Online Annual Report 2009

 

 

 

Definition

Through-the-cycle
This refers to a benign to positive economic environment, ie one representing the ‘average’ growth rate of an economic cycle.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Further reading

More details on the financial performance can be found here
CHIEF FINANCIAL OFFICER'S REVIEW

 

 

 

 

 

 

 

 

 

Further reading

More details on the operational performance can be found in
Massdiscounters divisional review
Masswarehouse divisional review
Massbuild divisional review
Masscash divisional review
OPERATIONAL REVIEW

 

Definition

Comparable sales
Comparable sales are sales figures quoted for stores that have traded, and will trade, for all 12 months of the current and prior year. These stores’ sales would therefore exclude new store openings or store closings in the current and prior years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sustainability

BBBEE
SUSTAINABILITY REPORT

Chief Executive Officer’s review

It is a pleasure to present my report to stakeholders in conclusion to a year which will be recorded as one of the most turbulent in recent economic history. Despite the global economic challenges, the Group is healthy, delivering a competitive performance, and well positioned to benefit from the next expansionary cycle.

Management’s focus shifted during the year in response to declining sales growth. Without taking our eyes off the long-term growth imperative, the preservation of the income statement and balance sheet became paramount, with the threat to the availability of bank financing uppermost in our minds.

At the same time, resources became more limited, leading to pressure from all stakeholders for a greater share of the economic pie. Management had to balance demands from various stakeholders in the interest of the long-term sustainability of the Group.

In short, it was a challenging year, but one for which we had been preparing for many years. Time will judge how well we stood up to the challenge.

Core Group philosophies

The year has been a useful one to revisit and recommit to some of our basic business philosophies. We feel more certain now that:

  • Strategic discipline is the key to focused leadership and management.
  • Decisions should be made as close to the customer as possible, driven more by values and principles and less by rules, enabling a faster more entrepreneurial response.
  • Cash is the only real source of value.
  • Decisions to invest for growth must be made in the context of looking ‘through-the-cycle’, not investing for the peaks or troughs.
  • Leadership makes the difference, and talented people can only outperform in an environment where they are challenged, energised and enabled.

Environment

The South African economy entered a recession in the first quarter of the calendar year. The economy was already in the contraction phase of a normal interest-rate cycle and that became synchronised with a global recession. While there was a period in which it appeared that South Africa would remain somewhat insulated, as it was not directly exposed to the financial crisis, the interconnectedness of the global economy became apparent as South Africa followed the developed world into recession.

The 500 basis point reduction in interest rates that began in December 2008, has been most welcome. Consumers have to date been responsibly reducing their levels of indebtedness. We are closely monitoring our comparable sales figures for signs of the effect of these reductions on consumer expenditure. The earliest we believe consumer spending will rebound is Christmas 2009.

The greatest management challenges, other than economic, have been in crime prevention and labour relations. The recession seems to have emboldened criminals and we are seeing upturns in fraud, store robberies and shrinkage. In terms of labour relations, we have been fortunate so far, through careful management of costs, to avoid resorting to cost-saving retrenchments. Within the current political and economic environment, it is perhaps understandable that the incidence of industrial action has increased as different stakeholders exert pressure to achieve their demands.

The Competition Commission investigation into the large food retailers and wholesalers has commenced. We welcome the investigation and look forward to any practical suggestions the Commission has to increase the sustainable competitiveness of the industry in the interests of consumers. Without prejudging the potential outcome of the investigations, we believe that the industry is already one of the more competitive in South Africa and that the social problem being faced is one of food price instability.

Financial performance

A number of factors have complicated the interpretation of Massmart’s underlying operating performance. The first is the inclusion of an extra week of trading in our 2008 accounts. The second has been the volatility of African currencies.

Excluding the effects of currency volatility and the 53rd week in the prior year, sales increased by 10.7% (8.2% comparable), trading profit increased by 5.5%, and headline earnings increased by 3.8%.

Including the effects of the currency volatility but excluding the 53rd week in the prior year, sales increased 10.7%, operating profit declined by 2.1%, and headline earnings declined by 4.3%.

Without these adjustments, sales increased 8.4%, operating profit declined by 6.5%, and headline earnings declined by 8.5%.

Importantly, despite comparable sales growth declining from 11.9% in the first half to 8.5% in the second half, the business managed to maintain operating profit growth in both halves.

This disciplined income statement management was supported by equally disciplined management of the balance sheet, particularly inventories which ended the year up only 2.8% on last year.

The business produced strong cash flows with cash generated from operations up by 6.0%.

In this period, trading space increased 3.8%, by opening a net two new stores and acquiring 12 new stores.

Operating performance

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.

Massdiscounters’ (comparable sales grew 8.9%, trading profit before taxation up 8.9%) financial performance was better than the underlying trading performance. Game Africa performed very well, Dion Wired, although small, also performed well. But Game SA’s performance reflected the strain felt by middle-income consumers with sales up 2% and profit before taxation down 8%. It remains a very well run company, a fact confirmed by all operating metrics. The level of investment activity in supply chain, product innovation, store look and feel, financial services and process re-engineering is unsustainably high, but necessary to re-engineer for future growth.

Masswarehouse (comparable sales grew 10.0%, trading profit before taxation up 14.0%) also had a good year, although general merchandise struggled and food sales slowed towards the end of the period. Overall it is in very good shape although there is room to improve stock levels which should start to respond this year to the investment in replenishment systems. Good progress has been made on new site acquisition with five sites (four new and one relocation) in various stages of progress.

Massbuild (comparable sales down 3.7%, trading profit before taxation down 34.1%) performed satisfactorily and with the benefit of hindsight, is more cyclical than previously envisaged. Sales growth was under pressure throughout the year, but the fact we had any sales growth at all is positive, with the South African residential market statistics at recent lows. This business is well controlled and the quality of the stock is high, while stock levels are lower than last year. Therefore, under new leadership, and with most of the hard decisions behind us, the division is well positioned to take advantage of market share growth.

Masscash (comparable sales grew 11.6%, trading profit before taxation up 23.9%) was the star performer this year, but slowed towards the end of the year as deflation hit oil and wheat. The division invested in Powersave (low-end retail cash and carry) and Saverite (franchise retail) during the period. The leadership team was stretched with the challenge of completing and integrating the acquisitions. Three Massmart executives have now joined the divisional retail team: Jay Currie as Retail Director, Gerhard Dempers as Property and Corporate Finance Executive, and Bill Davies as Supply Chain Executive.

Progress on Vision 2012

As we do every year, the Executive Committee and Board met to review the three-year rolling strategic plan. Other than further clarification on some of the divisional strategies, no significant changes were identified, other than to focus limited cash resources on high-return growth initiatives. The headlines of the strategic plan remain:

Leadership development and transformation. At the Group level our key responsibility is to attract, retain and develop a world-class management team. We continue to refine our investments in terms of recruitment through advanced search and assessment; talent retention through competitive remuneration, wealth creation and personal career planning; leadership development through executive experientially-based education, talent management and performance management; and transformation through giving development opportunities to high quality candidates from under-represented groups.

This year we enrolled 62 individuals in our business in leadership and management development programmes in the Massmart University, 42 graduates are in training in our development programme, and fully complied with all administration requirements of the Employment Equity Act. We also began a process of expanding our talent management programme exposing another level of management to professional assessment and feedback.

Growth of the core business. To earn the right to open new stores and make acquisitions, we believe you first have to be able to grow your core business. In this respect the most important measures are sales and margin growth from comparable space. To achieve this consistently, we need programmes which give us a sustainable competitive advantage. Our competitive advantage relies on our ability to keep our costs lower (through higher productivity) than our competitors’. The specific programmes, over and above our continual development of the quality of our retail offering, are supply chain, private label and financial services. Investments in supply chain are to remove the constraints in the utilisation of our space; in private label these are to balance our relationships with the very powerful brand owners and give us product differentiation; in financial services these are to increase the service offering to our customers to enable sales in partnership with companies whose core competencies lie in this specialised field.

This year we made significant progress in all divisions with supply chain. Massdiscounter’s new regional distribution centre met and exceeded expectations on re-engineering how we receive stock and will significantly transform that business division as we extend this strategy into other geographic areas. Massbuild successfully implemented automated replenishment and planning, dropped its stock by R200m and shut a number of warehouses. Masswarehouse implemented the most advanced forecasting and replenishment in the Group and will be the first to do so in wholesale food. Masscash converted 30% of its stores onto a new single in-store system, which will completely transform the business’s ability to learn about itself.

Organic growth. Our organic growth has continued to ensure we have an up-to-date, optimally structured portfolio. The latest review of our store opening opportunities shows potential for space growth of 7.0%, 5.0% and 5.4% in 2010, 2011 and 2012 respectively. That suggests a net 62 new stores across the Group, 171,620m2 of new space and R7.7 billion in annualised turnover. That scenario includes retail cash and carry and other store acquisitions. We also continue to look for more growth in Africa. We are working on a number of opportunities in Africa including 11 Game sites and have begun the process of looking for sites for Builders Warehouse in southern Africa.

Greenfields and acquisitive growth. Dion Wired has now established six stores and is busy rolling out five new stores into regional shopping malls. The New Formats division has generated a clearer picture of which formats are viable in South Africa and we have at least one new opportunity we have developed that will be deployed at the appropriate time. This team will expand its scope of operations to generate ideas for new categories within our current 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. We are among the best in South Africa when it comes to our management and communication of sustainability issues and will maintain that focus. We have made good progress in improving our BEE scores and increased our status to a level five contributor this year. We received a number of plaudits for our sustainability report. We are also contributing to society in various forms, particularly in the education of the neediest segments of our society.

Prospects

For the 14 weeks to 4 October 2009, total sales increased by 5.0% and comparable sales increased by 0.7%.

As is evident in the first 14 weeks’ sales, the consumer remains under pressure. Until there are clear signs of recovery in consumer expenditure, management remains focused on protecting the income statement and balance sheet, while continuing to invest for growth where returns are clear.

The first-half of the 2010 financial year will undoubtedly be very difficult compared to the reasonably resilient first-half of last year, which could see profits decline. Profit growth for the full year will depend on the recession coming to an end by the middle of the financial year.

Appreciation

In difficult conditions this year, each and every part of the Group is in better shape than a year ago and for this I am grateful to my fellow executives, management and every one of our 24,518 employees who has contributed to the Group’s performance.

I am also grateful for the support of all of our suppliers, and service providers. I hope we have behaved as valued partners. And, of course, I am grateful for the support of our customers.

Thank you.

Grant Pattison

Grant Pattison
Chief Executive Officer

5 October 2009 

Report to Shareholders