ONLINE ANNUAL REPORT 2010

CHAIRMAN'S LETTER TO SHAREHOLDERS

For decades the leaders of Massmart have seen financial performance as a lagging indicator of the Company’s health. This approach has resulted in a continual focus on human performance and operating performance, which are always the predictors and the long-term determinants of progress and growth.

Mark J Lamberti
Chairman

Over the past two years this ethos has been particularly relevant. In the confidence that Massmart people were doing the right things and that our operating metrics were sound, we continued to invest your capital with confidence, undeterred by the uncontrollable exogenous factors that dampened the financial result.

In consequence, and in every respect, Massmart is a better Group today than it was before the start of the recessionary cycle: its strategic positioning is more acute; its competitive stance more aggressive; its geographic footprint larger; its leadership more nimble and assured; and its growth and performance potential much enhanced.

ENVIRONMENT

The state of the economy over the past year and the impact on Massmart of various short-term environmental factors are commented on elsewhere in this report.

There are of course broader issues that occupy the thoughts and deliberations of your Board. These range from the impact of the global financial crisis on the export, financial, labour and consumer markets of South Africa, through the sometimes noisy evolution of our young democracy, to the world’s leading edge developments in the art and science of retail.

We do not aim to predict the economic future, but rather to develop a set of competencies that position Massmart as an effective competitor under all scenarios, able to respond rapidly to short-term changes in consumer demand. The control of margin, inventory and expenses captured in this report are indicative of how this can be achieved in volatile circumstances such as those of the reporting period.

We are apolitical, but alive to the impact that thoughtless rhetoric and political posturing can have on the psyche of the country. Contrast the national pride and elation that surrounded the World Cup, with the despair in almost every quarter around the Public Sector strikes and the proposals that may see press freedom being curtailed.

We are also deeply conscious of the enduring impact that Apartheid has had on our society. Our extraordinary socio-economic divide cannot be ignored by business and while we see education and training as the only sustainable palliative and invest accordingly, we are delighted that 15,186 of our staff have participated in one of South Africa’s most successful broad-based black economic empowerment schemes. Assuming a share price of R148, and including dividends, R107.51 of value has been created per share since the scheme’s inception, representing a gain on average of R139,000 per current participant.

Over many years we have monitored closely the manner in which the world’s most successful retailers excel in two areas: format renewal, which creates the relevant ambiance for merchandise presentation; and the supply chain where technology and logistics combine to improve service levels to consumers at lower cost. Our vigilance in both areas was evident over the past year in the latest generation Game, DionWired, Builders Warehouse and Cambridge stores, and in the dramatic improvement of our supply chain capability.

STRATEGY

Massmart is an African business founded and rooted in South Africa. There are compelling strategic and commercial reasons to favour a strong regional presence over a scattered intercontinental footprint, and we have no desire or intention to venture beyond the sub-continent.

But we know that the markets of sub-Saharan Africa are far from homogeneous. The wealthiest people on the continent reside within ten kilometres of our Group offices – so do some of the poorest.

Massmart has chosen to serve the entire socio-economic spectrum in 14 countries across the region through a multi-product, multi-format portfolio of 288 stores, founded on the belief that a low-price value proposition can only be sustained through high-volume, low-expense distribution.

Over the past year this strategy was advanced in every way. As always, we entered new markets with new formats offering new products. We invested R369.9 million in the acquisition of 13 businesses, and integrated them into the Group with an ease that belies the risk and complexity involved in acquisitive growth. And, after many years of investment in replenishment information technology, the Massdiscounters supply chain experienced a step change in efficiency with the opening of a 70,000m2 distribution centre that will significantly reduce the complexity and costs of placing the right quantity of goods on the shelf at the right price and time.

This major endeavour was accomplished while making substantial progress with all of the other elements of the Chief Executive’s strategic agenda. The pursuit of excellence – imbedded in the leadership ethos of the Group – found expression and in many cases public recognition, in the areas of Leadership and Transformation, Private Label, Financial Services and Sustainability.

The annual Strategic Review is a highlight on the Board calendar, and this year the presentation of Vision 2010 – 2013 revealed exciting medium-term growth prospects and heightened creativity and innovation in format renewal, penetration of the retail food market and the use of internet technologies to educate and respond to consumers.

LEADERSHIP

The biggest and most pressing threat facing South Africa today is the shortage of skills. We simply have too few competent managers, leaders, professionals and technicians to meet our need.

This need is being fuelled not just by South African factors such as transformation, rapid economic growth, the emigration of young graduates seeking international experience, and by some escaping the high crime rate. It is also being fuelled by the worldwide exit from the workplace of my generation – the baby boomers, by a decline, other than in India and East Asia, of graduates in the quantitative disciplines, and by the fact that the market for top level executives has become one of the world’s few truly global markets.

Massmart has addressed this by investing heavily to enable individuals with an appropriate education and a core competence to become general managers who understand urgent creation of shareholder value and possess the ability to lead business units or functions. More specifically the leadership development, retention and succession programmes have aimed to nurture individuals who can thrive on the ambiguities and stress of top level enterprise leadership. Finally, in responding to our transformation obligation we aggressively seek out the considerable and increasing Black talent and potential, and actively create the mechanisms, practices, processes and paths to senior executive competence and confidence.

GOVERNANCE

A section of this report provides extensive detail on the governance of Massmart and in particular our response to King III. While this will provide shareholders with assurance that your Board is structured appropriately and follows the processes necessary to ensure oversight and compliance, two issues warrant elucidation.

Today anti-business sentiment and cynicism is a world-wide phenomenon, fuelled by the global financial crisis and the causal instances of appalling corporate behaviour. In addition, the socio-economic divide creates a fertile context for anti business sentiment in this country. Regardless of how well we as directors of companies deal with the many issues of strategy, risk, succession, remuneration and governance, we will not stem the tide of negative stakeholder sentiment unless we are seen sensitively to respond to broader societal issues.

The Massmart Board therefore places the advancement of the company’s sustainability agenda among its most important obligations.

Allied to the above, executive remuneration has received much emotive attention but disappointingly little cogent analysis in recent times. It is clear that there must be a high correlation between corporate performance and reward. It is equally clear that for senior executives in large organisations there is a very lengthy time period of discretion; that is the time between when decisions are taken and when the efficacy of those decisions can be fully assessed. Put simply, the quality of today’s decision may not be able to be measured for many years. Fine judgement is therefore an extremely precious characteristic.

The compensation of the Board and senior executives, as described in this report, has been structured with these principles in mind. Scarce talent is acknowledged in fixed compensation, short-term incentives correlate with the performance of the individual’s business unit, and retention and long-term alignment are assured through participation in the equity of the company.

SHAREHOLDERS

At the time of writing 72% of Massmart’s shareholding is held by non-South African institutions. This is not by design and indeed since Massmart’s listing in 2000, the frequency of management’s interface with shareholders has been biased strongly towards South African institutions.

We have neither a view nor an explanation for this, but we are humbled by the fact that leading international investors place South Africa and Massmart among their emerging market investment preferences.

APPRECIATION

The dramatic improvement in the Group’s performance during the second half of the financial year is a tribute to the Chief Executive, his executive colleagues and the more than 26,000 men and woman whose efforts and application throughout the recession positioned the Group to take full advantage of improving conditions. On behalf of the Board and shareholders I express sincere gratitude.

It is rare for any group of individuals to be greater than the sum of its parts. The Massmart Board is an exception and it remains a consistent, efficient source of diverse good counsel. I thank each member for their wisdom and contribution and their confidence in my leadership.

LOOKING FORWARD

At the time of writing we have received a non-binding proposal from Wal-Mart that could lead to it making a firm cash offer to acquire the entire issued share capital of Massmart at a price of R148 per share. A due diligence which is a precondition to such an offer is currently underway.

For the first time since its founding in 1990, Massmart’s future will not be determined by the Board. While your Board will make recommendations in due course in the best interests of Massmart, the Group’s destiny resides in the sequential decisions of Wal-Mart and you the shareholder. I am confident that these decisions will be fully informed and sound.

Over a twenty-two-year period I have been associated with Massmart and its six-store predecessor Makro in various leadership capacities. Whether or not any association continues is less important to me than the privilege of knowing that each year, without exception, we took one step closer to the scale and standards necessary to attract the interest of the world’s largest retailer.

In the process I met and worked with some of the finest people imaginable and I thank them all.

Mark J Lamberti

Mark J Lamberti
Chairman of the Board

6 October 2010

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