WELCOME TO OUR ONLINE ANNUAL REPORT 2011

Masscash divisional review

HIGHLIGHTS
  • Cambridge retail format becoming a single, national identity
  • New Cambridge stores performing well
  • Wholesale division-wide IT system roll-out complete
  • Private label sales growth of 25%

  • 14 CCW stores acquired in June 1998
  • 22 Brown and Weirs stores acquired in July 2010
  • Two chains combined under CBW format from July 2001
  • Now 81 stores
  • Operating in SA, Botswana, Lesotho, Mozambique, Namibia, Swaziland
  • Food/liquor/groceries/ethnic cosmetics
  • LSM 2 – 6

  • Six Jumbo stores acquired in April 2001
  • Now six stores
  • Operating in SA
  • Food/groceries/ethnic cosmetics
  • LSM 2 – 6

  • Now 18 stores
  • Operating in SA
  • LSM 2 – 5

  • 378 members acquired 1 March 1992
  • Now 605 members and 661 outlets
  • Operating in SA, Botswana, Lesotho, Namibia, Swaziland
  • Food/groceries
  • LSM 2 – 6

Masscash delivered good sales growth in a very difficult market. Increasing food inflation and the impact of job losses within its key consumer markets made for a challenging operating environment. In addition, management attention was required to focus on implementing the new in-store IT system in the Wholesale Division and aggressively expanding the Cambridge retail footprint.

After spending R260 million on new acquisitions and refurbishments in our Retail Division, turnover almost doubled from R1.8 billion to R3.1 billion. Notable retail acquisitions included buying controlling interests in Savemore and JDs Supermarkets and also acquiring a further 25% in Thaba Wholesalers, all in support of our aggressive growth strategy. In addition, we opened two new retail stores in Gauteng and one in Nongoma, KwaZulu-Natal. We also rebranded six existing stores under the Cambridge Food brand with the balance of our retail stores scheduled to be rebranded by the end of the next financial year. We are in the process of acquiring the 16-store Rhino Group which trades in KwaZulu-Natal and the Eastern Cape and this acquisition remains subject to Competition Authority approval.

The Masscash brands

Masscash consists of wholesale food and cosmetics businesses as well as retail food outlets both of which target the lower LSM groups. Our Wholesale Division consists of CBW Holdings, Shield and Jumbo Cash & Carry as well as a number of independent wholesalers operating under their own brands while our Retail Division is being consolidated under the Cambridge banner.

CBW wholesales food, liquor, groceries and cosmetics in bulk to independent general dealers, government feeding schemes, franchise members, small traders and hawkers in peri-urban and rural areas within Southern Africa. Jumbo sells mainly cosmetics, toiletries and hair-care products to individual customers and independent general dealers. Shield is a voluntary buying association that buys products in bulk on behalf of 456 members who own wholesale or retail food businesses in South Africa, Botswana, Namibia and Swaziland.

We offer wholesale customers with more formal operations the ability to trade under national retail brands such as Saverite, Multisave, Powersave and Liquorland. Our marketing team offers wide-ranging support to these supermarkets and bottle stores assisting owners with marketing initiatives such as designing of leaflets, signage and implementing national television and radio advertising campaigns.

On the retail side, we are consolidating our retail outlets under the Cambridge brand. Fresh service departments, consisting of an on-site bakery, butchery and fresh fruit and vegetable offering form an important component of our Cambridge retail offering.

MASSCASH FINANCIAL PERFORMANCE
    2011 2010 2009
    52 week 52 week 52 week
Sales Rm 19,623.7 17,418.0 15,215.7
Trading profit before interest3 Rm 374.8 469.1 481.9
Trading profit before interest as % sales % 1.9 2.7 3.2
         
Net finance income Rm 16.9 26.5 47.7
Trading profit before taxation3 Rm 391.7 495.6 529.6
Trading profit before taxation as % sales % 2.0 2.8 3.5
         
Operating profit before taxation Rm 404.6 498.4 533.4
Operating profit before taxation as % sales % 2.1 2.9 3.5
         
Inventories Rm 1,613.6 1,354.4 1,077.6
Inventory days days 33 31 29
         
Net capital expenditure1 Rm 244.0 95.6 117.7
Cash flow from operating activities Rm 93.3 154.1 308.0
         
Number of stores   105 97 79
Trading area m2 351,929 321,210 270,324
Average trading area per store m2 3,352 3,311 3,422
Number of employees   9,276 8,395 5,931
         
Sales per store R000 158,289 148,927 163,047
Sales per m2 R000 47 45 48
Sales per employee R000 2,116 2,075 2,565
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. Shield is shown as average sales to each independently owned outlet (ie this represents only a portion of the outlet's sales).
5. Definitions/explanations to the ratios and terms above can be found here.

Our value proposition

All our stores apply the philosophy of supplying the right range of products at competitive prices to low- and middle-income customers. We keep costs down by employing a no-frills cash and carry warehouse format coupled with basic distribution centres that supply our private label products and general merchandise ranges. Our private label food brands, Econo, Heritage and Cambridge, offer our customers exceptional value and the assurance of stringent quality and safety controls. Our retail stores are well located, close to high traffic commuter nodes and offer the best quality and affordable prices.

Operating environment

The loss of approximately one million jobs during the 2009 economic recession continued to affect our customer base. This, coupled with low sales inflation of 2.1% and expense inflation of 7.0%, resulted in a decline in the Wholesale Division’s profitability.

Many of our customers rely on social grants to fund their purchases and government’s increased expenditure on grants from 3.2% of South Africa’s Gross Domestic Product to 3.5% was therefore welcomed.

We face increased competition in our wholesale market with the major retail chains continuing to target the lower LSM sector aggressively.

The Saverite brand has grown to 80 members purchasing R350 million through our wholesale channel. We plan to grow this to 200 members over the next three years.

Our retail offering made good progress bolstered by the decision to bring all retail stores under the Cambridge brand. The contemporary design appeals to our customers and was first rolled out to all new stores and then to older stores. The refurbishment programme is now 60% complete. This includes JDs and Savemore with rebranding of all remaining stores scheduled to be completed during the next financial year.

The retail division plans to open a dedicated dry grocery distribution centre in Gauteng which will service the Cambridge stores in the region while a central meat processing plant will be opened in KwaZulu-Natal. Both facilities will improve operating efficiencies as well as ensure a more consistent level of quality and stock availability in our stores.

Our Private Label programme reported 25% sales growth and private brands outgrew national brands by 11.7%. We launched 54 new Private Label products with Econo, Heritage and Cambridge accounting for sales of R1 billion. By sales, the Econo brand is now the largest Private Label brand within the Massmart Group.

Financial performance

The division reported total sales of R19.6 billion representing a growth of 12.7%. Comparable sales growth was 4.1% and our annual sales inflation was 2.1%. Acquisitions during the year accounted for the significantly higher total compared with comparable sales growth.

The low comparable sales growth coupled with cost growth associated with the aggressive investment in structure and capacity in the Retail Division caused trading profit before interest and taxation of R374.8 million to be 20.1% lower than the previous year.

Net interest received declined due to lower average interest rates and funding tactically higher stock levels for part of the financial year. Debtors remain well controlled while stock levels increased by 19.1% to R1.6 billion representing 30 days’ cover.

Total capital expenditure of R259.3 million for the year was significantly higher than the previous year’s
R98.3 million mainly as a result of the acquisitions and refurbishments discussed above.

Improving efficiencies

Masscash serves its customers through low-cost stores located in areas which are easily accessible. Our low-cost mindset is essential for maintaining competitive pricing ultimately resulting in superior net margins.

The store-by-store rollout of our new Arch point-of-sale IT system to our wholesale stores was successfully completed before the year-end peak trading period. All 80 wholesale stores now operate off one central stock file ensuring that information passed through to our data warehouse and financial reporting systems is consistent and reliable. With this foundation now in place, we will work on developing an IT system solution for our Saverite franchise that enables our franchisees to use an easy and effective buying process from both the Shield buying group and our cash and carry stores.

The IT Division’s focus will be to systematically upgrade our Cambridge food stores to the Arch point of sale platform. The KwaZulu-Natal region will be completed during the new financial year.

Investing in our human resources

In support of Massmart’s Impilo programme, we launched the Masscash HIV and Aids programme. Many of our stores are in rural areas where the rates of HIV are high and the number of HIV-positive Masscash employees on an HIV management programme increased from 233 to 487. We offered voluntary counselling and testing services to our 5,660 employees of whom 49% chose to be tested.

We continued to invest significant resources in up-skilling and training our staff. Employees attended courses ranging from soft skills development to diversity awareness and health and safety. Adult Basic Education and Training remains an ongoing offering for our employees and we granted 267 learnerships to black staff members.

We have adopted a multi-faceted approach to transforming our business including aligning our training interventions with succession planning and talent management. Masscash achieved a Level 5 BBBEE score of 65% independently audited by Empowerdex. Finding appropriate equity candidates for senior management positions remains a challenge with 24.1% of our senior managers and 41.5% of professionals and middle-managers being black. Masscash employs 63 people with disabilities.

We continue to run a successful mentoring programme and four previously disadvantaged graduates have been successfully promoted to more challenging roles. Our Business Processing team has been transformed with all analysts being black as well as the majority of the support team.

We have an ownership mentality in our national, regional and store-level leadership teams, all of whom are empowered to trade and are incentivised through profit shares. Minority equity partners who have sold a majority share in their businesses to Masscash are accommodated and continue to operate within them thus retaining important entrepreneurial talent in the business.

We also extend credit facilities to black wholesale customers on attractive terms and continue to assist the development of small- and medium-sized black business through various banner groups who are given preferential pricing and special promotions to assist their trading.

Investing in our communities

Masscash supports projects that focus on building food security and improve educational outcomes for disadvantaged students.

Thousands of children continue to receive a balanced meal at container kitchens sponsored by Masscash. During the reporting period, we donated 19 kitchens to schools throughout the country adding to the 33 already in place. Each container costs about R67,000 to convert and a Masscash store then "adopts" a container and provides food on an ongoing basis for volunteers to prepare and distribute to hungry schoolchildren.

Masscash donated a library to the Mpumelelo School in Ivory Park near Johannesburg as well as R250,000 to the Wildlands Trust in support of their Treepreneur project which provides food in exchange for indigenous trees to reforest areas and create carbon credits.

Staff members continue to volunteer their time on several charitable projects.

Opportunities in Africa

For several years Masscash has had a presence in Namibia and Botswana and, as a first step into Portuguese-speaking Africa, we acquired the Kawena group of stores in Mozambique. We intend to use this as a base to develop a wholesale and retail footprint in the rest of the country. Our operations in Botswana experienced another difficult year as the political and economic situation in neighbouring Zimbabwe normalised and cross-border demand decreased.











MASSCASH DIRECTORATE
Grant Pattison
Chairman
Robin Wright
Chief Executive
Jane Bruyns
HR Director
Jay Currie
Retail Director
Neville Dunn
Operations Director
Don Frieson
Non-executive Director
Guy Hayward
Non-executive Director
Dino Holmes
Financial Director
Pearl Maphoshe
Non-executive Director
Mike Marshall
Business Systems and Process Director
Mike Spivey
Non-executive Director
Llewellyn Steeneveldt
Non-executive Director
Ilan Zwarenstein
Non-executive Director

Masscash intends to expand into other African countries once we have bedded down our existing operations.

Risks and rewards

Continued high unemployment, low inflation in commodities and increased competition from retailers penetrating the lower LSM groups continue to pose challenges for Masscash. We are confident that the Masscash cash and carry format, underpinned by a low-cost philosophy, will continue to play a significant role in the South African food supply chain.

Service departments and perishable categories account for an increasingly large part of our customers’ grocery baskets. This presents an opportunity for us to grow in these areas and build a business that differentiates itself from existing national players. Cambridge as a single, powerful national retail brand will also have a competitive edge over other operators.

Uncertainty around liquor legislation continues with many of our stores battling to get licence applications processed. Periodic outbursts of xenophobia remain a concern as many of our customers are foreign nationals.

Future outlook

The LSM 2 – 6 market remains highly fragmented but Masscash is well positioned to offer new retail formats and expand our current footprint to better supply food, cosmetics, liquor, cigarettes and cellular phones to lower-end consumers. Future growth will focus on building our Retail Division, expanding the wholesale range to include meat as well as fruit and vegetables, growing the franchise and Banner Group formats, as well as expanding into Africa. Our strategy is to open 10 Cambridge stores each year, in addition to the Rhino acquisition, as we seek to grow our footprint nationally and into the continent.