WELCOME TO OUR ONLINE ANNUAL REPORT 2011

Massdiscounters divisional review

HIGHLIGHTS
  • Achieved double-digit sales growth
  • Successfully launched Foodco offering
  • Two RDCs operational with final RDC being developed
  • First retailer to achieve a BBBEE score of over 80%

  • 20 Dion stores acquired 31 May 1993
  • Dion stores rebranded to Game stores in 2000
  • Launched greenfield DionWired concept stores in 2006
  • Now 13 stores
  • Operating in SA
  • General merchandise
  • LSM 8 – 10

  • 26 stores acquired 1 July 1998
  • Now 100 stores
  • Operating in SA, Botswana, Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia
  • General merchandise and FMCG
  • LSM 5 – 10

Although South African consumer demand was muted, Massdiscounters outperformed by posting double-digit sales growth. Game SA continued to drive the Division’s performance with an exceptional performance that saw sales growth of 10.9% with sales deflation of 7.3% which implies real growth of 18.2%.

The difficult environment resulted in a slowdown in sales growth during the financial year which was exacerbated by the high 2010 sales base created by our 40th birthday and the Soccer World Cup promotions. With consumers carefully managing their spending and debt exposure, they became more promotionally driven in their purchasing decisions undertaking pre-purchase research and carefully planning their purchases. We continue to deliver unbeatable value on the most wanted items and introduced more customers to our private label products. In this market, customers respond well to the value in our “bundle deals” where, for example, we sold a TV together with a digital decoder or a computer with a printer and we endeavour to remain top of mind among our target consumers.

In order to increase our value-offering to our Game customers, we introduced a differentiated food offering, Foodco, which provides a narrow, but relevant assortment of items. Commencing this year, we now have Foodco in four of our Game stores. Despite project complexities and timeline pressures at the pilot sites in our N1 City and Canal Walk stores in Cape Town sales in the opening month at both stores exceeded expectations and we now plan to roll out Foodco where the space allows us to do so.

Liquor stores under the LiquorMart brand will be co-located with Foodco stores and we successfully piloted LiquorMart stores at both N1 City and Canal Walk and will continue to roll these out alongside our Foodco offering.

The growth in private label sales shows how consumers have responded to our house brands. Our private label penetration increased to 13.4% of total sales with Logik now being the second biggest brand sold in our stores. Simple Choice is now the fifth largest brand in Game securing two places in the top five brands for our house brands.

At DionWired, we continued to focus on the brand’s unique market positioning and target market of LSM 8 – 10 even as we entered new territories and Massmart Annual Report 2011 83 smaller markets such as Nelspruit and Polokwane. Our approach has been on delivering better value to our selected target market and increasing market share rather than expanding our target customer market.

The Massdiscounters brands

Massdiscounters now operates two retail formats: Game and DionWired. Game is a discount retailer of general merchandise and predominantly non-perishable groceries for home, leisure and business use operating throughout South Africa and in 13 major cities in sub-Saharan Africa. During the past financial year we opened nine new Game stores, bringing its footprint to 100 stores and opened two new DionWired stores which sell middle- to upper-end electronics and appliances through 13 stores across South Africa.

Game

At Game our positioning offers customers the widest range of branded products at the best price for a given set of product specifications. Customers are presented with a wide range to choose from and are assured of the best value product for that price.

The Game business model is promotionally-driven with five million promotional leaflets distributed each week. By working closely with our suppliers and benchmarking ourselves against competitors we are able to offer our customers well-priced products representing great value.

Commencing in November 2010, four Game stores now also provide a food offering under the Foodco sub-brand and this will be rolled out at the rate of about 15 stores annually.

MASSDISCOUNTERS
FINANCIAL PERFORMANCE
    2011 2010 2009
    52 week 52 week 52 week
Sales Rm 13,332.5 12,164.9 11,206.0
Trading profit before interest3 Rm 744.0 612.8 680.0
Trading profit before interest as % sales % 5.6 5.0 6.1
         
Net finance income Rm 38.0 47.6 66.6
Trading profit before taxation3 Rm 782.0 660.4 746.6
Trading profit before taxation as % sales % 5.9 5.4 6.7
         
Operating profit before taxation Rm 749.7 586.9 651.0
Operating profit before taxation as % sales % 5.6 4.8 5.8
         
Inventories Rm 2,283.8 2,134.7 1,856.0
Inventory days days 84 85 81
         
Net capital expenditure1 Rm 336.3 285.1 212.2
Cash flow from operating activities Rm 81.6 290.6 110.5
         
Number of stores   113 102 93
Trading area m2 387,594 355,423 341,687
Average trading area per store m2 3,430 3,485 3,674
Number of employees   8,445 8,876 9,469
         
Sales per store R000 117,987 119,264 120,495
Sales per m2 R000 34 34 33
Sales per employee R000 1,579 1,371 1,183
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.

DionWired

DionWired creates an easy, interesting and interactive shopping experience offering the latest in home entertainment, computing, video and digital photographic equipment and appliances. DionWired sells complete technological solutions demonstrating in-store the interconnectivity of the latest innovations and products. The IT experts manning our in-store service centre are on hand to offer the best advice and onsite repairs and services.

Although our products are well priced, DionWired is not a discounter. Our main proposition is to offer the widest range of the world’s biggest and best upmarket brands such as Apple, Smeg, Miele, Marantz, Jamo and Onkyo to the South African middle- and higher-end consumer.

The concept has proved to be exceptionally successful and during the year under review, we expanded our operations, establishing a national footprint. We also subtly repositioned the brand to appeal to an appropriate customer segment and differentiate in a busy market place.

Operating environment

The South African retail sector showed real growth for every month of the 2011 financial year after contracting in 2009 and remaining flat during 2010. This was enabled by the macro-economic forces of record low interest rates and low national inflation. While retail businesses driven by consumer credit performed ahead of the market over the festive period, the lack of cash in the hands of consumers remained a concern for Massdiscounters. The ratio of debt to disposable income reached an all-time high of 82% during the previous financial year and although this ratio has now decreased to 78%, this suggests that the South African middle-income consumer may still be heavily burdened by debt.

Higher than normal levels of product deflation experienced by the durable goods market due to technology improvements and the strengthening of the Rand/ Dollar exchange rate impacted some categories like flat screen televisions which showed deflation of approximately 50% and laptops 30%.

Traditionally Game has been known as a “general discounter”, but our format renewal with the introduction of Foodco has pushed the brand towards a “multi-category” format. We expect the rollout of Foodco to all our stores to take six years to complete with 15 new Foodco formats being completed each year. In the short term, our dominance in general merchandise implies that most consumers will continue to view Game as a general discounter.

The Foodco proposition is centred on making food shopping easy through pre-packaging, store layout and signage with limited in-store service and a high proportion of private label. With the Foodco rollout we introduced our own Foodco private brand into the new fresh categories. Customers showed a willingness to buy Foodco-branded perishables and we have already extended the Foodco brand with the introduction of Foodco Basics, an entry-level product range.

At Game we continue to broaden and enhance our offering in hi-tech and multimedia to better service the upper LSM customers who currently seek value and have been migrating towards Game. In addition, we focused on the sports and outdoor categories and began rebuilding our strength in these areas. Housewares also showed positive growth.

We are opening Game stores in rural areas across South Africa using a rural store concept which is differentiated from our urban mall-based stores. In these outlying areas the balance between food and general merchandise is likely to be different as well as our advertising strategy and available stock.

DionWired invested in a new world-class store design aimed at facilitating customers’ purchasing and decision-making through unique pre-retailing and interactive product displays. Together with this new design, a smaller store was made possible resulting not only in lower capital and operational costs, but a superior new customer experience. The new store design and footprint now enables DionWired to expand into targeted locations faster.

DionWired focused on extending its offering of premium and exclusive brands, clearly positioning itself as the market-leading appliance and electronics store in SA.

Financial performance

Massdiscounters reported total sales of R13.3 billion representing growth of 9,6%. Comparable sales growth was 3.7% and sales inflation of 7.3% deflation was recorded. By containing comparable store expense growth at 1.6%, we were able to deliver profit before tax, excluding foreign exchange movements, of R789.5 million representing growth of 15.5% on the prior year.

On the back of 20.0% profit growth in 2010, Game SA performed exceptionally well again delivering further profit growth of 24.6% in 2011.

Softer sales performance in the second half of the 2011 financial year compared with the previous half was primarily due to the high base created by the success of our 40th birthday campaign and the World Cup.

The strength of the Rand compared with those currencies of the African countries continued to negatively impact our performance in Africa by pushing up imported product prices on the African stores’ shelves and resulting in us reporting lower Rand sales and profits from those countries. While sales from Africa contracted 23.0% in Rand terms in 2010, this year sales growth recovered to a positive 1.0% and we believe this points to the bottoming-out of our Africa segment. African sales growth in own currency was positive with double-digit sales growth of 11.4% for the year while trading profits declined 12.4% in Rand terms and 3.8% in own currency.

In both Namibia and Botswana, markets not affected by exchange rate fluctuations, returns and profitability improved over the financial period.

DionWired achieved sales growth of 18.3% with sales deflation of 19.9% therefore achieving real growth of 38.2%.

Improving efficiencies

Improving supply chain management through our three regional distribution centres (RDCs) is a key strategic initiative for Massdiscounters over the next three to five years. This will improve overall business efficiencies, reduce costs and improve stockholding for the benefit of our customers.

The Cape Town RDC performed well and now services 21 stores. The July 2010 opening of the 70,000m2 RDC in Gauteng was a major achievement for Massdiscounters and it now has 52 stores linked to it including all eight Africa road-bound stores. More stores will be linked to the Gauteng RDC during the next year taking the total to 73 stores by the end of 2012.

The building of a new 45,000m2 RDC site in Riverhorse, Durban, is underway and this final RDC will become operational during the 2012 calendar year.

To increase space productivity, space planning was deployed across the business improving the visibility of out-of-stock items. This enabled us to increase sales through better proportional merchandising and stock management.

We also put in place processes to manage vacancies, improve access control, schedule flexi-time employees and manage overtime, resulting in labour efficiencies with comparable store salary costs declining.

The addition of a Process and Systems Optimisation team was a major step forward in the way we manage our business IT systems. The team will work with divisional heads and establish a roadmap to determine demand for new IT systems and ensure that synergies across divisions are achieved.

A risk and compliance manager, senior support analyst and regional IT manager were appointed and will enhance on-site systems service to our stores and RDCs. In line with our Best of Suite IT strategy, a JDA Demand and Forecasting tool will be implemented and promotions planning and optimisation rolled out. In addition, enterprise planning as well as price and markdown optimisation modules will be implemented over the next three years.

Investing in our human resources

The success of our transformation strategy is measured on the progress in our skills development, training and employment equity. We made exciting progress on our BBBEE score recording over 80% for the first time and being the first retailer to achieve this.

We use innovative recruitment methods to assess candidates’ potential with regard to their experience and this has facilitated the employment of previously disadvantaged individuals. Our strategy is bearing fruit, with 55% of senior managers, 84% of middle managers and 94% of junior managers being black. The recruitment, development and retention of staff with scarce skills remains a challenge.

Our Retail Academy provides assessments and training to develop our leadership pipeline. The emphasis during the past year was on supervisory learnerships at NQF Level 4 and this was rolled out to four regions. Massdiscounters also participated in Wholesale and Retail SETA-funded learnerships which address scarce skills. Of the total 128 employees registered on learnerships, more than 98% were black. The huge increase in learnerships is due to the SETA offering funding for projects to address scarce skills shortages and give unemployed graduates workplace experience.

In addition, various skills programmes were offered to staff to fast-track their learning and address skills gaps. These include modules such as time management and finance for non-financial managers.

Massdiscounters again partnered the Wholesale and Retail SETA, Aboutlearning, and South African Disability Trust to provide another phase of learnerships for persons with disabilities. Of the 12 learners who successfully completed the learnership, eight were employed at our Gauteng stores. We plan to train another 44 disabled learners in KwaZulu-Natal, Free State as well as the Western and Eastern Cape.

To improve communication across the business, we engaged with the entire business to develop a set of values which will form the foundation of Massdiscounters’ corporate culture.

Investing in our community

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. Each stationery box contains enough basic stationery for a class of 50 and each year Game has added more value to the packs. The kits are estimated to cost around R1,000 each. Game donated R1.1 million in stationery kits to schools during the year under review.

Game also supports the AmaLunchbox project with the Department of Education to strengthen the national School Nutrition Programme. This involves the distribution of mobile kitchens built inside converted shipping containers. This year we invested in another 25 kitchens worth R80,000 each bringing the total sponsored to 70. These kitchens will provide 13.7 million meals per year to hungry learners. One of the ways we raise funds for the AmaLunchbox project is through our Gift Wrap service during the December festive period, with Game shoppers raising R780,000 through this initiative.

In 2009 we launched Tools to Play with the handover of custom-built units packed with educational toys to disadvantaged communities in KwaZulu-Natal. We donated 70 units worth more than R15,000 each packed with 60 educational toys and puzzles focused on early childhood development.

We also supported the Game Vodacom Wheelchair Project which provides wheelchairs to hundreds of disabled schoolchildren. We donated R1 million in wheelchairs for 400 children around the country, bringing the total number of wheelchairs donated to date to 5,000, with a value of R10.5 million. Game and DionWired also raised R1.2 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 and, through this, donated R18,500 on behalf of our employees to worthy causes.

As we have done for many years, in 2011 Game entered 40 teams made up of 200 swimmers in the Midmar Mile Company Relay. Game donates R1,000 for each swimmer who completes the race to the Midmar Mile charity bringing this year’s donation to R200,000.

We have sponsored eight top-performing learners from Umlazi Comtech School on full bursaries for the past five years. This year, six of the learners will complete Grade 12. Those who achieve an 80% average in Grade 12 may also receive a bursary to attend a tertiary institution to study a degree of their choice. We spent R88,000 on this initiative.

DionWired upgraded the learning environment of more than 100 blind and partially-sighted learners from Filadelfia Secondary School. We sponsored the school with state-of-the-art computer equipment and specialised software to the value of R80,000 to help these learners.

Learners at 10 special-needs schools around the country received hi-tech Smart Boards that revolutionise special-needs education from DionWired. Our R350,000 investment also provided a massive pre-loaded resource library enabling teachers to tap into a wealth of lessons that have been created using special software tailor-made for children with learning disabilities.

Our Foodco stores each have a relationship with a local non-profit organisation and food that has reached its sell-by date is made available for donation under careful supervision. All food types excluding meat are considered. A total of R630,000 worth of food products was donated.

To celebrate Game’s 40th birthday in 2010, Game committed to planting indigenous trees as part of a green initiative. Working with the Wildlands Conservation Trust, more than 13,000 trees to the value of R322,000 were planted in more than 48 disadvantaged schools in rural locations across KwaZulu-Natal.

Investing in our environment

We continued to drive energy efficiencies at our stores and warehouses with a particular focus on using the latest technologies in our lighting and cooling systems. The majority of cathode ray tube TV screens have been replaced with energy-efficient LCD screens and our Gauteng RDC operates with motion detectors that operate the lighting, reducing our energy consumption. Our three RDCs will use waste management service providers, reducing emissions and consolidating waste.

As consumers become more aware of their choices and their impact on the environment, we aim to launch an energy-wise initiative in the major appliance category during 2012. We also began showing the environmental specifications of products in our advertising pamphlets so that consumers can make more informed choices.

Opportunities in Africa

Our strategy is to grow our footprint in Africa by investing in new countries and extending our store base in countries in which we already operate. We plan to open another seven stores on the continent in the next three years.

In Nigeria, two new Game stores will be opened in Enugu and Kano and we are working on another five potential store sites. The fi rst of three stores in Luanda, Angola, should be finalised in the next fi nancial year and we will also look at increasing our store presence in Zambia, Mozambique and Ghana. Other markets on our radar include the Democratic Republic of Congo, Senegal and Cameroon.

We will introduce Foodco offerings in the coming financial year into our Game stores in Maputo, Mozambique, Lusaka and Zambia.

The African countries in which we trade felt the lingering effects of the global downturn during the reporting period and in particular, the reduction in donor funding. Many of our customers experienced the impact of rising inflation especially in food and electricity. Exchange rate fluctuations and in particular the strength of the Rand over the past two years has made pricing in African markets expensive. Over the last two years the basket of African currencies we are exposed to weakened by 40% against the Rand. This affected the volume of goods sold especially high-ticket items which became very expensive. However, we maintained our margins by focusing on expenses.

We continue to support local suppliers where appropriate and commenced a process of import replacement into African countries.

Risks and rewards

Through Massmart we engaged in various forums and workshops around the implementation of the Consumer Protection Act (CPA). Massdiscounters is well prepared, having set up a process to ensure that CPA-related customer queries or complaints are quickly addressed and resolved. All affected store employees and management have been trained on the effect of the legislation.

MASSDISCOUNTERS DIRECTORATE
Grant Pattison
Chairman
Jan Potgieter
Chief Executive
Don Frieson
Non-executive Director
Richard Fuller
Store Operations Director
Ann Hansen
Financial Director
John Hart
IT Director and Logistics Director
Guy Hayward
Non-executive Director
Richard Millson
Marketing Director
Rogany Ramiah
Human Resources Director
Mike Spivey
Non-executive Director
Llewellyn Steeneveldt
Non-executive Director
Mark Turner
Africa Director
Tyrone Vieira
Merchandise Director
Ilan Zwarenstein
Non-executive Director

The CPA affected the way we buy and engage with our vendors, both locally and internationally, and has placed more administrative onus on the business in terms of the management of our Private Brands. We also established a quality control office within our merchandise division and activated an electronically controlled and managed supplier management process.

Changes in the area of duties and excise payment impacted our pricing of merchandise in our African stores with Malawi being particularly affected. There was also a growing trend for African countries to introduce local quality standards on imported products.

Our business remains susceptible to foreign exchange rate fl uctuations and we manage this by regularly repatriating cash, undertaking currency sensitivity analyses and maintaining optimal funding and management of the foreign operations’ balance sheets.

Logistics continues to be a challenge on the continent with port congestion and bureaucratic clearing processes affecting planning and in-stock rates. However, we regularly monitor and re-evaluate our stock availability and pricing to manage this risk.

Future outlook

With surging inflationary pressures in the areas of commodities, fuel and utilities, job losses as well as increased industrial action set to negatively affect the South African economy, the likely outlook for retail is one of muted single-digit growth into 2012.

Next year, 10 new Game stores will open in South Africa, two new stores will begin trading in Nigeria and five new DionWired stores will open in South Africa. We expect our aggressive growth strategy to take market share and deliver our low-cost, low-margin, high-volume business model to more customers in a highly competitive retail sector.

At DionWired our revamped stores and focus on customer service as well as after-sales guarantees will position the brand on a national basis.

At Game we will continue to seek out and introduce the world’s leading consumer brands alongside our aggressive roll-out of Private Label to ensure that we offer the range of products required to retain and grow our customers.