WELCOME TO OUR ONLINE ANNUAL REPORT 2011

Massbuild divisional review

HIGHLIGHTS
  • Double-digit sales and profit growth achieved in difficult trading environment
  • Two Builders Warehouse stores achieved turnover of more than R300 million for the first time
  • Massbuild’s roof truss business grew 300%

  • Five Builders Warehouse stores acquired in February 2003
  • Three De La Rey stores acquired in June 2005, rebranded to Builders Warehouse
  • Now 27 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 24 stores
  • Operating in SA
  • Home improvement suppliers/ tools/building materials
  • LSM 5 – 10

  • 34 Federated Timbers stores acquired in June 2005, rebranded to Builders Trade Depot
  • Now 30 stores
  • Operating in SA, Mozambique
  • Building materials/tools
  • LSM 4 – 8

Despite the subdued growth in new residential homes and low consumer confidence levels, Massbuild reported double-digit sales and profit growth over the period under review. The difficult market caused a number of independent hardware stores to close and Massbuild continued to gain market share.

Our three brands, Builders Warehouse, Builders Express and Builders Trade Depot delivered good growth under a new centralised operating structure. Massbuild continues to focus on providing a wide range of relevant and well-priced stock to our customers in the DIY, hardware and construction markets, helping to attract a wide customer base across the income groups.

Our marketing strategy, which builds on the strength of each of the Massbuild brands, kept brand awareness high in our customers’ minds. We also focused on providing outstanding customer service, a strategy which has built loyalty among customers. A survey by independent researchers Living Facts showed that Massbuild improved in all areas of customer service. As part of a broader customer relationship management strategy, Massbuild launched a private label branded revolving credit card powered by RCS which enables us to offer customers up to R15,000 credit enabling us to attract more customers. A trade card which enables us to recognise individual customers and actively manage their portfolios is also in the pipeline.

To differentiate from competitors, we introduced a range of major appliances into one of our Builders Warehouse stores in Gauteng on a pilot basis. The success of this project has provided the impetus to repeat this strategy in more stores in the coming year.

Under the new centralised structure, we were able to ensure that Builders Warehouse’s merchandising strategy of ensuring that customers have access to a choice of “good, better or best” stock was also rolled out in Builders Express and Builders Trade Depot. Other benefits of the centralised structure include cost savings and an opportunity to co-brand each business under the Massbuild umbrella brand.

Massbuild opened new Builders Warehouse stores in Emalahleni in Witbank and Woodlands in Pretoria as well as our first Builders Warehouse store in Durban, at Riverhouse. In Cape Town, the smaller-store format of Builders Express, which fits neatly into busy trading areas, has proved a successful expansion strategy and we opened two Builders Express stores in Willowbridge and Kenilworth. Builders Express stores in the South Coast Mall and Gateway in Durban were revamped and the recently acquired store at Cedar Square, Johannesburg, was re-launched under the Builders Express brand. The Builders Trade Depot store in Port Elizabeth, including all staff and most customers, was incorporated into the Builders Warehouse Port Elizabeth store, to provide an improved shopping experience, in a more suitable location, for our customers.

Massbuild focused on re-energising its roof truss business, centralising operations and regionalising the manufacturing and selling of trusses. By using our widespread store base to sell trusses and spread the cost of the manufacturing plant, we were able to grow our truss business more than 300% since re-entering this market.

MASSBUILD FINANCIAL PERFORMANCE
    2011 2010 2009
    52 week 52 week 52 week
Sales Rm 7,271.0 6,366.9 5,604.6
Trading profit before interest3 Rm 315.1 260.5 222.6
Trading profit before interest as % sales % 4.3 4.1 4.0
         
Net finance income Rm 39.6 31.2 47.5
Trading profit before taxation3 Rm 354.7 291.7 270.1
Trading profit before taxation as % sales % 4.9 4.6 4.8
         
Operating profit before taxation Rm 368.5 275.7 276.3
Operating profit before taxation as % sales % 5.1 4.3 4.9
         
Inventories Rm 1,062.1 943.6 801.4
Inventory days days 74 74 73
         
Net capital expenditure1 Rm 140.8 143.2 145.3
Cash flow from operating activities Rm (13.0) 165.4 137.1
         
Number of stores   81 76 71
Trading area m2 412,996 384,625 357,589
Average trading area per store m2 5,099 5,061 5,036
Number of employees   6,834 6,409 6,074
         
Sales per store R000 86,697 80,495 78,938
Sales per m2 R000 17 16 16
Sales per employee R000 1,064 993 923
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 Massbuild brands

Massbuild operates three complementary brands: Builders Warehouse, which operates large home improvement stores in major urban areas; Builders Express, a chain of smaller neighbourhood home improvement stores; and Builders Trade Depot, a chain of building contractor outlets located in industrial sites in peri-urban and urban areas. The management structures of Builders Warehouse, Builders Express and Builders Trade Depot are now integrated under a single executive team.

In 2003, Massmart acquired five Builders Warehouse stores operating in Johannesburg and Pretoria, then bought and rebranded three De La Rey stores in the Western Cape in 2005 and now operates 27 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 brand 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 24 home and garden Builders Express stores in four provinces that cater to home owners and provide a “filler strategy” for the Group. They are situated in convenient locations with aesthetically pleasing displays, customer-friendly store layout and offering personalised service and advice.

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 store conversions and acquisitions, Builders Trade Depot now operates 30 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.

Our value proposition

Builders Warehouse and Builders Express are both pioneers in introducing retail principles to the South African home improvement sector and attaching garden centres to hardware stores. The clean, friendly and uncluttered look and feel of our stores offers customers a shopping experience not traditionally associated with the sector. 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 hand tools 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 8.6% to our total sales and drove margin growth, a trend which we expect to continue.

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

Our operating environment

Housing prices continued to stagnate during the 2011 financial year and with banks reticent to grant new credit, the residential alterations and additions market remained muted. In the rental market, home owners undertook minimal maintenance and there was a reluctance to invest in home improvement projects. Although higher LSM customers were less affected by the difficult economic conditions than the lower end of the market, many upper-end consumers appear to have changed their shopping habits and seek value for money from their purchases.

However, there was real growth in the low-cost building contractor market. Massbuild successfully assisted contractors to fulfil government contracts, particularly in the low-cost housing market and the Group is ideally positioned to help small black contractors grow their businesses. A six-month moratorium by the Department of Public Works which covers all tenders issued by municipalities continues to negatively affect small contractors, many of whom rely on these government contracts to survive.

Financial performance

The Division reported total sales of R7.3 billion, representing growth of 14.2%. Comparable sales increased by 7.2% and annual sales inflation was estimated at 0.8%.

Trading profit before interest and taxation of R315.1 million was 21.0% higher than the previous year. The sales growth and improvements in working capital management assisted in trading profit before taxation of R354.7 million being 21.6% above the previous year. This effective working capital management ensured that, despite 14.2% sales growth, total stock at year-end increased by only 10.7% from R909.1 million to
R1.0 billion.

Capital expenditure of R162.1 million was higher than the previous year (R145.9 million) and came from the five new stores and refurbishing existing stores.

Improving efficiencies

Planning of our new 30,000m2 Distribution Centre in Midrand is scheduled for November 2011. The
R200 million project will improve operational efficiency and enable us to better manage the entire supply chain.

The business is steadily seeing the benefits of the centralised head office structure and the allocation of executive resources to Massbuild’s respective businesses. We have worked hard to ensure that the skills base is spread throughout the Group with senior resources such as merchandise and supply chain directors now appointed to oversee all Massbuild brands.

We started rolling out auto-replenishment technology employed at Builders Warehouse to Builders Express and then to Builders Trade Depot. Although the three brands are at different levels of implementation in terms of systems and processes, the aim is to provide our customers with a similar merchandise experience no matter where they shop. The consistency of technology will have a positive impact on stock profiles, cash flow management and on-shelf availability of stock across the Group. Such systems also free up management time and allow store managers to spend more time with customers. In the year ahead, we will be implementing an advanced SAP Forecasting and Replenishment tool across the business.

Cost increases were contained at below inflation levels and we managed to decrease the rates of stock shrinkage and scrapping to less than 1.0% in line with world-class standards.

Investing in our human resources

We endeavour to apply the same standards and efficiencies to all three brands.

Based on staff feedback, we launched a new "values formula” outlining the main pillars of the Massbuild culture. These included values such as ethics, honesty and respect for the individual which were depicted by easy-to-understand iconography. The values formula was launched to the business using industrial theatre.

Through our “Think Big” campaign we invited staff to come up with innovative ideas such as new product suggestions or ways of operating. A panel decides the winning suggestion on a monthly basis. The winning staff member is awarded a cash prize.

Massbuild has launched a monthly employees’ newsletter and we continue to meet staff on a monthly basis. Quarterly birthday breakfasts also allow staff members to interact with senior management at head office. These interactions provide accessible channels for staff to generate new ideas and provide feedback to management on how to improve our business.

We continue to encourage our staff to be tested for cholesterol, HIV, diabetes and high blood pressure through our Impilo programme. Impilo visits were arranged for all 81 stores and more than 4,280 staff members underwent voluntary HIV testing and 35 employees are on confidential antiretroviral treatment.

Massbuild remains committed to the development and training of our staff. During the past year a total of 18,000 days of training was undertaken, not only meeting current training and development needs, but ensuring succession planning and meeting new store staff requirements internally. A total of 5,192 permanent employees underwent training of which 84.7% were from designated groups. Courses ranged from a basic five-day induction programme for all staff through to specialist technical skills training and a suite of management and leadership development programmes for junior and senior management.

Our business depends on staff having excellent product knowledge as a basis for giving good customer service. In-house subject matter experts and suppliers are used to train employees. We also established the first of our in-house training academies. These focused on electrical, power tools and plumbing selling skills.

To ensure a pipeline of future business leaders, management and leadership development is also a key focus area of Massbuild’s education programme. Our senior staff attended various development programmes run by Massmart’s Corporate University. In addition, 362 staff members from junior non-supervisory to senior management attended financial management training and 209 managers attended an Interaction Management course, our primary leadership training for all managers.

Massbuild also runs a small Adult-based Education and Training programme in Pretoria and trained 29 employees on handling their own personal finances and planning for their financial future. A BusinesswisePlus programme not only trained 82 junior staff on understanding the main profit drivers for our business, but also gave them insight into running their own business.

Massbuild continues to place an emphasis on health and safety training. A total of 1,454 employees attended various courses including gas handling safety, first aid, fire-fighting, handling hazardous chemicals and racking and stacking.

In terms of transformation of our business, the percentage of black employees (African, coloured, Indian) reached 21.5% (2010: 16.9%) at senior management, 52.8% at middle management and 68.2% at junior management. While representation at junior management is adequate, middle and senior management levels remain areas for further improvement.

Training and development of previously disadvantaged staff is prioritised to ensure that they are well placed to be considered for career opportunities. Supervisory Development Learnership programmes have been implemented as a vehicle for a structured approach to supervisory level advancement.

We continued to improve our performance on the BBBEE scorecard and now have 71.25 points which secures our position as a Level 5 contributor. We continue to work with our suppliers to improve their BEE credentials, driving transformation into our supply chain.

Investing in our community

Massbuild provides support to a range of corporate social investment initiatives which focus mainly on youth development as well as feeding schemes. Our staff members are also actively involved in CSI programmes through our Staff Volunteer Programme. Worthy causes are identified within a 20km radius of our stores.

Last year Massbuild’s CSI budget was distributed as follows: Education and Community Development (65.0%); Staff Volunteer Programme (15.0%); Environmental and conservation projects (15.0%); and welfare and ad-hoc projects (5.0%).

Builders Warehouse sponsored vegetable tunnels and donated 105 tunnels to disadvantaged schools across the country. These enable schools to grow vegetables such as spinach and tomatoes and assist them to feed less privileged children. The project forms part of the Massmart feeding scheme project.

We also supported the Lapdesk programme which provides lap desks to mainly rural schools lacking desks and formal infrastructure. Massbuild donated 5,652 lap desks to disadvantaged schools across the country. Massbuild also helped build a school in Cosmo City outside Johannesburg and provided building materials and cash donations for the project.

As part of our drive to support enterprise development, Builders Warehouse continued its support of the Hot Dog Café and The Coffee Stops concepts where we sponsored ambitious, talented but unemployed youngsters to start their own businesses. This year one Coffee Stop and two Hot Dog Café franchises were opened, bringing the total to eight Coffee Stops and 24 Hot Dog Café franchises operating at selected Builders Warehouse stores.

Investing in our environment

A major achievement over the past year was the development of an auditable carbon footprint. Across Massbuild’s operations, we are now able to measure electricity consumption and have met our target of reducing this by 10.0% over the period. Two of our Johannesburg stores, North Riding and Strubens Valley, are being researched for alternatives in an attempt to take them off the grid partially or completely. Technologies being investigated are photovoltaic panels as well as wind generators.

Our new stores are built with energy efficiency as a key consideration. They utilise the latest technology in terms of design, including clear roofing panels that maximise natural light without affecting the ambient temperature of the store. Each Builders Warehouse store is also fitted with rooftop water tanks to harvest rain-water which we use to water plants in our garden centres.

Massbuild has worked closely with Eskom to set up an exchange programme to enable customers to swap their old light-bulbs for energy-efficient CFLs. There is also a strong drive to promote solar power and water-saving products in our stores. Through our Eco-wise range we help to empower our customers to better manage their water and electricity usage. We provide a complete environmentally aware offering from solar geysers to rooftop water tanks for rain-water harvesting.

Massbuild implemented a waste management programme across its stores to promote recycling. The waste management policy has been standardised nationally and reporting is accurate, consistent and auditable. Massbuild also reduces waste by using “sorters” trained in waste management who ensure that our stores recycle as much material as possible. Nationally our stores provide collection bins for fluorescent tubes, CFL’s rechargeable and standard batteries. The disposal of the non-recyclables is also auditable and in line with waste management legislation.

The Group has implemented green procurement guidelines for its merchandise. All listed suppliers are given the opportunity to join the Eco-wise programme and selected suppliers have been approached to be private brand suppliers of Eco-wise products. In total we support 300 products that are endorsed as environmentally friendly including paint, wood, lightbulbs and panel heaters. The number of environmentally friendly products continues to increase in our business each year and these product lines are promoted in our monthly catalogues with environmental benefits highlighted to customers.

Opportunities in Africa

Economic growth, boosted by the development of the tourism industry as well as the natural resources sector has driven growth in many African home improvement, DIY and building contractor markets. Hardware as a format has much potential with cement and construction materials making up a higher percentage of the customer’s basket in most African countries than in South Africa.

In Mozambique, Massbuild completed the buyout of minority shareholders in Kangela cementing its acquisition of 51.0% of the hardware chain. We have 13 Kangela stores in Mozambique and, in addition, we will seek to acquire land in attractive locations in Maputo, Tete and Vilancoulos to roll out more stores in future. We have also begun developing our first Builders Warehouse format in Maputo and we are hopeful of positive developments to have a store up and trading in 2012.

Our first Builders Warehouse in Botswana will shortly open in Gaborone and once this is bedded down, we will look to expand to other centres such as Maun and Francistown.

MASSBUILD DIRECTORATE

Grant Pattison
Chairman
Llewellyn Walters
Chief Executive
Madeline Chalmers
Supply Chain Director
Thashmi Doorasamy
HR Director
Don Frieson
Non-executive Director
Neville Hatfield
Merchandise Director
Guy Hayward
Non-executive Director
Chris Lourens
Operations Director
Alex Rymaszewski
Store Development Director
Mike Spivey
Non-executive Director
Andre Steyn
Director (Builders Express)
Andries Strydom
Director (Builders Trade Depot)
Chris Tugman
IT Director
Simon White
Financial Director
Ilan Zwarenstein
Non-executive Director

Risks and rewards

High but declining consumer debt levels, stagnant housing prices and little or no government infrastructure spending remain the biggest challenges to our business over the coming financial year. However, as our stores continue to offer value for money, great customer service and a range of products that meet consumers’ needs, Massbuild is positioned to continue to take market share in this competitive sector.

As we seek to increase our footprint nationally, finding new sites for our stores remains a challenge. Massbuild has developed a project management process that reduces the time taken between procuring suitable sites and opening the new stores to prevent this impacting our expansion plans.

Massbuild anticipated the introduction of the Consumer Protection Act for some time and has had a returns policy in place for many years. The effect of the legislation was therefore negligible.

Unfortunately, there was an increase in the number of armed robberies at our stores. We have installed drop-safes in all our stores as well as barricaded cash offices in our Builders Express Stores. All staff are provided with counselling and training.

Future outlook

Sales growth will be challenging as consumer spending remains under pressure and household debt levels high. Massbuild will continue to focus on winning market share from competitors and increasing customer spend across the three Massbuild brands. The current economic environment has not diminished our plans to increase our footprint across South and Southern Africa and future capital expenditure will be focused on new store openings as well as refurbishments.

Opportunities lie in adapting existing store formats to suit smaller towns throughout the country. The Builders Express format with its smaller retail front-end could be combined with Builders Warehouse successful builders’ yard to provide a suitable way to give customers the complete shopping experience of the larger big-box stores, but on a smaller scale.

The Walmart investment presents an opportunity for Massbuild to share its knowledge and experience with this global retailer and for us to learn key supply chain management skills. As noted above, Africa presents a major growth opportunity for the Group.