Now 6 stores
  • Operating in SA
  • General merchandise
  • LSM 6–10
 

At a glance

Massdiscounters comprises 90 retail discount stores offering a wide range of general merchandise and non-perishable groceries to customers seeking value. 84 Game stores trade in South Africa, Namibia, Botswana, Zambia, Uganda, Mozambique, Nigeria, Mauritius, Malawi, Tanzania and Ghana. Six Dion Wired stores trade in Gauteng, South Africa.
 
One of Dion Wired’s ‘Propeller Head’ vans. IT experts are on hand to offer advice, and are available for onsite repairs and services
 
Dion Wired in Woodmead provides displays that create an easy, interesting and interactive shopping experience
 
Ama-lunchbox, Game’s partnership with government and NGOs, supports feeding schemes throughout South Africa
 

Group contribution

Group contribution
 
Jan Potgieter

"These financial results were assisted by our internal focus areas on improving... efficiencies... closing or converting non-performing stores, and opening new stores..."
JAN POTGIETER CHIEF EXECUTIVE

 

Ama-Lunchbox

Massmart has decided to focus social spending on areas that really make a difference, and has identified education for the poorest of the poor as the most worthy cause.

In line with the philosophy that you can’t teach a hungry child, Game partnered with government departments and NGOs to pioneer an innovative support programme for feeding schemes that was rolled out to many schools currently on the government feeding scheme throughout South Africa this year.

Many of these schools lack modern and hygienic cooking facilities. Painted in vibrant pink and branded ‘ama-lunchbox’, each R60 000 container kitchen is fitted with a gas burner, double bowl sink, cupboards, stainless steel containers, shelving, large cooking pots and spoons, and a supply of bright pink tumblers and bowls.

To launch our ama-lunchbox, staff from the nearest Game store prepare a nutritious meal and distribute it to the local school children, who get their own Game-branded lunch box.

This year we spent R1,5 million, or over a quarter of our social investment funding, on equipping 24 schools throughout South Africa with container kitchens that prepare meals for 31 500 children every day. We expect to supply another 30 containers in the next financial year to bring the total up to 55. These kitchens would then help to provide an estimated 10 million meals in a year. We believe that we are making a critical difference to our country’s development.

 
A friendly Game employee and a satisfied customer leaving the store
 

Massdiscounters directorate

Grant Pattison
Chairman

Jan Potgieter
Chief Executive

Ann Hansen
Financial Director

John Hart
Supply Chain Director

Mark Turner
Marketing Director

Richard Fuller
Africa Director

Rob Barrell
Store Operations Director

Rogany Ramiah
HR Director

Tyrone Vieira
Merchandise Director

Guy Hayward
Non-executive Director

Jay Currie
Non-executive Director

Massdiscounters divisional review

In an exciting year for Massdiscounters, our new Dion Wired stores began to show a combined profit, we built a new regional distribution centre that will improve supply chain efficiencies, and our Board approved the opening of several new Game stores in Africa. A return to our high-volume, low-margin discounting model helped us achieve an increase in sales despite a general slowdown in consumer spending.

The Massdiscounters brands

Massdiscounters operates two retail formats: Game and Dion Wired. Game is a discount retailer of general merchandise and non-perishable groceries for home, leisure and business use, operating throughout South Africa and in certain major cities of sub-Saharan Africa. Our newest division, Dion Wired, opened its first store in 2006 and sells upmarket electronics and appliances to affluent consumers through six stores in South Africa.

Massmart bought Dion in 1993 and Game in 1998, merging them a year later. At that time, both operated similar, competing formats and the decision was taken to close or convert all Dion stores to Game where this was made possible by impending store lease terminations. A core of ten Dion stores was retained in the Gauteng province of South Africa until those leases came up for renewal. In the past two years these stores have been closed or converted to Game.

Game’s value proposition

At Game our positioning is to offer customers the widest range of branded products at the best price for a given set of product specifications. Customers are presented with a wide range from which to choose and are assured of the best value product for that price.

This financial year we focused particularly on increasing our promotional activity and improving our price perception among customers. By taking large positions on selected products and working closely with our suppliers, we were able to offer our customers well-priced products representing great value.

Dion Wired

The Dion Wired slogan is “Experience the future”. Our product displays create an easy, interesting and interactive shopping experience for the latest home entertainment, computing, video and photographic equipment and appliances. Dion Wired sells complete technological solutions, demonstrating in-store the interconnectivity of the latest innovations and products. The IT experts manning our in-store service centre, the ‘Propeller Heads’, are on hand to offer the best advice and can do onsite repairs and services.

Trading profit before tax return on sales

Actual 2008 Medium-term
target
International
benchmark
7,5% 8,0% 7,4%

Key indicators

         

Financial performance

  2008 2007 2006
Sales* Rm 10 406,5 9 424,5 8 095,7
EBITA Rm 724,5 634,2 546,4
EBITA as a % of sales % 7,0 6,7 6,7
Operating profit before interest Rm 724,5 620,1 546,4
Operating profit before interest as % of sales % 7,0 6,6 6,7
Net finance income Rm 58,6 52,1 30,0
Operating profit after interest Rm 783,1 672,2 576,4
Operating profit after interest as % of sales % 7,5 7,1 7,1
Inventories Rm 1 766,8 1 597,8 1 272,5
Inventory days days 83 84 78
Net capital expenditure** Rm 208,8 210,5 120,3
Cash flow from operating activities Rm (6,2) 43,2 458,6
Number of stores   90 90 80
Trading area m2 338 285 346 387 322 066
Average trading area per store m2 3 759 3 849 4 026
Number of employees   9 817 10 681 9 925
Sales per store R000 115 247 104 038 101 196
Sales per m2 R000 31 27 25
Sales per employee R000 1 057 877 816
* 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 Stores converted Stores closed Number of stores at the end of the year
Game 82 4 3 -5 84
    Key West (Gauteng, Krugersdorp)

Richards Bay (KZN, Richards Bay)

Potchefstroom (North West, Potchefstroom)

Walmer Park (Eastern Cape, Port Elizabeth)
Sandton (Gauteng, Johannesburg)

Brooklyn (Gauteng, Pretoria)

Westgate (Gauteng, Johannesburg)
East Rand Mall (Gauteng, Johannesburg)

Clearance Store (Gauteng, Johannesburg)

Westgate (Gauteng, Johannesburg)

Maynard Mall (Western Cape, Cape Town)

Metlife Plaza (Eastern Cape, Port Elizabeth)
 
Dion/Dion Wired 8 4 -3 -3 6
    Dion Wired – Gateway
(KZN, Durban)

Dion Wired – Woodmead
(Gauteng, Johannesburg)

Dion Wired – Kolonnade
(Gauteng, Pretoria)

Dion Wired – Bedfordview
(Gauteng, Johannesburg)
Sandton
(Gauteng, Johannesburg)

Brooklyn
(Gauteng, Pretoria)

Westgate
(Gauteng, Johannesburg)
Alberton
(Gauteng, Johannesburg)

Dion – Kolonnade
(Gauteng, Pretoria)

Boksburg
(Gauteng, Johannesburg)
 

Sustainability key performance indicators

Environmental  
   Electricity 247 991 078 kW/h
   CO2 carbon emissions 117 204 tonnes
Transformation (employment equity statistics)  
   Senior management 46,2%
   Middle management and professionals 61,7%
Human capital  
   Investment in staff training R4,7 million
Customer satisfaction  
   Satisfied customers 88,0%
HIV  
   Prevalence rates amongst employees 4,3%
CSI  
   CSI spend R5,3 million

Although our products are well priced, Dion Wired is not a discounter. Our main offering is the widest range in South Africa of some of the world’s biggest upmarket brands such as Apple, Smeg, Miele, Marantz, Jamo and Onkyo.

Three new stores were opened this year, bringing the total since launching the brand to six. Five are in Gauteng and one in KwaZulu-Natal. The new chain is already showing an overall profit and so we plan to roll out the concept nationally.

Our operating environment

The most important external events influencing our business this year were interest rate hikes and increases in the cost of transport and food, all of which cut into disposable income of our customers, who are predominantly in the middle-income category.

We sold approximately 4% of our sales through our own consumer credit arrangements. The impact of the National Credit Act (NCA) introduced in June 2007 prevented us from selling certain insurance products as part of these consumer credit arrangements, directly resulting in Massdiscounters losing income of R30 million. The additional credit risk now required to achieve the same degree of profitability prompted us to sell our Consumer Credit division, including the Consumer debtors book. Following a competitive tender process, the successful purchaser was RCS, a joint venture between Foschini and Standard Bank. RCS has been our business partner for over two years and, we believe, is in a better position to grow this Division. The sale was effective on 30 June 2008, immediately following the close of the 2008 financial year, and cash proceeds of R174 million were received.

The impact of the NCA, which was felt dramatically by many South African credit-based retailers, was offset in Massdiscounters by two factors. Firstly, Massdiscounters is primarily a cash business, with credit sales representing only a small proportion of total sales, so the NCA made little direct impact on our ability to sell to consumers. Secondly, in an inflationary environment more consumers are actively looking for better value and so our investment in rebuilding Game’s perception as a leading discount store enabled us to trade effectively in a tough consumer environment.

This year’s power cuts did not affect us operationally as all our stores are fully equipped with generators.

Financial performance

The Division reported total sales of R10,4 billion, representing growth of 10,4%, while the 52-week comparable store sales growth was 7,6%, with our annual sales inflation estimated at 2,7%. Sales growth from our 12 African stores was strong: in local currencies total sales grew by 95%, while comparable sales grew by 33%. Sales growth in Game South Africa was slightly positive and had increased towards the end of the financial year.

Profit before interest of R725 million was 14,3% higher than the prior year. Working capital management was less efficient than usual and so profit after interest received of R783 million was 14,1% above the prior year. The Division’s resultant return on sales (profit before tax/sales) of 7,5% was very pleasing given the economic environment. Included in profit are unrealised gains of R63 million (2007: R18 million loss) on translation of the African balance sheets.

Net capital expenditure of R209 million was in line with the prior year’s R210 million, which demonstrates the extent of the Division’s store refurbishment and relocation programme, as well as supply chain and IT investments.

For most of the year inventory levels were slightly higher than our optimal levels, but this situation has now normalised.

Improved efficiencies

These financial results were assisted by our internal focus areas on improving labour and supply chain efficiencies, upgrading IT systems, closing or converting non-performing stores and opening new stores at carefully selected sites.

This financial year we converted three Dion stores to Game, and closed two Dion and five Game stores. Four new Game stores opened this year, fewer than the 11 stores opened last year, and three Dion Wired stores opened. In summary, seven stores were opened and seven were closed, leaving the total number of stores unchanged at 90, although the net result was a 2,3% reduction in trading space. Subsequent sales performance at Dion stores converted to Game increased by up to 30%, confirming the decision to discontinue Dion, especially where both brands competed directly with each other.

Better labour scheduling resulted in full-time equivalent employees savings of 8% to 10% without any staff retrenchments. This was achieved by using temporary staff only when really needed, putting a freeze on new appointments, managing overtime and reducing the duplication of employee functions.

Investments in supply chain and process enhancements continued, reflecting our belief that our long-term success remains dependent on improving product availability for customers and reducing the associated handling and administration costs. Our import warehouse, which opened in Pinetown near Durban last year, has improved warehouse and distribution efficiencies. These gains will grow in the 2009 financial year when our Cape Town regional distribution centre becomes fully operational, serving 14 stores in the Western and Eastern Cape.

Once we establish our ability to manage these large distribution centres and our suppliers show that they are able to change their own supply chains to accommodate this new strategy, further regional distribution centres will be built in Durban and Johannesburg in the next two to three years, with two smaller hubs potentially planned for outlying regions within five years. These centres will relieve pressure on our stores because stock will no longer be delivered directly to our back doors, as well as reducing in-store stocking and improving the stock balances between stores.

We also extended our electronic portal to over 335 suppliers, providing them with instant access to sales information to help them make more informed supply chain and production decisions.

Efficiency improvements were also achieved through the use of automated stock replenishment, which in terms of total sales reached 70% by units and 50% by value.

African opportunities

Massdiscounters operates 12 Game stores outside South Africa in ten countries and most are doing exceptionally well, with sales growth strongly outperforming our South African stores. This prompted us to revise an earlier policy to limit our African footprint to one store per country (with the exception of Botswana and Namibia). This year we are negotiating agreements to open second stores in Malawi, Zambia, Ghana and Nigeria, while further stores in Angola, the Democratic Republic of Congo and several other countries will follow.

Our success in Africa begins with a superior product range, competitive prices and better after-sales service than our competitors.

Local conditions are researched carefully before a decision is made to open a store in Africa. An independent business plan suited to local market expectations and supply chain constraints is created for each site. We buy locally and import some products directly from the countries of manufacture, while others pass through our warehouses in South Africa.

Although merchandising and administration managers are initially appointed from South Africa, they are tasked to develop local citizens to take over their positions within five years. Today half of our African stores are run by citizens of those countries.

Risks and rewards

The biggest external risk our business faces is the financial health and confidence of our consumers. Current economic conditions are a concern, but there seems to be growing consensus that there may be some interest rate reductions in the second half of the 2009 calendar year.

Future outlook

Our new Game stores will have a more contemporary feel. The first such store is being piloted in Boksburg, Gauteng. Signage will be less cluttered and will focus on price and promotions. Store flow design will encourage customers to visit more aisles, and our electronics displays will become more appealing by applying lessons learned in our Dion Wired stores. If successful, the new look and feel will be rolled out to several new Game stores planned for metropolitan centres and regional hubs in the next three years. Product ranges will be reviewed constantly to match regional customer profiles more closely.

We believe there is ample scope to grow our successful Dion Wired brand, and expect to open up to ten more outlets in the next five years, with careful attention being paid to selecting the right store location.