Online Annual Report 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Further reading

More details on the Group's vision can be found here
MASSMART AT A GLANCE

 

 

 

 

 

 

 

Sustainability

Environment and climate change
Human capital
BBBEE
Corporate social investment
African operations
SUSTAINABILITY REPORT

 

 

 

 

 

 

 

 

 

Further reading

More details on the Chief Executive Officer's review can be found here
REPORT TO SHAREHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Further reading

More details on Corporate Governance can be found here
CORPORATE GOVERNANCE

Chairman’s review



Game Boksburg

This is the first time since 1996 that Massmart’s earnings per share have declined on the previous comparable period. This metric belies the market penetration of the portfolio, the quality of the underlying assets and the competence and calibre of executive management, each of which improved significantly during a year of challenging trading.

Among the more notable developments coincident with Massmart’s reporting period was the nadir of the most serious global financial crisis since the Great Depression, South Africa’s first recession in seventeen years, and the transition from the second to the fourth President of our Republic.

The first resulted in the weakening of the Dollar and most African currencies against the Rand, and ultimately a material negative foreign exchange movement on Massmart’s reported earnings of 2008. The second resulted in a steep decline in consumer expenditure on durables, which constitute almost half of Massmart’s merchandise mix and a greater proportion of profit. The third increased the stridency of populist rhetoric and the vigour of socio-economic demands, both indicative of a more open democracy. Service delivery rioters, striking workers, obstructive taxi owners, and officious youth leaders all contributed to an environment conducive to the first ever protracted dispute between certain Massmart divisions and organised labour.

These and many other issues seized the attention of your Board during a year in which its custodial focus was unwavering. In late 2008, as some of the largest financial institutions in the world collapsed and the market capitalisation of General Motors approached that of Massmart, responsible directors everywhere were reminded that return of capital is more important than return on capital.

While the survival of Massmart was never in question, it is pleasing to report that in the most economically disordered year of my experience, we were able to both enhance the future earnings potential of your company, and render a 41.7% return on average shareholders’ equity and a 62.2% return on capital employed.

This was accomplished by balancing the reasonable demands of all stakeholders in a sustainable manner, through continued refinement of our approach to strategy, leadership, and governance.

Balancing stakeholder demands sustainably

A telling legacy of the global financial crisis is the deplorable image of business in the eyes of civil society. The last vestiges of trust have been eroded by appalling, oftentimes criminal behaviour by some business leaders, and blatant short-term self-interest by too many others. The proponents of shareholder supremacy no longer have a voice and society is demanding greater accountability from business in its relationship with all stakeholders.

As a responsible corporate citizen, Massmart’s response is to apply the highest standards of ethical conduct in its dealings with all stakeholders. The Group’s vision statement defines the perceptions we strive for from specific stakeholders, and the management and Board of Massmart regularly assess our progress in this regard.

Guided by our Code of Ethics, on which we are ready to be called to account at all times, our organisation-wide commitment is to integrity, ethical behaviour and transparency that engenders and maintains trust with all who are touched by our Group. Insofar as shareholders are concerned, this set of annual financial statements is crafted accordingly.

Ethics is at the core of our approach to sustainability, which seeks to ensure that Massmart plays its part in the preservation of our planet for future generations by integrating sustainability practices with business objectives and managing risks arising from economic, environmental and social developments.

Over the past year we were pleased to be recognised for our initiatives and reporting on climate change and environment, human capital, broad-based black economic empowerment, and corporate social investment. Additionally, this year we report for the first time on our sustainability performance in our African operations where our goal is to set sustainability policies that establish minimum standards for social and environmental accountability in the 13 sub-Saharan countries in which we trade north of our borders.

For many years, the leadership of Massmart has been clear that the survival and progress of our corporation can be curtailed by a failure to adequately respond to the reasonable needs of any stakeholder. We are strongly of the view that in an environment of widespread exaggeration, misrepresentation, obfuscation, spin-doctoring and lies by leaders in every field of endeavour, the necessity for business to be seen to be responsive and accountable to all stakeholders in a sustainable manner has never been more necessary.

Strategy

For the leadership of Massmart, strategic thinking is simply the precursor to establishing a defensible competitive position. This occurs at every Massmart Board meeting, where the strategic choices confronting the Group are always discussed. In addition, the annual three-year strategic review provides an opportunity for the Board to work with the Chief Executive and the Executive Committee, to understand debate and shape the strategic agenda and options over the medium term.

As is always the case, this year’s strategic review sought to enhance the competitive stance of the existing subsidiaries, enable entry into new categories, formats and territories, and facilitate skills transfer or shared activities that add value to the subsidiaries in excess of their tangible or intangible costs.

The essence of the Massmart value proposition to customers is unchanged. Adherence to a high-volume, low-gross margin, low-cost, business model has enabled the Group to deeply penetrate the general merchandise, home improvement, liquor and wholesale food segments, with extensive ranges at exceptionally low prices. Sales of over R159m per store, gross margins that declined to 18% of sales and expenses that rose only slightly to 13.8% of sales, are indicative of a commitment to this approach over the past year.

A noteworthy example of skills transfer during 2009 was the improvement of the supply chain in all divisions, removing complexity from the ordering, management, storage, movement and display of merchandise, and reducing inventories while improving service levels to customers in a climate of declining sales growth – a remarkable achievement as any shopkeeper will attest.

The Chief Executive’s report which follows features a section entitled “Progress on Vision 2012”. This provides a comprehensive review of the past year’s strategic achievements and an outline of future strategies arising from this year’s annual review.

Leadership

Everyone employed by Massmart contributes to its success and progress, and we acknowledge and reward this contribution accordingly. However there are some who are given the responsibility to lead others and to take significant decisions about customers, assets and our people. Their tasks require specific expertise, skills and experience and they are held to a much higher standard of accountability.

Monitoring the attraction, development, motivation and retention of the best available people to fill these positions, is among the Board’s greatest responsibilities; one that is carried out through the Chief Executive and the Remuneration and Nominations Committee.

In the quest for an appropriate balance between formal education, commercial acumen, retail and wholesale experience, and succession requirements, changes were made during the year to strengthen the core leadership group comprising the Executive Committee and their direct reports. An increased investment in leadership development, particularly through the Massmart University, has ensured an impressive pipeline of young graduates who will enhance the capacity and diversity of our senior management cadre in time.

Compensation to attract and retain scarce talent remains a challenge to be dealt with sensitively in a country where many are unskilled, unemployed and poor. Massmart’s performance correlated compensation policies are evident in the 2009 earnings of directors. The executive directors’ total compensation declined by 6.2%, and by 31.1% excluding share benefits. Non-executive directors’ compensation was unchanged other than where additional duties were assumed.

Governance

A significant portion of this report is devoted to corporate governance. Massmart has approached this discipline from various perspectives apart from our obvious commitment to mitigate risk and comply with the letter and spirit of all laws, regulations and codes of good practice.

Firstly, we see governance as yet another element of our enduring quest for excellence in everything we do. Secondly, we have imbibed and institutionalised corporate governance in a manner that prevents the associated bureaucracy from being intrusive to the day-to-day task of serving stakeholders. Thirdly, we are motivated by the rising standards of corporate governance practice and determined to remain at its forefront. Finally and philosophically, we see discipline and control as a precondition for creativity in any field of endeavour.

We welcome King III and the new Companies Act, our compliance with which will be reported on in the June 2010 annual financial statements.

We welcome too the decision by the Competitions Commission to investigate the large retailers and wholesalers of food and hope that their political expediency in announcing the investigation is matched by their efficiency in concluding it. South Africans need clarity on the reasons for food inflation, most of which reside in a careful analysis of its current decline and the too soon forgotten food deflation of 2004. Our Chief Executive has met with the Commission and will cooperate fully and proactively to that end.

Appreciation

The past year was one in which it would have been easy to falter. The day-to-day pressures of business are heightened in recessionary times and stress can impair judgement and undermine the quality of decisions. This is particularly so in large complex multinational organisations, where devolution of decision-making is necessary to respond rapidly to changes in markets and customers.

The fact that this never happened in Massmart is a tribute to the counsel of a diverse diligent Board, clear calm leadership from the Chief Executive and his colleagues, highly responsive divisional management and 24,518 Massmart employees who cared for our customers and assets with passion and commitment.

Today Massmart is a better company than it was a year ago and I thank them all.

Looking forward

At this time last year my views on the economic cycle underestimated the severity of what transpired. My views on Massmart were more accurate. The manner in which we have weathered the recession confirms the Board’s conviction that the assets, resources, capabilities, controls and leadership of Massmart are able to withstand less than favourable circumstances.

While there are tentative signs of a slowing in the deterioration of the real economy, many important metrics and confidence indices continue to reflect the poor state of the highly geared South African consumer. This is unlikely to reverse substantially in 2009 but developments around the World Cup will be stimulatory as will the return to growth of the world economy in 2010. The approach of Massmart’s leadership is to closely monitor and rapidly respond to any improvements in consumer spending rather than to predict it.

Finally, our contact with the President and his new administration has revealed clarity and determination both to resolve some of the major maladies of our society such as crime, education, healthcare and poverty, and to do so in consultation and collaboration with the private sector.

We welcome and are supportive of this in the firm belief that many of the capabilities required to capture the full potential of our country exist in business. Our sense moreover is that many companies, like Massmart, will be ready to answer the call.

Mark J Lamberti

Mark J Lamberti
Chairman of the Board

5 October 2009

Report to Shareholders