Online Annual Report 2009

 

26 stores acquired 1 July 1998
Now 87 stores
Operating in SA, Botswana, Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia
General merchandise and FMCG
LSM 5 – 10

 

 

20 Dion stores acquired 31 May 1993
Now 6 stores
Operating in SA
General merchandise
LSM 6 – 10

 

 

Insight

Living Standards Measure (LSM)
The South African Advertising Research Foundation (SAARF) Living Standards Measure (LSM) has become the most widely used segmentation tool in South Africa. It is a means of segmenting the South African market that cuts across race, gender, age or any other variable used to categorise people. Instead, it groups people according to their living standards.

 

 

 

 

 

 

 

 

Highlights

Sales exceeded R11.2 billion
Completed the Western Cape regional distribution centre
Game’s new look-and-feel successfully piloted at our Boksburg store
Good growth in Africa

 

 

 

 

 

 

Group contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Store progress

Game
 
Opening balance 85
   
Stores opened  
Jeffreys Bay (Eastern Cape)
Kenilworth (Western Cape)
Vredenburg (Western Cape)
+3
   
Store closed  
George (Western Cape) -1
Total stores in 2009 87
   
Dion Wired  
Opening balance  5
Store opened  
Bedfordview (Gauteng) +1
Total stores in 2009 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Massdiscounters directorate

Grant Pattison
Chairman

Jan Potgieter
Chief Executive

Richard Fuller

Store Operations Director

Ann Hansen

Financial Director

John Hart

IT & Supply Chain Director

Guy Hayward

Non-executive Director

Richard Millson

Marketing Director

Rogany Ramiah

Human Resources Director

Mark Turner

Africa Director

Tyrone Vieira

Merchandise Director

Massdiscounters divisional review


Despite the severe slowdown in South African consumer spending during the financial year, we were pleased that Massdiscounters reported positive sales growth in this country and delivered record sales in total. Commencing in the previous financial year, Game repositioned its price points which assisted with bolstering sales despite the decline in consumer demand for general merchandise. Our Dion Wired stores proved resilient, with sales and profits growing steadily and plans in place for a national rollout.

Our new Regional Distribution Centre (RDC) in the Western Cape became operational in August 2008 and is part of a greater journey to significantly improve supply chain efficiencies. Following this success, we began building a similar facility to service the greater Johannesburg and Pretoria region that should be operational by July 2010.

The Massdiscounters brands

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 facilitated by impending store lease terminations. A core of ten Dion stores was retained in Gauteng until those leases came up for renewal, and in 2008 all these stores were closed or converted to Game.

Massdiscounters now 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 twelve major cities in sub-Saharan Africa. During the past financial year we opened three Game stores and closed one.

Our newest division, Dion Wired, opened its first store at the end of 2006 and now sells middle- to upper-end electronics and appliances through six stores in South Africa.

Game

At Game our positioning offers 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 to choose from and are assured of the best value product for that price.

The Game business model is promotionally driven, with more than four million copies of our weekly promotional leaflets distributed each week. During this financial year, we continued to take large positions on selected products and through working closely with our suppliers, 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 in the latest home entertainment, computing, video and digital 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 onsite repairs and services.

Although our products are well priced, Dion Wired is not a discounter. Our main proposition is to offer the widest range in South Africa of some of the world’s biggest upmarket brands such as Apple, Smeg, Miele, Marantz, Jamo and Onkyo to the South African middle- and higher-end consumer.

The concept has proved to be exceptionally successful and we are about to establish a national footprint.

Our operating environment

The global financial crisis and its impact on business and consumers was felt across the South African economy and our business was no exception. In particular, the second half of the financial year saw trading conditions deteriorate significantly – consumer confidence was knocked as equity and property prices declined, interest rates remained high for a period, and the prospect of job losses in certain sectors loomed large. These factors cut into the disposable income of our Game customers who are predominantly in the credit-sensitive middle income category. Aggravating this, for the first time in four years we reported product inflation rather than deflation and so our South African sales growth was negative in real terms.

Our Game stores in Africa performed well up to December 2008 and thereafter the delayed effect of the global downturn began to impact the local economies as well as weakening many of those African currencies.

Dion Wired was less affected by the pressure on consumer spending due to customers primarily being drawn by the technological innovation in the digital TV and camera, GPS and gaming categories.

The market penetration of durable goods and technologies in South Africa remains lower than the global average. First-time buyers not only represent a growth opportunity for Game, but also a pipeline of future demand as they are likely to upgrade their equipment over time. Similarly, as these customers grow in wealth they may frequent Dion Wired.

We do not expect the Consumer Protection Act, the new regulations that become effective in October 2010 that makes retailers jointly liable with suppliers for the goods they sell, to have much of an impact on our South African business. We already have processes in place to deal with customer complaints and have a strict policy of only dealing with suppliers who operate with the highest integrity. Nevertheless we will be implementing additional training to our staff, ensuring our supplier contracts are updated, as well as educating our customers.

Financial performance

To make comparisons with the prior financial year meaningful, all current year income statement figures in this review are compared to the equivalent figure for the proir year's 52-week period.

             
      2009 2008 2008 2007
      52 week 52 week 53 week 52 week
Sales Rm   11,206.0 10,129.8 10,406.5 9,424.5
Trading profit before interest 3 Rm   680.0 627.9 661.8 662.1
Trading profit before interest as % sales %   6.1 6.2 6.4 7.0
Operating profit before interest Rm   584.4 690.7 724.5 620.1
Operating profit before interest as % sales %   5.2 6.8 7.0 6.6
Net finance costs Rm   66.6 57.5 58.6 52.1
Trading profit before taxation 3 Rm   746.6 685.4 720.4 714.2
Trading profit before taxation as % sales %   6.7 6.8 6.9 7.6
Operating profit before taxation Rm   651.0 748.2 783.1 672.2
Operating profit before taxation as % sales %   5.8 7.4 7.5 7.1
Inventories Rm   1,856.0   1,766.8 1,597.8
Inventory days days   81   83 84
Net capital expenditure 1 Rm   212.2   208.8 210.5
Cash flow from operating activities Rm   110.5   (6.2) 43.2
Number of stores     93 90   90
Trading area m2   341,687 338,285   346,387
Average trading area per store m2   3,674 3,759   3,849
Number of employees     9,469 9,817   10,681
Sales per store R000   120,495 112,553   104,038
Sales per m2 R000   33 30   27
Sales per employee R000   1,183 1,032   877
   
1   Net capital expenditure is defined as capital expenditure less disposal proceeds.
2   The ratios have been calculated using year-end balance sheet figures.
3   Trading profit is earnings before asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements.


The Division reported total sales of R11.2 billion, representing respectable growth of 10.6%. Comparable sales growth was 8.9% while our annual sales inflation was 6.6%. Given the negative consumer environment, total sales growth in Game South Africa of 0.8% was pleasing (1.8% comparable) and was at the upper-end of most competitors’ growth rates. As noted earlier, sales growth from our African stores was initially very strong but weakened in the last three months of the financial year. In local currencies total African sales grew by 26.9% (37.0% in Rand), while comparable sales grew by 26.9% (40.6% in Rand).

Trading profit before interest and taxation of R680.0 million was 8.3% higher than the prior year. This excludes the impact of net foreign currency translation losses caused by weaker African currencies. These translation losses are mostly unrealised and non-cash amounts that arise from the translation of the certain balance sheet items in the African Game stores and are materially influenced by the movement in the exchange rate on the date of the financial year-end compared to that of the prior year. Massdiscounters executives are managed and rewarded on profit growth excluding the impact, positive or negative, of these foreign exchange movements.

Trading profit before taxation was 8.9% higher than the prior year. The Division’s resultant return on sales (trading profit before taxation/sales) of 6.7% was satisfactory given the difficult South African consumer environment. Inventory levels were well managed and only slightly higher in Rands than the prior year, and so stock days of 80.9 are an improvement on 2008.

Despite fewer new stores, capital expenditure of R213.6 million was similar to the prior year’s R209.1 million, as a result of the expenditure on the Western Cape RDC, as well as ongoing IT investments and store refurbishments. We expect capital expenditure to continue at this level although the new Johannesburg-based RDC will add R85 million in 2010.

The Massdiscounters consumer debtors book and business unit was sold to RCS on the first day of the 2009 financial year. This transaction had a negligible effect on this year’s results but should have a positive effect as the South African consumer environment improves.

Trading profit before tax return on sales


Actual
2009
Medium-term

target

International

benchmark

     
6.7%
8.0% 7.4%         


Trading profit before tax return on sales has been calculated using profit before tax adjusted for asset impairments, the BEE IFRS 2 charge and net foreign exchange movements.

We believe that Massdiscounters should move toward the medium-term trading profit target margin when the South African consumer environment improves. As described below, in the medium-term we are expecting significant benefits from our Supply Chain initiative which will also bring the business closer to achieving this target.

Improved efficiencies

The 19,500m² Western Cape RDC now services 17 stores and handles 75% of all products for the Game stores in the region. It will significantly improve supply chain efficiencies. Cost savings will result not only from lower stock levels and reduced off-site storage facilities but also from accessing extra rebates from suppliers who find it more attractive to deliver all goods to one centre. These rebates, combined with the savings from closing satellite warehouses, should fund the additional operational costs of the RDC. In-stock service levels should improve resulting in better customer retention and potentially higher sales from existing stores. We have approval for the Johannesburg RDC and have begun construction of the new 70,000m² facility which will ultimately support 54 stores across the greater region. Over the next three years we plan to reconfigure the Durban import warehouse to create an RDC with some national responsibilities in order to optimise logistical efficiencies through a tighter distribution network.

During the year we also improved labour efficiencies through better labour scheduling, which resulted in total full-time equivalent employees being 3.5% lower without any staff retrenchments. We used temporary staff only when really needed, froze new appointments and managed our overtime more tightly.

In a drive to improve space planning, we intend using technology to introduce a more scientific approach to store planning through digital space technologies and planograms.


Game Boksburg

Investing in human capital

One of our biggest challenges remains the recruitment, development and retention of our staff. Our Retail Academy which forms the crux of the leadership pipeline with our own assessment centre, has started to build a pipeline of talented team members for the company. An unprecedented project where we recognise employees’ prior learning will culminate in at least 50 team members receiving a national qualification through the South African Qualifications Authority. Management continued with 'fireside chats' to engage with middle and senior management, and we achieved excellent results in our internal employee attitude survey.

Massdiscounters also made excellent progress with our BBBEE strategy where we achieved a 56.81% score, verified by Empowerdex, compared to the 45.98% of the prior year. We hope to increase this to over 60% next year by focusing on improving our scores across all measures and in encouraging suppliers to improve their compliance with the BBBEE Codes of Good Practice.

Investing in our community

Massdiscounters has identified education as a priority area and for many years Game has been involved with providing educational equipment and support to disadvantaged communities. Through our Tools to Teach project, we have been a committed partner in Rally to Read, an annual event where volunteers deliver purpose-built units containing teaching materials, books and educational supplies to teachers in rural schools around the country. This year Game expanded the highly successful Tools to Teach concept to develop its own Tools to Play unit. The programme aims to provide the right educational toys to deserving schools at the foundation phase of schooling to prepare learners for primary school education. This year Game donated 20 boxes, worth R25,000 each. These were filled with toys, building blocks, puzzles, musical instruments, beading kits, art supplies and books in students’ mother tongue. The educational toys in Game’s Tools to Play units assist in laying the foundation for problem-solving, reading, numeracy and creative self-expression through art and music.

Game continued with our investment in feeding projects such as AmaLunchbox Container kitchens in schools and providing top-up feeding through the Cape Peninsular Feeding Scheme. A total of 35,000 children benefited from these initiatives this year. To date 34 AmaLunchbox kitchens are in schools with a further 14 awaiting handover.

Game also launched the Vote for Life campaign this year to encourage as many employees as possible to become regular blood donors. Our goal is to collect enough blood to save 100,000 lives by the start of the FIFA World Cup in June 2010. This means staff will have to donate blood on average six times before the tournament kicks off.

Game Boksburg


Opportunities in Africa

In the prior year the Board approved the opening of several new Game stores in Africa. We already operate in 10 countries and 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 should follow in the next few years. Progress in finalising these opportunities has been slower than anticipated as we continually seek to work with the right developers in the right locations. The global financial downturn has impacted developers’ appetite to take on investment risk in emerging economies, especially in the property sector. To overcome this, we are considering owning properties, as we currently do in Mozambique and Uganda, rather than strictly leasing store space as we do in South Africa. Our focus over the next year will be to finalise growth opportunities in Africa and to keep the current momentum, despite increased competition in those countries.

Risks and rewards

The future Game store with a more contemporary look-and-feel was implemented in Boksburg in October last year to improve the overall shopping experience of our customers. The aim was to improve our offering without losing our 'discounter' feel. Changes included a single-minded price message, better layout and flow to enable customers to navigate the store more easily. The new format will be rolled out to all new stores and departmental changes will be made to our existing top performing stores.

We finalised the sale of our consumer credit division and consumer debtors’ book to RCS, a joint venture between Foshini and Standard Bank. Although we still consider ourselves a cash business, with just 5% of our sales made on a credit basis, we hope to increase credit sales when RCS launches a new private label Game card in the coming year. This will provide one credit facility for customers, including hire-purchase and revolving credit, while requiring less administration and no Massdiscounters balance sheet exposure to credit.

Currency volatility in the African countries where we operate may make trading difficult in those countries and may also make the evaluation of those stores’ performance in Rands difficult. The review from the Chief Financial Officer has given some guidelines to assessing the degree of this volatility.

Future outlook

The business is well poised to take advantage of any increase in consumer spending as a result of lower interest rates and increased confidence levels.

We plan to open eight Dion Wired stores in the next 18 months and to open 12 new Game stores in the next three years. By 2012, we will have completed our RDC network, allowing us to focus on expanding our coverage of smaller towns across SA. We also plan to finalise a number of property deals in Africa and open more stores across the continent within the next five years.