Massmart Annual Report 2008
 

Highlights

Silver Lakes store opened profitably
Over R10 billion in sales for the first time
Automatic stock forecast and replenishment system piloted
Two stores’ sales were more than R1 billion
 
Makro
  • Now 13 stores in SA
  • Operating in SA, Zimbabwe
  • Food/liquor/general merchandise
  • Liquor and general merchandise LSM 6-10 and food LMS 2-4
 

At a glance

Masswarehouse comprises 13 Makro warehouse club stores, trading in food, liquor and general merchandise in South Africa.
 
Makro Silver Lakes in Pretoria is our first new store in four years. It boasts energy efficiency, technical advancement and a modern look and feel
 
Makro’s electronic waste bin at the Woodmead store. This joint venture with Fujitsu Siemens collects ‘e-waste’ for proper recycling or disposal
 
Makro’s offerings fit a variety of customer needs within and across all our merchandise categories
 

Group contribution

Group contribution
 
Kevin VyVan-day

“…this year saw us aggressively pursuing our strategy of making Makro the shopper’s destination of choice for premium brands."
KEVIN VYVYAN-DAY CHIEF EXECUTIVE

 

Going green

Makro played a leading role in developing Massmart’s EcoWise programme this year, which will be rolled out across the Group’s divisions.

EcoWise is premised on the belief that South African consumers lag behind their European and US counterparts in environmental awareness.

Makro proactively engaged with suppliers to find out which of their products had achieved independent environmental endorsements that could be displayed on packaging. These include the Marine Stewardship Council mark recognising that fish stocks are managed sustainably, the Forest Stewardship Council mark that indicates wood products are sourced from forests where strict environmental and social standards apply, and the Green Seal, a US stamp of approval certifying products comply with a published set of environmental criteria.

EcoWise products will be flagged in Makro stores in the next financial year through poster displays, information boxes, and green shelf edging and interrupters.

Makro also played a leading role in producing Massmart’s Green Book of Answers, which provides merchandising directors and buyers with a set of questions to put to suppliers that encourage them to develop green products and adhere to environmentally sound practices.

This year Makro also piloted an electronic waste disposal programme at the Woodmead store. Placed in the parking lot, customers can discard unwanted electronic goods safe in the knowledge that these goods will be destroyed, reused or recycled in an environmentally sensitive manner.

 

Masswarehouse directorate

Grant Pattison
Chairman

Kevin Vyvyan-Day
Chief Executive

Bruce Cayzer
Food Director

Chris Nezar
Marketing Director

Derick Kalan
General Merchandise Director

Douglas Jones
Financial Director

Garry Hendry
Liquor Director

Gert Lourens
Operations Director

Pieter Schoeman
IT Director

Thuli Mpshe
Human Resources Director

Guy Hayward
Non-executive Director

Jay Currie
Non-executive Director

Masswarehouse divisional review

Masswarehouse exceeded all expectations this year with an incredible trading and operating performance. Our new Makro store in Silver Lakes, Pretoria, did well and made a positive profit contribution. Makro’s total sales topped R10 billion for the first time and profit before tax increased by almost 40% to R731 million.

The Makro formula

Masswarehouse was the founding entity of Massmart and currently operates 13 massive warehouse stores, branded Makro, situated in all the large metropolitan centres in South Africa selling food, liquor and general merchandise to retail and wholesale customers. Our two stores in Bulawayo and Harare, Zimbabwe, were deconsolidated from our financial figures in 2007.

The Makro formula is unusual in that it offers general merchandise for sale to retail customers, while most of its food and liquor is sold to wholesale customers. This blend gives it a robustness that enables it to trade comfortably through most economic cycles. The big-box warehouse club format with our no-frills approach keeps costs down and provides the platform for our high-volume, low-margin sales offering of quality branded merchandise. Our customer database generated by Makro store cards swiped at the point of purchase helps us keep track of the spending patterns of our 1,5 million active members and we communicate regularly with them through targeted promotional material.

Our operating environment

With rising inflation and depressed consumer spending as the higher interest rates took effect, we continued offering our customers affordable products representing better value for their money. Food inflation contributed to overall sales growth, but this was offset to some extent by deflation in general merchandise, especially electronic goods. The National Credit Act, which came into effect last year, had little effect on Makro as we are largely a cash business.

Selling alcoholic beverages from our liquor outlets adjacent to our main stores is an important part of our business, which makes it crucial for us to monitor and help shape new regulatory developments. This year all but one South African province were in various stages of drafting new liquor legislation and regulations flowing from the National Liquor Act passed in 2003.

Trading profit before tax return on sales

Actual 2008 Previous target Revised
Medium-term
target
International
benchmark
7,2% 6,0% 7,0% 5,0%

Key indicators

         

Financial performance

  2008 2007 2006
Sales* Rm 10 103,8 8 640,1 7 661,1
EBITA Rm 640,2 466,7 288,3
EBITA as a % of sales % 6,3 5,4 3,8
Operating profit before interest Rm 640,2 466,7 288,3
Operating profit before interest as % of sales % 6,3 5,4 3,8
Net finance income Rm 90,6 58,7 29,6
Operating profit after interest Rm 730,8 525,4 317,9
Operating profit after interest as % of sales % 7,2 6,1 4,1
Inventories Rm 1 043,6 807,2 682,3
Inventory days days 45 40 38
Net capital expenditure** Rm 153,7 49,8 34,3
Cash flow from operating activities Rm 285,8 375,8 289,1
Number of stores   13 12 14
Trading area m2 117 859 107 575 121 435
Average trading area per store m2 9 066 8 965 8 674
Number of employees   2 770 2 570 2 794
Sales per store R000 777 215 720 010 547 221
Sales per m2 R000 86 80 63
Sales per employee R000 3 648 3 362 2 742
* 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.
Masswarehouse includes Makro Zimbabwe for 2006, but not 2007 and 2008. Details can be found in note 6 in the annual financial statements

Store progress

 
Chain Number of stores at the start of the year Stores opened Number of stores at the end of the year
Makro 12 1 13
    Silver Lakes (Gauteng, Pretoria)  
Excluding two Zimbabwe stores, deconsolidated since 2007

Sustainability key performance indicators

 
Environmental  
   Electricity 128 305 524 kW/h
   CO2 carbon emissions 60 989 tonnes
Transformation (employment equity statistics)  
   Senior management 17,7%
   Middle management and professionals 45,6%
Human capital  
   Investment in staff training R7,5 million
Customer satisfaction  
   Satisfied customers 84,0%
HIV  
   Prevalence rates amongst employees 3,6%
CSI  
   CSI spend R6,9 million

We continue to engage constructively with the various administrations and have made submissions on draft bills to several provinces this year. This year the High Court dismissed with costs the National Liquor Authority’s appeal against an earlier ruling allowing Makro to act as both retailer and distributor of liquor. Failing this we might have been forced to stop selling liquor to our wholesale customers.

This year’s power cuts did not affect us operationally as all our stores are fully equipped with generators. These power cuts did, however, enable us to sell large volumes of generators, gas equipment and electricity-saving devices. This was offset to a small extent by lower purchasing volumes of perishables by the traders.

Financial performance

The Division reported total sales of R10,1 billion, representing growth of 16,9%, while the 52-week comparable store sales growth was 10,5%, with our annual sales inflation estimated at 7,2%. The new Silver Lakes store bolstered total sales growth.

Profit before interest of R640 million was 37,2% higher than the prior year. Working capital management remained very effective and profit before tax of R731 million was 39,1% above the prior year and represented a return on sales (profit before tax/sales) of 7,2%. Our medium-term target return on sales was increased from 6,0% to 7,0%.

As a result of the new store, net capital expenditure of R154 million was higher than the prior year’s R50 million. This includes R61 million spent on Silver Lakes and R27 million on upgrading our SAP software.

Historically, Makro does relatively better during difficult economic times because more consumers are actively seeking better value, whether through bulk-buying or specials on selected branded goods.

There are several other reasons for our performance. Food inflation and the contribution from our new Silver Lakes store all played a role. So did new sales initiatives for our small- and medium-sized commercial customers, including introducing a delivery service and piloting a credit programme. Our Makro card allows us to make informed decisions on providing credit to enterprises that may traditionally lack access to credit. We are also building relationships with third-party credit providers such as RCS, which operates kiosks in our stores.

An automatic electronic stock forecast and replenishment system was piloted and will be fully implemented during the 2009 financial year. Supply chain improvements were achieved by introducing formal monitoring and reporting processes, and continuing to roll out efficiency benchmarks with key suppliers and at our distribution centre, thereby significantly improving suppliers’ truck turnaround times at our stores.

Our value proposition

Makro’s offerings are tailor-made to fit a variety of customer needs within and across all our merchandise categories.

Our food offering caters to wholesale shoppers ranging from informal traders and grocery store owners to hoteliers, restauranteurs and schools. Wholesalers account for 60% to 80% of Makro’s food sales and mostly shop during the week for the convenience of our wide range of good value, quality consumables. At weekends our focus shifts to promoting good buys for retail food and grocery shoppers, who can achieve substantial savings on their monthly household basket compared to other mass retail outlets.

Our liquor outlets are constantly increasing their range of premium brands, especially in wine and whiskey. These products are sold at a low margin to maintain and grow our share of the market. At the same time we have maintained a strong presence of budget brands for liquor wholesalers looking for good value. This year we piloted a wine offering in the grocery section of two Makro stores, Germiston and Woodmead in Johannesburg. The results so far have been encouraging.

Hi-tech product focus

In general merchandise, this year saw us aggressively pursuing our strategy of making Makro the shopper’s destination of choice for premium brands. By taking large positions on selected ranges and improving distribution efficiencies we were able to make selected brands more affordable and accessible to our customers. Aggressive promoting was done through advertising, in-store announcements and bold, powerful stack displays on the floor. Hi-tech products, such as flat-screen TVs and portable satellite navigation systems, performed particularly well in this category.

Another highlight this year was rolling out our expanded selection of branded sports apparel and equipment to seven Makro stores. Many of the leading sports brands, including up-market footwear and leisure clothing, are now available in our eight largest stores. The sports areas in these stores have been enlarged and visually enhanced with lifestyle banners and bold brand displays.

Our Private Label programme continued to flourish this year, providing exceptional value to our customers who are assured of stringent quality control and best supplier practices. Several have become household names, including Trojan exercise equipment, Campmaster outdoor gear, and Mastercraft hand tools.

A new store

The decision to open a new Makro is not taken lightly. Our stores are massive structures occupying 6ha of retail and parking space. A shortage of suitable land, the need to identify growth opportunities that can deliver annual store turnover of at least R450 million and the danger of cannibalising customers from other Massmart stores are factors that are carefully considered.

The research that went into opening Silver Lakes, our first new store in four years, has paid off. Despite pre-opening costs and the anticipated cannibalisation of the two nearest Makro stores in Pretoria, Silver Lakes made a net positive trading contribution. Silver Lakes is our most technically advanced store, achieving 10% to 20% better energy efficiency than older Makro stores. It also reflects the more modern look and feel that will become a hallmark of all Makro stores in the future and which has since been implemented at our Woodmead branch.

Risks and rewards

Makro’s spectacular organic growth comes with its own risks. The same infrastructure producing sales of R6 billion a few years ago is now turning more than R10 billion. Our Woodmead and Germiston stores had sales of more than R1 billion each this year. This means sites must be found for new stores to reduce the trading pressure on those stores, but affordable land at strategic locations near urban growth nodes is increasingly rare. In the meantime, the volume and rate of product flow within stores must improve without compromising on safety. This year we focused on forklift safety by restricting speeds, painting our vehicles in bright colours, and trying to keep them off the floor during trading hours.

Future outlook

In the meantime, we are actively scouting for sites for new stores. No new Makros are planned for the next financial year, but within three years we expect to open a new store in each of the Western Cape, Gauteng and KwaZulu-Natal regions. Makro will use lessons learned from Silver Lakes and Woodmead to improve the shopping environment at our other stores. Three stores will be refurbished in the next two years, and the remainder thereafter.

Consumer spending is likely to continue to slow. Our response will be an ongoing focus on offering strong value propositions, constantly refining operational efficiencies, improving outbound sales efforts, and enhancing the Makro shopping experience in our stores.