Massmart Annual Report 2008
GM Pattison

“We are pleased with the performance of the Group across all areas, although we still see much room for improvement in our pursuit of world-class standards.”

GRANT PATTISON CHIEF EXECUTIVE OFFICER

 

Further reading

More detail on the Divisions can
be found in the Operational Review

OPERATIONAL REVIEW
 

“…Massdiscounters and Massbuild did well to grow profits at or near their rate of sales growth.”

 

“…Masswarehouse and Masscash produced strong profit growth…”

 

“The completion of the regional distribution centre in Cape Town marks a new era of logistics for Massmart…”

 

Further reading

For detail on new stores target and
new trading space target refer to the
‘Looking forward’ section

MASSMART AT A GlANCE
 

“In the 13 weeks to 28 September 2008, total sales increased 13,1% and comparable sales increased by 11,8%.”

Chief Executive Officer’s review

It is a pleasure to present my report on my first year as CEO of Massmart. Even though it was a challenging year, we managed to deliver a strong overall performance thanks to a balanced contribution from the four Divisions. The economic cycle was clearly gaining downward momentum, but we proved that the Group is able to ride through the troughs.

The year began with my taking on the role of CEO after a three-year succession process and ten years with the Group. The process ensured that I have been able to take on the role well prepared for the challenges of managing the Group. My thanks are due to Mark Lamberti, who left the CEO position to become Chairman, the rest of the Board and the Executive Committee for their support and confidence. I remain inspired by the calibre of the team at Massmart.

Environment

Many challenges tested the country over the past year, some fuelled globally and some locally. The political temperature rose as the ruling party elected new leadership, shifting the balance of power. Crime remained a serious issue, though some victories were scored in bringing it under control. Maintaining and growing the country’s infrastructure came under close scrutiny as a result of load-shedding by Eskom.

Food and energy inflation continued to drive general inflation, forcing interest rates higher and putting the middle-income consumer under pressure. It also put low-income consumers, who are living hand to mouth and struggling daily to feed their families, under even greater pressure. This has challenged both government and ourselves to redouble efforts to provide support to those who cannot support themselves.

Financial performance

The economic environment was reflected in the trading patterns across the Group. Food and liquor sales grew 17,1%, general merchandise sales growth was steady at 11,2%, while home improvement sales grew 14,4%, although this growth slowed during the year.

For the 53 weeks to 29 June 2008, total sales grew 14,3%. Comparable store sales – which measures sales in stores that were open for the full financial year and the year before – grew at 13,1%. Operating profit increased 24,6% and profit before tax increased at a slightly slower rate of 24,1%. The difference was largely due to increased interest costs because of higher interest rates and a slightly worse working capital position during the year. A lower net tax rate and fewer shares in issue boosted headline earnings per share by 23,8% before accounting for our Thuthukani empowerment scheme.

Analysis of the financial results is complicated by the 53-week period, which is compared to the 52-week period the year before. To better understand the operating performance relative to the prior year, we need to review the results for the 52 weeks to 23 June 2008. For that period, total sales grew 11,9% and comparable store sales grew 10,8%. Operating profit increased 17,7% and profit before tax increased 20,7%.

A further consideration is the impact of foreign exchange gains on these financial results. Because of the accounting treatment of various items on the income statement and the balance sheet, the movement of the Rand exchange rate can cause large (mostly unrealised) losses or profits. For the period, translation gains amounted to R62,5 million, or 3,7% of the growth in operating profit. Therefore, a truer reflection of performance is that operating profits grew 12,5%, maintaining operating margin from the previous year.

The Chief Financial Officer’s review provides a detailed financial analysis.

Operating performance

For the 52-week period, Masswarehouse and Masscash produced strong profit growth while Massdiscounters and Massbuild did well to grow profits at or near their rate of sales growth. The Divisional figures below represent the growth for the comparable 52-week period. A fuller discussion of each Division’s performance is in the Operational Review.

Massdiscounters

Massdiscounters consists of the 83-store General Merchandise retail discounter Game and the six-store hi-tech retailer Dion Wired. Game trades in South Africa, Namibia, Botswana, Zambia, Uganda, Mozambique, Mauritius, Malawi, Tanzania, Nigeria and Ghana.

Massdiscounters had a challenging year although much progress was made in implementing various initiatives that will pay off in years to come. Sales increased 7,5% (7,6% on a comparable store basis) and profit before tax by 9,5%. In South Africa, comparable sales grew throughout the year thanks to investment in trading aggression and a shift in focus towards value. African sales and profits performed at substantially higher levels than in South Africa. Locally, the National Credit Act reduced the Division’s trading profit by an estimated R30 million.

However, future growth is on track thanks to investment in several areas. African expansion gained momentum with at least ten new potential sites identified, two of which were recently approved. The debtors book was sold and outsourced the day after the financial year-end. The original Dion brand was finally removed through store closures and conversions, while a new regional distribution centre was recently commissioned in Cape Town. The Dion Wired format was also successfully established as a profitable national brand focused on the high-tech consumer market, and three new stores were opened. Four new Game stores were opened and two Dion stores converted to the Game format. Two other Dion stores were closed and five Game stores closed.

The team is in good shape with a new Financial Director and HR Director settled in.

Masswarehouse

Masswarehouse consists of the 13-store Makro warehouse club, trading in food, general merchandise and liquor in South Africa. A further two Zimbabwean stores are not consolidated in the results.

Masswarehouse had a good operating year. Sales increased 14,7% (10,5% on a comparable store basis) and profit before tax 34,4%. Margins, cost and stock remain under tight control. Its unique formula demonstrated its resilience in the tightening economic environment while management responded to trading opportunities faster than competitors.

The new Silver Lakes Makro store had a record opening and subsequent trading has been pleasing, although the performance of food is below expectations. Cannibalisation has been within forecast levels.

A major upgrade to the SAP ERP system was also implemented faultlessly.

We believe that there is potential for at least four more Makro stores to be opened in South Africa. The challenge, however, is to identify new properties that are well situated at appropriate prices. We continue to pursue opportunities.

Massbuild

Massbuild consists of 68 outlets trading in DIY, home improvement and builders’ hardware, under the Builders Warehouse, Builders Express and Builders Trade Depot brands in South Africa.

Sales increased 12,4% (9,0% on a comparable store basis) and profit before tax by 7,8%. Trade Depot had a particularly good year with sales up 12,6% and profit before tax up 27,4%.

Activities during the year were focused on stabilising the structure of the business, processes and control following the previous year’s rapid consolidation of brands and systems. During the year the Massbuild head office was removed and Builders Express was consolidated within Builders Warehouse. A number of processes and systems were upgraded and improved, including those handling imports, supply chains and stock management. One new Builders Warehouse store and three new Builders Express stores were opened.

The teams at both Warehouse and Trade Depot are now complete and performing well.

Masscash

Masscash consists of 71 Cash and Carry stores trading in South Africa, Lesotho, Namibia and Botswana, and Shield, a voluntary buying association.

The Division had an exceptional year. Sales increased 13,2% (14,3% on a comparable store basis) and profit before tax by 38,5%. The performance was driven by high food inflation of 13,3% for the year and by benefits extracted from the merger of CBW, Jumbo, Shield and Cell-Shack the previous year. Food inflation fed into sales and trading margin, while the merger successfully eliminated costs.

There were two main strategic thrusts for the year: to test the rollout of a new in-store system and to implement the hybrid strategy. The system rollout test was successful and final approval for the rollout has been given. By the end of this financial year we should have all the Cash & Carry stores on one system with one stock master file – a major achievement.

The hybrid strategy aims to develop a store format that includes both retail and wholesale food. This gained momentum with the acquisition of ten stores with combined R1,0 billion in annual turnover that are awaiting competition authority approval and a further five stores that are still being negotiated.

The Masscash team is in good shape. During the period Operations Director Fred Cresswell moved to the Trade Depot business. This resulted in a reshuffle in which Neville Dunn moved from Financial Director to Operations Director and Dino Holmes from Financial Manager to Financial Director. We are in the process of appointing a new Financial Manager.

Progress on vision 2011

Vision 2011 covers our focus on leadership and transformation, supply chain, private label, financial services, organic growth, new formats and sustainability, all of which represent the headlines of our three-year rolling strategic plans.

Emigration and the general skills shortage is seen as a priority risk in the Group, so we are focusing on building our skills base internally. The year saw 42 executives and senior managers participate in Massmart University programmes and the participation of all senior management across the Group in a diversity management programme. Another ten executives participated in a Walton College of Business programme during the year. In total, 17 black graduates completed our in-house programme and were appointed to roles across the Group, while a further 17 are already in the pipeline. We have planned to increase the intake to 25 per year. Our annual Black Economic Empowerment scorecard saw an improvement by 13 percentage points in our self-assessed rating to 49%, making Massmart a level 6 contributor.

The completion of the regional distribution centre in Cape Town marks a new era of logistics for Massmart, but we still have much to learn. We have also learnt a lot in space planning by examining best practice overseas and a trial is under way of a new methodology. We have also established automatic replenishment systems in all retail divisions.

A complete rework was undertaken of some of the Group’s private label brands – those brands which are exclusive to Massmart – and the foundation has been set to improve the quantity and quality of our participation in some of the biggest consumer brands in Africa. We now have the ambition to become one of the leading owners of consumer goods brands in South Africa.

On the financial services front, we completed the sale of the Massdiscounters book just after year-end and will look for leverage opportunities across the Group in future.

Our organic growth has continued, and will continue to ensure we have an up to date, optimally structured portfolio. The latest review of our store opening opportunities shows potential for unweighted space growth of 5,1%, 6,0% and 3,5% in 2009, 2010 and 2011 respectively. That suggests a net 25 new stores across the Group, including 147 698m2 and R3,66 billion in annualised turnover. That scenario excludes any acquisitions. However, our efforts to deliver on that opportunity have been frustrated by bureaucracy and unrealistic price expectations for land, resulting in slower store opening progress than the potential suggests.

Our greenfield formats have done well – Dion Wired has now established six stores and is profitable. We have identified further sites and are talking to landlords.

We also continue to look for more growth in Africa. During the year we found a number of fantastic sites on the continent and we are working on further store openings. We have also established a New Formats division and have made exciting progress with preparations to enter new categories with new formats.

We also continue to look out for acquisitions that comply with our strategic objectives. We have identified targets and continue to evaluate opportunities as they arise.

Sustainability is the final area in our vision for 2011. We have made good progress in improving our BEE scoring and we now rank as the most empowered listed retailer. We received a number of plaudits for our Sustainability Report. We have also now calculated the carbon footprint in the Group and are working on ways to improve it, including a pilot e-waste recycling project begun during the financial year. We also continue to build environmental awareness in our procurement processes and are bringing suppliers on board to improve overall energy consumption, packaging use, food sourcing and water consumption.

Prospects

Trading in the new financial year has been good. The resilience of Massmart through previous economic cycles gives us confidence that we will continue to perform well relative to our competitors trading in similar categories. This short-term cycle presents both opportunities and threats as consumers adjust their purchasing behaviour to accommodate higher food, energy and interest costs. Parts of the Group will benefit as consumers ‘trade down’ to take advantage of our value proposition relative to other retailers. Other parts of the Group will have to adjust to the new environment. We are closely monitoring the effects of the interest rate cycle on our relatively new home improvement business.

We are confident in the medium- to long-term scenario for the South African consumer economy. It will continue to benefit from a growing middle class, a general shortage of housing, the social spending programme and the downstream economic benefits from the country’s infrastructure investments.

Africa also continues to provide opportunities as its economies respond to improved governance and higher commodities prices.

We are pleased with the performance of the Group across all areas, although we still see much room for improvement in our pursuit of world-class standards.

Given the current economic environment, we are cautious about the year ahead but are confident that our business model will prove its resilience. We remain excited about the opportunities that are available to ensure medium- to longer-term growth.

Appreciation

In my first year as CEO I have benefited from the support of the Executives and Board and thank them for their contribution to the CEO hand-over process. I am very grateful for their ongoing commitment to the Group and their exceptional contribution to our success.

I am well aware that financial success is a lagging indicator of human performance. Every one of our 24 308 employees has contributed to the Group’s performance, evident particularly during a time of tightening retail conditions. Thank you.

GM Pattison

Grant Pattison
Chief Executive Officer

1 October 2008