ONLINE ANNUAL REPORT 2010

MASSBUILD DIVISIONAL REVIEW

Massbuild delivered solid sales growth over the reporting period, despite the national Hardware, Paint and Glass categories experiencing a negative sales growth year. Our three brands, Builders Warehouse, Builders Express and Builders Trade Depot, operating in different market segments, protected our business from the difficult economic conditions, which more severely impacted many of our competitors.

Builders Warehouse and Builders Express reported an exceptional performance, with strong comparable sales growth which suggests large market share gains. Due to negative comparable sales growth however, Builders Trade Depot reported lower profit than the prior year which was representative of the lack of business opportunities available to building contractors generally.

We introduced our new Builders Warehouse store format consisting of 4,000m2 of retail space and 4,000m2 of yard space in Bedworth Park, Vanderbijlpark. Although smaller than traditional Builders Warehouse stores, these stores stock the entire range of our bigger stores and we expect them to have a higher return on sales per square metre.

Massbuild also opened a Builders Trade Depot store in Ballito, KwaZulu-Natal and acquired three ex-Mica stores (two in KwaZulu-Natal and one in Norwood, Gauteng). We have rebranded these as Builders Express stores and expect them to trade well in their chosen markets.

We plan to open three new Builders Warehouse stores over the coming financial year, including our first store in KwaZulu-Natal at Riverhorse, as well as new format stores in Witbank and Woodlands in Pretoria.

THE MASSBUILD BRANDS

Massbuild operates three complementary brands: Builders Warehouse, which operates large DIY and home improvement stores in major urban areas; Builders Express, a chain of smaller neighbourhood home and garden improvement stores; and Builders Trade Depot, a chain of building contractor outlets located in industrial sites in peri-urban and urban areas.

Massmart initially acquired five Builders Warehouse stores operating in Johannesburg and Pretoria in 2003, bought and rebranded three De La Rey stores in the Western Cape in 2005 and now operates 24 Builders Warehouse stores in seven provinces. Builders Warehouse follows the big-box or warehouse retail format, offering home owners, DIY enthusiasts and building and maintenance contractors a comprehensive range of competitively priced products under one roof, with a large garden centre display and builders’ supplies yard. The format is unique in that it is the only home improvement warehouse in the country.

Builders Express was formed in 2005 when Massmart bought and rebranded 14 Servistar stores operating in the Eastern Cape and KwaZulu-Natal. Massbuild now operates 21 home and garden Builders Express stores in four provinces that cater to home owners. They have a strong focus on convenient locations, aesthetically pleasing displays, customer-friendly store layout and personalised service and advice. Builders Express is integrated into Builders Warehouse with a single management structure.

Builders Trade Depot was created when 34 Federated Timber stores were acquired and rebranded in 2005. Seven smaller stores have since been closed and, after the store conversions and acquisitions to date, Builders Trade Depot now operates 31 outlets catering mostly for medium- to large-sized contractors and tradesmen engaged in building, maintenance and renovation projects. It also focuses on servicing the needs of construction entrepreneurs who need trade credit, telephonic ordering and want bulk goods delivered from low-cost outlets.

  • Five Builders Warehouse stores acquired in February 2003
  • Three De La Rey stores acquired in June 2005, rebranded to Builders Warehouse
  • Now 24 stores
  • Operating in SA
  • Home improvement supplies/tools/building materials
  • LSM 5 – 10

  • 14 Servistar stores acquired in June 2005, rebranded to Builders Express
  • Now 21 stores
  • Operating in SA
  • Home improvement supplies/tools/building materials
  • LSM 5 – 10

  • 34 Federated Timbers stores acquired in June 2005, rebranded to Builders Trade Depot
  • Now 31 stores
  • Operating in SA, Mozambique
  • Building materials/tools
  • LSM 4 – 8

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.

OUR VALUE PROPOSITION

Builders Warehouse and Builders Express are both pioneers in introducing retail principles to the South African DIY and home improvement sector and attaching garden centres to hardware stores. The clean, friendly and uncluttered look and feel of our stores offer customers a shopping experience not traditionally associated with the industry. Our new stores aim to introduce ‘retail theatre’ where lighting, colour and ambience enhance the shopping experience, signage is clean and bold, and product displays are enticing.

Several of our private brands, including Mastercraft and Builders Pride, have become household names, with our customers assured of stringent quality control and best supplier practices. During the year private label contributed more than 8% to sales at higher margins, a trend that we expect to continue.

In both the residential and commercial property markets, Builders Trade Depot’s value proposition to customers is our ability to consistently deliver an appropriate, professional range at highly competitive basket prices, combined with exceptional contractor support services in a relationship-driven environment.

OUR OPERATING ENVIRONMENT

Highlights

  • Double digit sales growth achieved in difficult market
  • Launched new store format
  • Acquired Kangela in Mozambique
  • Branding opportunities maximised

Despite a weak residential property market and negative growth in national Building Plans Passed and Buildings Completed data, Builders Warehouse and Builders Express managed to readily grow sales and to capture significant market share, particularly in the additions and alterations market.

While growth of new housing developments remained sluggish, we saw an increase in smaller residential repair- and alterations-oriented projects. We believe that this was indicative of consumers spending more time at home and wanting to improve the look of their homes. Given the difficult environment, our product solution and format gave us the ability to remain relevant to our customers as we continued to provide a one-stop, project-complete product offering.

Our wide product offering means we remain relevant to customers through their life stages – whether they are graduates decorating their first home, a married couple tackling home improvement projects or retirees scaling down. During the year we managed to take market share from competitors, especially independent operators, who found it difficult to optimally manage stock levels and cash flow during the recession. We also actively campaigned in the contractor market and were able to gain new customers, despite limited work availability, as many contractors changed their focus to maintenance work.

Historically we focused on advertising our brands, but over the past year we began to build brand associations across logical product ranges. Because our stores straddle all aspects of home improvement and construction, from garden tools to plumbing and electrical products, we are able to create common categories and project-complete ranges across our different businesses.

To maintain our price perception we operate an ‘everyday low pricing’ strategy, which applies to more than 200 key items through our stores. We undertake regular ‘shop-outs’ of our competitors and communicate differences in prices on a basket of goods to our merchants and buyers. While this information is analysed centrally, we give our store managers flexibility to roll out price cuts so that they are able to offer their customers competitive pricing in their particular store.

Although our Builders Warehouse and Builders Express stores target customers in the LSM 5 – 10 range, our Builders Trade Depot stores target a wider target market as they supply contractors who build houses in the wealthier income bands, as well as affordable housing. The successive interest rate decreases over the past two years have meant that our customers do have more money in their pockets, although generally debt levels remain high.

In a tight economy, customers look for stricter cost management on building projects and are able to do this by better managing material and labour costs. By trading in convenient locations and opening our doors seven days a week, we offer a convenient way for customers to control their cost of materials. During the past year, we saw sales in most categories increase, with paint particularly delivering excellent growth across all the Builders brands.

Apart from developing the new regional store format, we will look to establish stores which are conveniently situated for customers to make smaller purchases. These ‘stores amongst the roofs’ will be positioned as neighbourhood hardware stores under the Builders Express brand.


FINANCIAL PERFORMANCE

    2010 2009 2008 2008
    52 week 52 week 52 week 53 week

Sales

Rm 6,366.9 5,604.6 5,563.0 5,662.9
Trading profit before interest3 Rm 277.3 222.6 368.0 390.2
Trading profit before interest as % sales % 4.4 4.0 6.6 6.9
Operating profit before interest Rm 244.5 228.8 367.9 390.1
Operating profit before interest as % sales % 3.8 4.1 6.6 6.9
Net finance costs Rm 31.2 47.5 42.1 42.9
Trading profit before taxation3 Rm 308.5 270.1 410.1 433.1
Trading profit before taxation as % sales % 4.8 4.8 7.4 7.6
Operating profit before taxation Rm 275.7 276.3 410.0 433.0
Operating profit before taxation as % sales % 4.3 4.9 7.4 7.6
Inventories Rm 943.6 801.4   852.5
Inventory days days 74 73   77
Net capital expenditure1 Rm 143.2 145.3   138.8
Cash flow from operating activities Rm 165.4 137.1   265.6
Number of stores   76 71 68  
Trading area m2 384,625 357,589 344,388  
Average trading area per store m2 5,061 5,036 5,065  
Number of employees   6,409 6,074 6,625  
Sales per store R000 80,495 78,938 81,809  
Sales per m2 R000 16 16 16  
Sales per employee R000 993 923 840  
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.
4 Definitions/explanations to the ratios and terms above can be found here.


The Division reported total sales of R6.4 billion, representing growth of 13.6%. Comparable sales increased by 3.4% and annual sales inflation was estimated at 1.8%.


Trading profit before interest and taxation of R277.3 million was 24.6% higher than the prior year. Despite working capital management improving, lower commercial interest rates reduced interest received and so trading profit before taxation of R308.5 million was 14.2% above the prior year. In Builders Warehouse, total stock increased by 11.8% from R565.9 million to R632.9 million mainly as a result of sales growth and the two new stores.

Capital expenditure of R145.9 million is consistent with the prior year (R149.7 million) and arose by opening two new stores, refurbishing existing stores and installing CCTV security at selected sites.

TRADING PROFIT BEFORE TAX RETURN ON SALES

Actual 2010 Medium-term target International benchmark Home Depot/B&Q

4.8%

7.0% to 9.0%

10.0%

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.

IMPROVING EFFICIENCIES

We continued our aggressive management of costs at store level, from managing our resources more efficiently to better staff training and improving productivity levels.

During the year we also embarked on a process to improve supply chain efficiencies and appointed independent advisors to assist with the development of our supply chain strategy. Much of the improvement in stock profile, stock availability and inventory reduction can be attributed to the 2009 implementation of the SAP auto-replenishment software. With approximately 70% of our stock now auto-replenished centrally in Builders Warehouse, Builders Express, and auto-replenishment trials in Builders Trade Depot, we will have more of the right stock available at the right place, at the right time to meet our customers’ requirements.

INVESTING IN OUR HUMAN RESOURCES


INVESTING IN OUR HUMAN RESOURCES

Read more

More information on the Group’s investment in Human Capital

Corporate Accountability

A number of programmes were implemented to improve staff morale, productivity and to build a positive culture amongst our staff. To encourage employees to work as a team, be goal driven and to drive efficiencies, we introduced a team building exercise called Home Team Heroes to take advantage of the hype generated around the 2010 FIFA World Cup. Staff members were assessed on a range of measures including customer service, respect for their colleagues and timeous attendance to all outstanding issues and stood the chance of winning a car. Teams competed at regional level, linking across the business. As a result of this, and other initiatives, our annual staff turnover has dropped from 17% to 12% over the past year in Builders Warehouse and from 31% to 26% in Builders Express.

Our performance on our independently verified B-BBEE scorecard for Builders Warehouse and Builders Express combined, moved from 40.2% to 50.7%, securing our position as a Level 5 contributor from Level 7. Builders Trade Depot achieved 46.1% during the same period, becoming a Level 6 contributor. We have also been pushing our suppliers to improve their B-BBEE credentials, driving transformation into our supply chain.

INVESTING IN OUR COMMUNITY

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More information on the Group’s investment in Corporate Social Investment

Corporate Accountability

Massbuild provides support to a range of corporate social investment initiatives, which focus on developing enterprises and improving education in disadvantaged communities.

Builders Warehouse continues to sponsor vegetable tunnels, and erected 90 tunnels that reach 30 disadvantaged schools across the country. These enable schools to grow vegetables such as spinach and tomatoes to feed less privileged children.

Builders Warehouse continues its support of the Hot Dog Café and The Coffee Stop concepts, where we sponsor ambitious talented, but unemployed, youngsters, to start their own businesses. This year one Coffee Stop was opened and 16 Hot Dog Café franchises opened at selected Builders Warehouse and Builders Express stores.

We embarked on the fifth consecutive year of partnership with Men on the Side of the Road and Primedia to provide training to 50 men and women focusing on skills development aligned to our industry such as painting, tiling and bricklaying.

INVESTING IN OUR ENVIRONMENT

Read more

More information on the Group’s investment in Climate Change and Environment

Corporate Accountability

Through our Eco-wise range we help to empower our customers to better manage their water and electricity usage. We provide a complete offering – from solar geysers, to water tanks for rainwater collection – to enable them to reduce their carbon footprint and impact on the environment.

Our stores continue to promote energy-efficient and green technologies as part of our environmental programme and buyers and merchants engage proactively with suppliers to determine which of their products have garnered independent environmental endorsements. These endorsements indicate to consumers that the products comply with a published set of environmental criteria. Sales of Eco-wise products, which include energy-saving light bulbs, continue to grow.

Our new store designs make use of energy-efficient technologies including innovative roofing panels that make use of natural lighting. This has been implemented in the new Builders Warehouse Bedworth Park store and the new Builders Trade Depot Ballito store. It is intended to implement this process in the new Woodlands and Witbank Builders Warehouse stores with an anticipated decline in electricity usage of 10,000kWa/month. This roll-out will continue in Builders Warehouse over the next three to four years, and Builders Trade Depot stores will be investigated for a similar rollout.

19 Builders Warehouse stores with adjacent garden centres are fitted with water tanks to harvest rainwater, which we use to water our nurseries. In Builders Express, where possible a smaller system will be rolled out in 2011, whilst this process is still being investigated in the Builders Trade Depot stores.

We also started to provide battery disposal units at some of our Builders Warehouse stores. During the coming year we will expand this initiative so that customers can also dispose of fluorescent tubes and power tool batteries. We hope next to provide facilities that enable our customers to safely dispose of insecticide bottles.

OPPORTUNITIES IN AFRICA

Limited competition in the home improvement, DIY and building contractor markets in Africa make the continent attractive from a long-term expansion perspective. Builders Trade Depot acquired 13 Kangela stores in Mozambique during the reporting period and we will look to improve trading in the existing stores and to open more stores in the coming years.

In early 2010 in Namibia, we signed a deal to purchase Pupkewitz Megabuild, a Windhoek-based business with 16 stores around the country. This transaction is still conditional upon the Namibian authorities’ approval. Builders Warehouse stores in Botswana and Zambia are also in the pipeline – sites have been established and plans are being finalised.


RISKS AND REWARDS

General stagnation in the national Hardware, Paint and Glass categories as well as a slowdown in new building plans, buy-to-let property purchases, and delays in government’s affordable housing programme could negatively affect Massbuild’s business. Apart from benefiting from market share gains, we are also well positioned to take advantage of the growth in the additions and alterations business, which we believe, will shield our business.

We embarked on a feedback survey using the latest cell phone technology, which included interviewing 900 consumers and employees. We also held focus groups with particular customer groups, such as plumbers and electricians, to determine what they wanted to see in our stores. The process yielded useful information about our customers’ buying patterns and shopping experiences. We plan to use this to change our in-store processes to better meet our customers’ requirements and expect this to inform our marketing strategy over the next few years.

We make every effort to ensure that we are 100% compliant with the Occupational Health and Safety Act. Nearly half of our stores store bulk material on high racks and during the year an unfortunate incident occurred where a customer was injured while shopping at one of our stores. We arranged for treatment at a private clinic and provided compensation as well as an ex-gratia payment for her pain and suffering.

As with many businesses in South Africa, we face the risk of armed robberies aimed at our cash, especially during the Festive season. We have introduced drop safes into all our stores and outsourced cash management and collection to a third party to protect our stores from being targeted.

FUTURE OUTLOOK

We expect some improvement in the South African residential housing and commercial sector, with continued growth in the additions and alterations market, as well as an increase in demand for affordable housing, to underpin sales going forward. The energy-efficient home improvement market is also set to drive sales, as consumers struggle to manage increasing electricity costs. Longer term, our focus remains on creating an enjoyable shopping experience for our customers, to build consumer loyalty across all sectors and to move closer to our strategy of being the number one home improvement and building materials business in southern Africa.

Massbuild directorate

Grant Pattison
Chairman

Llewellyn Walters
Chief Executive and
Managing Director (Builders Warehouse)

Madeline Chalmers
Supply Chain Director

Th ashmi Doorasamy
Human Resources Director

Neville Hatfield
Merchandise Director

Guy Hayward
Non-executive Director

Chris Lourens
Operations Director

Alex Rymaszewski
Store Development Director

André Steyn
Director (Builders Express)

Andries Strydom
Director (Builders Trade Depot)

Chris Tugman
IT Director

Simon White
Financial Director

Ilan Zwarenstein
Non-executive Director

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