Massmart Annual Report 2008
Mark J Lamberti

"We are clear that the sole objective of our strategic thought and action is the achievement of competitive advantage."

MARK J LAMBERTI   CHAIRMAN OF THE BOARD

 
The Massmart Executive Committee meets at the Sunninghill
head office for monthly reviews of operational performance.
 

"Over the past year we increased sales per store, per employee and per square metre…and we decreased operating expenses as a percentage of sales."

MARK J LAMBERTI   CHAIRMAN OF THE BOARD

 

“While the achievement of excellence is reward in itself, we are humbled by the public recognition of our accomplishments over the past year.”

 

Further reading

Vision and mission can be found
at the beginning of the report

MASSMART AT A GlANCE
 

“We are committed to playing a constructive practical role in the normalisation of our society and we see no better way to do this than through collaborative and influential relationships with stakeholders.”

Chairman's report

In this environment and time, it is easy to be diverted from the primary purpose of a large business in a transforming society. The demands on the time, attention and resources of South African business are legion, with every constituency making claims founded frequently on interests that are diametrically opposed to the development of industry and commerce. We cannot be distracted by this.

With the average lifespan of a company still far from that of a human being, we at Massmart regard survival as our primary objective, reflected most obviously in the preservation and growth of your capital. The fact that we have been able to exceed this minimum requirement over the past year with a 53% return on average shareholders’ equity and a 73% return on capital employed, is attributable to four things: strategic clarity; leadership; a quest for excellence in every aspect of our endeavour; and a proven commitment to satisfying the legitimate needs of all stakeholders. In addition to its fiduciary obligations as defined by the law and good governance practice, the Board of Massmart applies its collective competence to these issues.

Strategic clarity

We are clear that the sole objective of our strategic thought and action is the achievement of competitive advantage. For many years we have done this through the continual improvement of a high-volume, low-margin, low-expense business model that has enabled us to provide exceptionally low prices on an extensive range of products, to a broad spectrum of society in 14 sub-Saharan countries.

Over the past year we increased sales per store, per employee and per square metre, we reduced gross margins at the product level and we decreased operating expenses as a percentage of sales. Customer response to the consequent lower prices was evident in real comparable store sales growth in all Divisions – the ultimate vindication of a retail trading strategy. Concurrently, and notwithstanding our mass market position as one of Africa’s largest distributors of consumer goods, we have mitigated risk by being selective in our choice of markets, sites, categories, products and payment methods. Finally, by virtue of productivity improvements, we have again grown profits ahead of sales to establish an 18-year compounded annual growth rate of 56,0% in sales, 75,8% in profit before tax and 26,7% in net asset value since the Group’s founding in 1990.

Massmart’s annual three-year strategic review ensures that there is continuity and coherence in the Group’s strategic thinking, and this year the Board was delighted by the prospects for revenue and profit growth arising from the new initiatives tabled in Vision 2011, covered in detail in the Chief Executive Officer’s review.

An important development since year-end has been the formation of the Strategy and Investment Committee of the Board. Although the Group’s high cash generation will further reduce its low gearing over the coming year, it is likely that the number and size of opportunities facing the Group will require capital rationing decisions unlike those we have previously faced. The Strategy and Investment Committee was formed to enhance the quality of such decisions by facilitating a robust analysis and evaluation of options by the Board and executive management.

Leadership

For many years Massmart has adopted an innovative and oftentimes unconventional approach to human capital development in general, and leadership in particular. Nowhere was this more evident than in the CEO succession process. The ease with which all Massmart stakeholders have adapted to and embraced Grant’s leadership is both a vindication of the process that the Board adopted and a tribute to his technical ability, business acumen and leadership stature.

The Executive Committee, the most senior executive decision-making body in Massmart, and their direct reports, constitute a young leadership cadre with the necessary formal education, retail and wholesale experience, and tenure to sustain performance and growth. The enhancement of their skills and those of the next generation of managers is carefully monitored and addressed in career and succession plans, which inculcate a developmental and performance ethos, while striving without compromising competence, for defined racial and gender targets throughout the Group. We can think of no greater insult than telling someone in Massmart that they hold their positions because of their race or gender.

The skills shortage in our country is no longer a matter of opinion. South Africa has too few competent managers, leaders, professionals and technicians of every race, gender and creed to meet our need. This need is being fuelled not just by South African factors such as transformation, rapid economic growth, the continued emigration of young graduates seeking international experience, and by some escaping the high crime rate. It is also being fuelled by the worldwide exit from the workplace of my generation – the baby boomers, by a decline, other than in India and South East Asia, of graduates in the quantitative disciplines, and by the fact that the market for top-level executives has become one of the world’s few truly global markets.

Massmart’s response to this has been to increase investment in education, training and to fast-track executive development programmes which accelerate individuals’ competence and confidence to take the hard commercial decisions associated with accountability and responsibility for profits, assets and people. We intend to redouble these efforts.

The quest for excellence

Every business is particularly good at something. Great businesses are good at many things. The reasons are obvious. As people imbibe the processes, practices and focus that lead to success in one aspect of an organisation’s endeavour, lower standards of performance are exposed elsewhere and the motivation to address these is increased. Over time the quest for excellence becomes a way of life.

David Susman, the founder of Woolworths and one of South Africa’s greatest retailers, described this as “divine dissatisfaction”, a state of being pleased with progress, but never satisfied. This philosophy is deeply ingrained in the leadership of Massmart and evidence of continual learning is abundant.

While the achievement of excellence is reward in itself, we were humbled by the public recognition of our accomplishments over the past year.

The following were the most notable of these:

  • First in the Financial Mail Top Companies Survey
  • Top of the JSE retail sector in the Financial Mail/Empowerdex 2008 Top Empowerment Companies Survey
  • The only company to achieve Top Performer Status in the 2007 JSE SRI-Index medium environmental impact category
  • Massmart’s 2007 Annual Report was ranked fourth in the Ernst & Young Excellence in Corporate Reporting Awards
  • Massmart’s 2007 Sustainability Report was ranked Best Sustainability Report, Non-Extractive Industries in the Association of Chartered Certified Accountants (ACCA) 2008 Sustainability Awards.

These awards are a tribute to every employee of Massmart and in my mind are almost equal in the quest for excellence, to the letters I receive from customers acknowledging a particularly satisfying shopping experience.

Satisfying stakeholders

The Massmart Vision lays out our objectives in our relationship with stakeholders.

We believe that our commitment to you as one of Massmart’s 10 817 owners are fulfilled only by ensuring enduring, productive relationships with other stakeholders and by establishing a reputation as a trusted, patriotic corporation in touch with the evolving needs and aspirations of our unique society. To this end we invest time, effort and money in canvassing and responding to the needs of our current and prospective stakeholders.

Whenever possible, we interact proactively with consumer bodies, industry forums, organised labour, non-governmental organisations, political parties, thought leaders and law makers on matters of importance to the performance and future of our business and industry.

We are committed to playing a constructive practical role in the normalisation of our society and we see no better way to do this than through collaborative and influential relationships with stakeholders.

Finally, and possibly most importantly, we recognise the importance of our stewardship of the planet. We have measured our carbon footprint and are determined to reduce it.

Governance

Our compliance with the letter and spirit of good governance practice is reported on fully elsewhere, compromised only by the Board’s decision to appoint me non-executive Chairman. My independence – as defined in the governance literature – is negated by my tenure and prior role as CEO. Both I and the Board are mindful of this, and Chris Seabrooke’s role as non-executive Deputy Chairman and Lead Independent Director is one taken seriously and utilised when necessary by all. We encourage shareholders to do the same.

Notwithstanding the above, the skills and diversity of the Board are well matched to your Company’s needs, and the allocation of committee responsibilities ideally aligned to the qualifications and experience of the Chairpersons and members involved. The Board’s independence is assured by 11 of its 14 members being independent non-executive directors, as are the Chairs of the Audit, Remuneration and Nominations, Risk, and Sustainability Committees.

Appreciation

Massmart is a large, complex organisation that in the past year handled billions of transactions, millions of customers and over two hundred thousand line items through 242 large stores in 14 countries.

The relative ease with which this happens belies the risks associated with this scale and complexity and it would not be possible without the wisdom of a diligent Board, the leadership of a talented CEO, whose performance in his first year has been flawless, the creativity and energy of an extraordinary executive and managerial group, the loyalty and competence of our 24 308 employees, and the support of our suppliers, bankers and professional advisers. On behalf of the Board I thank them all.

On a personal note, I record my appreciation for the support and counsel of my Board colleagues throughout the year and their presentation of a 20-year service award at the August 2008 Board meeting. That scroll meant more to me than any of you can imagine.

Looking forward

Economic cycles are a business reality. Massmart’s superior relative performance over the past year reinforces your Board’s conviction that the assets, resources, capabilities, controls and leadership of Massmart have been configured to withstand the less-than-favourable trading conditions that will prevail in the short term, and to prosper in the better times that will inevitably follow.

Presidential transitions are a democratic reality. Your Board is concerned that ours is proving to be as divisive as it is. In contrast to the past, and despite despicable but thankfully isolated racial incidents, the basis of division in South Africa today is not race, but political allegiance. Were it not coloured by attacks on the constitution, the judiciary and the rule of law, the reckless public rhetoric surrounding this could be dismissed as electioneering. It is not, and the unashamed assault on the pillars of our democracy cannot be tolerated under any guise of national interest.

In difficult times, criticism of capitalism is a social reality. Business must respond. Confronted with critique that seeks to vilify all businesses based on the behaviour of very few, and legislators who place votes above efficiency, the South African business community must stand proud as the unapologetic bastion of free market economic activity and growth, the major creator of employment (unionised or not), and the originator of a corporate and personal tax base that funds our institutions of democracy, pays our politicians and civil servants, and creates a social safety net for the most disadvantaged.

Ours is a region of extraordinary opportunity and challenge. The opportunity is in the abundance of our natural resource, the challenge is in the underdevelopment of our human resource. Business has a central role to play in redressing the latter by investing time, effort and resources to enhance education and training, accelerate the acquisition of skills and experience, develop competent leaders, and more broadly share power and profits at all levels of our organisations. Finally we must engage and collaborate more generously with government and civil society to address all matters of national concern, very few of which will be solved without the innovation, creativity and focus resident in business.

Massmart stands ready to play its part.

Mark J Lamberti

Mark J Lamberti
Chairman of the Board

1 October 2008