ONLINE ANNUAL REPORT 2010

MASSDISCOUNTERS DIVISIONAL REVIEW

Although market conditions across Africa continued to be challenging, Massdiscounters reported pleasing sales growth, driven by double-digit growth in Game South Africa. During the year under review, we grew South African comparable sales by 10.9%, while growth in comparable store expenses was negative. This is a result of more than 18 months of stringent cost control, which enabled us to fund our re-investment in price aggression.

Throughout the recession we reinforced our positioning by making our value-offering more compelling and relevant through smarter merchandise selection and innovative marketing campaigns. We also focused on building our portfolio of private brands to provide a lower price-point alternative for cost-conscious consumers.

At DionWired we continue to deliver more choice and value and offer differentiated merchandise ranges that inspire and excite our customers. We are South Africa’s leading electronics destination store and strive to attract customers through being informative and friendly.

The building of the 70,000m2 Gauteng regional distribution centre (RDC) was completed in June 2010 and will service 68 stores encompassing all Gauteng DionWired, Game SA and Game Africa stores in the SADEC region. By closing or consolidating all existing Gauteng warehouses and storage facilities, we will be able to extract important efficiencies and achieve significant savings once fully operational.

Significantly, 2010 marked the 40th year of trading for Game and we celebrated with various birthday campaigns. ‘What’s the Big Deal?’ was well executed, boosting sales by 40% over the promotional period, helping us to gain market share and achieve growth rates not experienced since 2002.

THE MASSDISCOUNTERS BRANDS

Massdiscounters operates two retail formats: Game and DionWired. Game is a discount retailer of general merchandise FMCG, and non-perishable groceries for home, leisure and business use, operating throughout South Africa and in twelve major cities in sub-Saharan Africa. DionWired is a South African electronics and appliances speciality store catering for the middle- to upper-end income consumer. During the past financial year we opened seven new Game stores, bringing its footprint to 91 stores and opened five new DionWired stores taking the total number of DionWired stores to 11.

Game

At Game our positioning offers middle-income (LSM 5 – 10) customers the widest range of branded products at the best price. The Game business model is promotionally driven, with five million leaflets distributed each week. Our market-leading sales volumes and strong vendor collaboration allow us to offer our customers very well priced products that represent great value.

  • 26 stores acquired 1 July 1998
  • Now 91 stores
  • Operating in SA, Botswana, Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia
  • General merchandise and FMCG
  • LSM 5 – 10

DionWired

The DionWired slogan is ‘Experience the future’. DionWired’s product displays create an easy, exciting and interactive shopping experience, offering the latest in leading branded home entertainment, computing, digital photography and appliances. DionWired sells complete technological solutions, thereby demonstrating the interconnectivity of the latest product innovations. The IT experts servicing our in-store service centre, the ‘Propeller Heads’, are on hand to offer the best advice, upgrades and onsite repairs and services.

Although our products are well priced, DionWired’s retail positioning is not primarily as a discounter. Our main proposition is to offer the widest range of some of the world’s biggest and leading brands such as Apple, Smeg, Miele, Marantz, Hewlett Packard and Sony to middle- to higher-end consumers (LSM 8 – 10) who demand exceptional value and a great shopping experience.

This concept, launched in 2006, has proved to be exceptionally successful and during the year we almost doubled the store base and so established a national footprint. Much time was spent understanding and refining the business model and we are excited about the brand’s potential and future plans. We repositioned the brand’s relevance to distinguish between different customer segments and differentiated the brand in a busy market-place.

  • 20 Dion stores acquired 31 May 1993
  • Dion stores rebranded to Game stores
  • Launched greenfield DionWired concept stores in 2006
  • Now 11 stores
  • Operating in SA
  • General merchandise
  • LSM 8 – 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.

OPERATING ENVIRONMENT

Highlights

  • Strong performance by Game SA with profits up 20%
  • DionWired now a national brand with 11 stores
  • New 70,000m2 Gauteng regional distribution centre operational
  • Level 4 B-BBEE contributor

During tough times Game customers seek value in terms of price and quality, and the past year was no different. Despite South African interest rates having been reduced by 550 basis points since December 2008, consumer debt as a proportion of household income has not reduced significantly which negatively affected the disposable income of many of our consumers. There was however, resurgence in demand for durable and semi-durable goods in the second half of the year, as the lagged positive effect of the interest rate cuts began to kick in. Contributing to this was the fact that we experienced 4.2% product deflation for the 2010 financial year.

Game benefited from the soccer mania that hit the country with the 2010 FIFA World Cup boosting sales. Incremental sales during the tournament were approximately R120 million, driven mainly by the sale of flat screen and high definition televisions but also soccer gear and accessories.

We introduced a new look and feel to our design and layout at selected Game stores and intend rolling this out to all future stores. Our offerings in the hi-tech and multi-media categories were also broadened and enhanced to better service upper LSM consumers. We also launched a ‘Merchandise 2010’ initiative, which focuses on significantly enhancing our ranges in the Top 20 stores while reducing the ranges in the smallest sites.

We continue to seek out and introduce the world’s leading consumer brands alongside the aggressive rollout of private label. Private label products now make up 11.4% of our sales, exceeding our short-term target of 10%.

Our African operations were negatively affected by the stronger Rand in two ways, first, it pushed up imported product prices in those African countries and, second, caused us to report lower Rand profits from those countries. In the previous financial year, of course, we experienced the reverse effect when the Rand initially weakened for much of the year. The Rand volatility also contributed to large changes in the translation effects of the African balance sheets. Despite the difficult trading environment, our profitability ratios remain intact and we believe that our business model for Africa remains sustainable.

 

FINANCIAL PERFORMANCE

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

Sales

Rm 12,164.9 11,206.0 10,129.8 10,406.5
Trading profit before interest3 Rm 642.7 680.0 627.9 661.8
Trading profit before interest as % sales % 5.3 6.1 6.2 6.4
Operating profit before interest Rm 539.3 584.4 690.7 724.5
Operating profit before interest as % sales % 4.4 5.2 6.8 7.0
Net finance costs Rm 47.6 66.6 57.5 58.6
Trading profit before taxation3 Rm 690.3 746.6 685.4 720.4
Trading profit before taxation as % sales % 5.7 6.7 6.8 6.9
Operating profit before taxation Rm 586.9 651.0 748.2 783.1
Operating profit before taxation as % sales % 4.8 5.8 7.4 7.5
Inventories Rm 2,134.7 1,856.0   1,766.8
Inventory days days 85 81   83
Net capital expenditure1 Rm 285.1 212.2   208.8
Cash flow from operating activities Rm 290.6 110.5   (6.2)
Number of stores   102 93 90  
Trading area m2 355,423 341,687 338,285  
Average trading area per store m2 3,485 3,674 3,759  
Number of employees   8,876 9,469 9,817  
Sales per store R000 119,264 120,495 112,553  
Sales per m2 R000 34 33 30  
Sales per employee R000 1,371 1,183 1,032  
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.

Store progress

Game  
Opening balance 87
Stores opened 7
Amanzimtoti (KwaZulu-Natal)
Ballito (KwaZulu-Natal)
Alberton (Gauteng)
Lenasia (Gauteng)
Mokopane (Limpopo)
Nelspruit (Mpumalanga)
Phuthaditjhaba (Free State)
 
   
Stores closed (3)
Wynberg (Gauteng)
Nelspruit (Mpumalanga)
Nelspruit CBD (Mpumalanga)
 
Total stores in 2010 91
DionWired  
Opening balance 6
Stores opened 5
Hyde Park (Gauteng)
Grove (Gauteng)
Woodlands (Gauteng)
Nelspruit (Mpumalanga)
Somerset West (Western Cape)
 
Total stores in 2010 11

The Division reported total sales of R12.2 billion, representing respectable growth of 8.6%. Comparable sales growth was 3.2% while our annual sales inflation was -4.2%. Given the difficult consumer environment, the total sales growth in Game South Africa of 15.2% was pleasing (10.9% comparable) and was at the upper-end of the market growth. African store total sales decreased by 5.1% in local currencies (and by 23.0% in Rands).


Trading profit before interest and taxation of R642.7 million was 5.5% lower 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 non-cash amounts that arise from the translation of 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 7.5% lower than the prior year. The Division’s resultant return on sales (profit before taxation/sales) of 5.7% was satisfactory given the difficult South African consumer environment. Inventory levels were well managed with stock days at 84.9 and the total inventory balance was 15.0% higher than the prior year, the result of sales growth and new store openings.


Capital expenditure of R285.7 million was higher than the prior year’s R213.6 million, with the increase mainly relating to the expenditure on the Gauteng RDC, as well as ongoing IT investments and store refurbishments.

TRADING PROFIT BEFORE TAX RETURN ON SALES

Actual 2010 Medium-term target International benchmark Wal-Mart ex-food

5.7%

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.

IMPROVING EFFICIENCIES

With the 70,000m2 Gauteng RDC operating from July 2010 and the 19,500m2 Western Cape RDC being fully operational from 2008, we are well positioned to extract efficiencies from our in-bound supply chain. More of the key parameters we set originally have been met and, in many cases, exceeded. Western Cape stores that were supplied by that RDC saw in-stock service levels 1% – 2% better than those stores that were supplied by off-site facilities and direct supplier deliveries. Cost savings were achieved from the closure of the now unnecessary off-site storage facilities.


With two of the three RDCs in our planned national distribution network now operational, we expect further efficiencies when the Durban RDC is completed in June 2012. With the opening of our RDCs, our back-of-store systems and processes underwent a complete overhaul and certain jobs such as data capturing and receiving became redundant. Despite our best efforts to find alternative staffing models, we regrettably had to retrench 504 people in June 2010 as a result of this change in the business model.

We improved business productivity by increasing sales per employee and reducing expenses as a percentage of sales. These developments are the fruit of three years of space- and employee-optimisation initiatives. Space planning, which studies the most profitable use of shelf-space and generally results in more shelf-space being available, allows for new product offerings, such as food, in selected Game stores. This will appeal to customers seeking convenience, value and excellent pricing.

In terms of information technology, we switched from ‘Best of Breed’ to ‘Best of Suite’ to reduce complexity and improve our long-term agility and efficiency. New Thin Client hardware was deployed into all stores. This new hardware is cheaper to deploy and support as well as being less prone to abuse by users and more resistant to viruses. We entered into a long-term partnership with JDA that will see the replacement of the Just Enough replenishment software with JDA Demand and Fulfilment software. We plan to implement a further two JDA modules over the next three years to optimise our enterprise planning, price and markdowns processes.

A new innovative mobility solution was piloted in two stores which comprises a handheld device and printer that allows for previously desk-bound activities to be completed more efficiently on the floor. This is the first step in a process that will see us introduce technologies to reduce queues and boost customer service in the next year.

INVESTING IN OUR HUMAN RESOURCES

Read more

More information on the Group’s investment in Human Capital

Corporate Accountability

Our Retail Academy forms the crux of our programme to develop our leadership pipeline. An assessment centre evaluates employees on a range of metrics including a work sample test, psychometric assessment, EQ and IQ tests. Training consists of four tiers, with each tier aligned to a level on the National Qualifications Framework. Massdiscounters also participates in various learnership projects.

We embarked on an unprecedented project with the Wholesale and Retail SETA where we developed a ‘recognition of prior learning’ initiative. This project gives team members the opportunity of receiving a national qualification through the South African Qualifications Authority.

Massdiscounters also made good progress with our B-BBEE strategy, improving our score from 58.6% to 68.8% from Level 5 to Level 4, externally verified and audited by Empowerdex. Encouragingly, 94% of our junior managers, 85% of middle managers and 53% of senior managers are black. In addition, of the total 65 employees on learnerships, more than 98% are black.

We also partnered with the Wholesale and Retail SETA, Outlearning and the Thabo Mbeki Trust for disabled persons to host disabled persons on the SETA’s Operations Learnership. Ten learners successfully completed phase 1 in various Gauteng stores. The project not only provided work experience for disabled learners, but also sensitised Game team members to the needs of disabled employees. We hope to roll out the programme nationally next year.

In the area of enterprise development, we ensure early payment to black suppliers and have achieved 100% in this area on the scorecard.

INVESTING IN OUR COMMUNITY

Read more

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

Corporate Accountability

Supporting projects that improve the education of disadvantaged children remains a priority for Massdiscounters. Through our Tools-to-Teach project we have been a committed partner to 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. Game donated R1.2 million in stationery kits to schools during the year under review. One of the other ways we raise funds is through our Gift Wrap service during the December 2009 festive period and Game shoppers raised R800,000 through this initiative last year. In 2009, we launched Tools to Play, with the handover to disadvantaged communities in KwaZulu-Natal of 45 play-kits packed with educational toys. Each play-kit contains 60 educational toys that enhance early childhood development.

We also support the Game Vodacom Wheelchair Project, which provides wheelchairs to disabled schoolchildren. This year we donated wheelchairs valued at R1.2 million to 400 children around the country. Game and DionWired also raised R1.1 million for the National Council for Persons with Disabilities in South Africa by selling Casual Day stickers at stores.

Through our Smile initiative, staff members who volunteer their services with a registered charity can apply for R5,000 worth of Game products to donate to the charity.

In 2010 Game entered 40 teams of employees, comprising 196 swimmers, in the Midmar Mile Company Relay as part of Game’s commemorative 40th birthday. Game has supported this event for many years and donates R1,000 to charity for each swimmer who completes the race.

We have sponsored eight top performing learners from Umlazi Comtech School on full bursaries for the past four years. This year the learners will complete Grade 11 and depending on their academic performance in Grade 12, we intend to provide them with bursaries to attend a tertiary institution of their choice.

DionWired upgraded the learning environment of more than 100 blind and partially sighted learners from Filadelfia Secondary School in Gauteng through sponsoring the school with state-of-the-art computer equipment and specialised software to the value of R205,000.

DionWired also aided learners at KwaZulu-Natal’s Browns School by donating high-tech Smart Boards that revolutionise special-needs education. Our R192,000 investment provided a massive pre-loaded resource library enabling teachers to tap into lessons and information from around the world that have been created using special software tailor-made for children with learning disabilities.

INVESTING IN OUR ENVIRONMENT

Read more

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

Corporate Accountability

We continued to drive energy efficiency at stores and warehouses with a particular focus on using the latest technologies in our lighting and cooling systems. In the next financial year we will launch a company-wide environmentally-focused programme that will give guidance to all our merchandise, marketing and operational activities.

We endeavour to introduce and promote green products where possible to encourage consumers to become more aware of their options and the impact of their choices on the environment. For example, compact fluorescent light bulbs are featured in our weekly promotions and we have introduced private label rechargeable batteries under the Logik brand. These have been co-branded with the Eco-wise brand to expand our green product range.

OPPORTUNITIES IN AFRICA

Our strategy in Africa is to grow our footprint by venturing into new countries and extending our store base in countries in which we currently trade. We hope to open a further seven stores in the next three years.

Because we offer a wide range of quality products under one roof, backed by guarantees and excellent service, our stores are attractive to African customers. Having established and managed operations in a number of countries, we are better able to understand risks and opportunities as regards the legislation and regulatory environment. The multiple stores also enable us to build our brand equity.

RISKS AND REWARDS

In addition to traditional media such as newspaper and television, increasingly community portals and social media represent new ways of communicating with our customers. Game’s 40th Birthday campaigns utilised this approach, which integrated different media types to drive consumers into a network of media options. This provides direction for future marketing efforts.

A pilot introducing a no-frills, well-priced, convenient food offering in some of our Game SA stores will be launched.

We also aim to increase the contribution of private label sales in our stores to 15% over the medium term. Having attracted cash-strapped consumers, we hope to be well positioned to retain them as the economy recovers and their purchasing patterns potentially broaden.

The Consumer Protection Act will come into operation during the next financial year and we have put plans in place to mitigate associated risks. A quality control office within our merchandising section was established and an electronic supplier management process was activated. We already meet most of the Act’s requirements pertaining to marketing initiatives, store policies and customer promises. New store customer policies have been documented and staff members have undergone training to ensure that we comply with all legal requirements.

Our business remains susceptible to foreign exchange rate fluctuations. We manage this by regularly repatriating cash, undertaking currency sensitivity analyses and maintaining optimal funding and management of the foreign operations’ balance sheets. We also drive up private label sales and engineer new products at more competitive price-points to protect ourselves against a weakening of the Rand and ensuing product inflation.

Whilst Massdiscounters remains primarily a cash business, credit sales doubled after we launched the Game private label credit card. Administered and financed by a third party, RCS, the card has increased equity in the Game brand and helped us to take market share from other credit retailers. Credit sales remain at less than 6% of total sales.

FUTURE OUTLOOK

Game SA and DionWired remain focused on differentiating their market positioning and entrenching world-class retail disciplines and technology as part of their day-to-day operations.

The Western Cape and Gauteng RDC networks are expected to deliver more supply chain efficiencies, which include improving customer service through bolstering stock levels. These will be further enhanced when the Durban RDC completes the national network.

With four DionWired stores opening in the next year, 13 Game SA stores in the next two years, and seven stores opening in Africa over the next three years, we expect our new stores to extend our brands into the communities, making our lowest prices and after-sales service guarantees more accessible to more customers.

Massdiscounters directorate

Grant Pattison
Chairman

Jan Potgieter
Chief Executive

Richard Fuller
Store Operations Director

Ann Hansen
Financial Director

John Hart
IT & Logistics Director

Guy Hayward
Non-executive Director

Richard Millson
Marketing Director

Rogany Ramiah
Human Resources Director

Llewellyn Steeneveldt
Non-executive Director

Mark Turner
Africa Director

Tyrone Vieira
Merchandise Director

Ilan Zwarenstein
Non-executive Director

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