Chief Executive Officer's review

The June 2011 financial year will be forever imprinted on our minds, and marks the transition of the Massmart Group into the next phase of its spectsacular growth path – from being a strong regional player to being part of a leading global retail company.

Massmart began the financial year owned by a spread of Institutional Investors, and ended the year as a Walmart subsidiary. This brings a great deal of change from all dimensions but also brings opportunity to the Group in the years ahead.

Walmart's entry into Africa signals the increasing confidence that the global market has in Africa, South Africa, South African retailers and most significantly, Massmart.

Whilst the demands of completing the transaction were significant, the Group managed to operate in a disciplined manner and continued to implement its ambitious growth strategy. Operating disciplines were tightly managed and any mistakes made were identified and responded to with a sense of urgency.

Our main trading brands of Game, Makro, Builders Warehouse, Cambridge Foods and Saverite are in good health. Their business models, social relevance and competitive advantage remain strong and all have significant growth plans in place.

The environment within which we operate remains challenging and complex, but managing that complexity is both stimulating and rewarding.

Financial performance

Pre-transaction cost operating profits increased by 10.3%, just below the increase in sales of 11.6%, which was a reasonable performance given the economic environment that prevailed during the 2011 financial year.

At a Divisional level, Massdiscounters and Massbuild had strong performances each growing profits above 20%; Makro a more tempered 9.3% profit growth; and Masscash a disappointing 20.1% profit decline. This trading pattern and profit performance was typical of the low inflation, low interest rate environment in South Africa.

For the 52 weeks to 26 June 2011, sales increased by 11.6% (comparable sales by 5.2%), Trading Profit increased by 6.4%, Operating Profit before Transaction costs increased by 10.3% and Headline Earnings before Transaction costs increased by 10.0%.

The Walmart transaction costs significantly affected Earnings, with Earnings and Earnings per Share down 22.5% and 23.6% respectively.

Stock is up by 10.7% compared to the sales increase of 11.6%, showing an improvement in stock efficiencies.

Walmart transaction

We were delighted with the 31 May 2011 Tribunal approval of the acquisition of Massmart by Walmart. Included with the approval were four conditions, three of which Massmart had volunteered. The conditions we offered the Tribunal were, in a sense, intuitive as they represented our natural intentions to contribute positively to the environment within which we operate, and our desire to find solutions with parties with whom we disagree. During the course of a “social dialogue”, these conditions had been offered to the Opposing Parties involved in the merger approval process, but had been rejected.

Subsequently, SACCAWU, Massmart’s major representative union, lodged an appeal against the Competition Tribunal ruling and three Departments of Government lodged a review of the Tribunal process. The hearing for both has been set down on 20 and 21 October 2011.

We have begun to manage the implementation of the Tribunal’s conditions, the two most visible being the offer of re-employment of the 503 retrenched Massdiscounters’ colleagues and the R100 million Supplier Development Fund. Work has begun on both. We have appointed an executive to manage the Supplier Development Fund, Mncane Mthunzi, who joined us on 1 September 2011.

Legally, implementation of the transaction is not delayed by any appeal or review, and so Integration workstreams commenced in July 2011. The 12-person Integration expatriate team is in place, and the Integration process has got off to a successful start. Integration is a disciplined process where 155 different potential projects (toolkits) are being evaluated, approved, implemented, measured and monitored by combined teams from both Massmart and Walmart. It is expected that the Integration process will last between 18 months and three years.

It is worth noting that within the controversy generated by aspects of the transaction, we rarely disagreed with the objectives of some of the opposition, but did at times disagree on how to achieve those objectives. We remain open to partnering with anyone in the best interests of customers in the markets in which we trade, on an equal and mutually respectful basis.

Perhaps the most under-reported aspect of the Walmart transaction, is that members of Massmart’s Thuthukani Empowerment Trust for employees, 86% of whom are black and 41% of whom are women, had their shareholdings in Massmart valued at R840 million, 51% of which was realised in cash and the balance freed up to be realised at the 9,000 individual employees' discretion. Although this share scheme was criticised in some quarters at its inception in October 2006, this is perhaps one of the best examples of BBBEE in action, and one of which Massmart shareholders can be very proud.


The Group performance suggests that the South African consumer is in reasonable shape, in an environment which is enabling them to invest their savings from low non-durable goods inflation into durable goods spending. In addition, the negative inflation in durable goods has encouraged consumers to either buy more durable goods, or to upgrade to higher quality durable goods.

Market data suggests that Builders Warehouse and Massdiscounters materially increased their market shares. This however, suggests that our sales growth rates are not reflective of higher consumer spending levels and that the health and confidence of the South African consumer may be weaker than it appears.

The semi-durable goods sector, which we barely participate in, has performed well, although market shares may have moved between players.

Meaningful interpretation of the current state of the South African retail market will have to wait until the national data for July and August 2011 is released, which will give us an accurate reading for the first time in several months, during which time the prior year base was affected by the timing of Easter moving and the significance of the 2010 Soccer World Cup.

The African markets outside of South Africa have begun to recover from the global financial crisis, and despite high inflation, consumers appear to be increasing spending on durable goods.

Divisional operating review


More detail on the operational performance can be found in

Massdiscounters. Sales increased by 9.6% (and by 3.7% on a comparable basis). Sales deflation was -7.3%. Given the low comparable sales growth, this Division’s profit performance was remarkable and was achieved through effective gross margin and expense management. Even more impressive is that the African business struggled due to Rand currency strength and weak local economies, and therefore Game SA performed even better than the overall Division. Although still small, DionWired had another spectacular performance, and is changing the market within which it operates as it expands.

During the year, some historic milestones were reached. The 70,000m2 Johannesburg Regional Distribution Centre (RDC) was opened and, despite some commissioning challenges, ended the year operating smoothly. Four Game Foodco stores were opened successfully, a concept first contemplated in January 2010.

The R500 million overstock position evident after the 2010 festive period was also dealt with well and we commenced the 2012 financial year in a satisfactory inventory position.

This year the Division’s focus will be on building and executing the Foodco rollout strategy, building the final KwaZulu-Natal RDC, and Integration.

Masswarehouse: Sales increased by 10.6% (and by 6.9% on a comparable basis). Sales deflation was -0.4%. General Merchandise was the best performing category increasing sales by 14.2% with Food and Liquor sales recovering in the second half to reach growth of 8.9%.

Margins and overheads were well controlled. Given that a new Makro store was opened during this financial year, with the associated higher than average costs and pre-opening costs of R14.0 million, the Division did well to grow profits to the extent it did.

The two stores comprising Makro Zimbabwe were sold. As a consequence, we reported transaction-related losses, partly resulting from the procedural delays, and the total amount of R38.6 million was excluded from headline earnings.

The Division’s focus is on new stores, building the Fresh and retail offering, and Integration. The new supply chain executive role is developing a Supply Chain and Africa Strategy, both of which are progressing well.

Massbuild: Sales increased by 14.2% (and by 7.2% on a comparable basis). Sales inflation was 0.8%. Very pleasingly, trading profits increased by 21.0% (off a prior year profit increase of 27.0%). By the end of the third quarter, we were on track for an even better performance but were hampered by the sales weakness of the last quarter of the 2011 financial year. The good start to sales growth in the 2012 financial year indicates that perhaps the World Cup effect was larger in Massbuild than anticipated – but we have no compelling explanation for this.

Builders Warehouse continues to perform the best. Builders Express did well in its comparable stores but saw weaker sales in the acquired stores – this was primarily due to poor stock and system conversion problems. Builders Trade Depot sales remained weak, but stable. We are implementing a Project Complete strategy in Builders Trade Depot, which is working, and will be well positioned when growth returns to the building contractor market.

At a Divisional level, the integration is complete and all three formats are running off a single Divisional Head Office. Analysis is underway to consider having a single IT system across the Division.

The Division’s focus is to complete Builders Trade Depot's repositioning, build a pipeline of new stores able to serve smaller markets, expand into Southern Africa and Integration.

Masscash: Sales increased by 12.7% (and by 4.1% on a comparable basis). Sales inflation was 2.1%. Trading profit decreased by 20.1%. The year was difficult because of first deflation and then low food inflation, compounded by a competitive market. Not assisting this were several own goals, some of which were probably avoidable. From a trading perspective, sales were reasonable given the low inflation, but margins were tight as competitors traded hard and targeted our store locations.

In context though, we confronted and implemented some difficult decisions. These include converting the Gauteng and Free State retail stores to Cambridge Foods branding; completing the roll-out of the new wholesale IT systems; selling the loss-making Saverite corporate stores and installing a Gauteng DC for the Retail business. While each decision was correct, they increased expenses and hurt profits.

The Division’s focus will be on growth in both our Saverite franchises and Cambridge Foods stores, and enhancing our supply chain capacity as we expand.


More detail can be found in
Corporate Accountability Report

Corporate accountability review

In the 2011 Corporate Accountability Report I expressed concern that our accountability agenda had become cluttered and this could impact negatively on implementation quality. I also indicated that we needed to improve our understanding of how retailers can optimise their practical corporate accountability impact. As a result, we made three improvements:

  1. We expanded the corporate accountability team by appointing two group corporate sustainability project managers (including an ecologist) and a researcher. They are tasked with identifying, sharing and tracking implementation of accountability best practice across our group.
  2. We initiated a study to gain insight into stakeholder views about how we could improve our impact. The study revealed firm stakeholder opinions that we should:
    • establish clearer relevance of sustainability projects within the retail industry, social discourse and public policy contexts;
    • improve communicability of our sustainability commitment by focusing on three accountability themes;
    • avoid a ‘one size fits all’ approach by differentiating each division’s focus based on retail format, merchandise proposition and commercial model.

    It became clear that the pivotal role retailers occupy in the supply chain creates high stakeholder expectations that we use our supplier convening power and unparalleled consumer access to improve accountability in the supply chain. The result is a reframing of our accountability focus around three themes:

    • enabling sustainable supply and consumerism;
    • minimising our group environmental footprint; and
    • championing social equality initiatives.

  3. Finally, we utilised our access to Walmart by identifying opportunities to leverage their sustainability expertise. These opportunities are numerous and include areas such as sustainable agriculture, packaging rationalisation, eco-label advocacy, consumer empowerment and energy efficiency.

Through this process we did not lose sight of the need to ensure continuity of our established sustainability commitments. We were delighted to achieve a Level 3 BBBEE contributor status and be ranked the most empowered retailer in the 2011 Top Empowerment Companies Survey. This included being rated 7th of all JSE-listed companies for Employment Equity representation. (Having said this, it’s likely that our 2011/12 BBBEE score will be lower, reflecting a dilution in the Thuthukani staff shareholding and the implementation of revised Enterprise Development best practice guidelines.)

We have also been focused on developing format-specific energy intensity benchmarks that are sensitive to opportunities to improve energy efficiency in our old and new stores. One energy efficiency highlight for us was the launch of Makro Vaal, which is 25% more energy efficient than similar sized older stores and which serves as a model for future Makro stores.

I was pleased to see that the Massmart human resource community’s efforts to improve enrolment of HIV-positive staff on our Impilo treatment programme have begun to bear fruit. A total of 87% of HIV-positive staff are now enrolled, and although this is still 13% below our 100% enrolment target, it’s significantly better than two years ago. A new objective will be to concentrate on improving our testing penetration rate to at least 70% of staff.

We’re confident that we now have a better-resourced and more structured corporate accountability approach. When combined with input from Walmart, we anticipate that our efforts will be more impactful than in the past. This is not to say that there won’t be difficulties and disappointments. There will be, but we believe that we are even better equipped to deal with these as they arise.

Vision for growth 2014

Due to the distraction of the Walmart transaction, we followed an abbreviated strategy process this year and focussed on preparations for Integration. I believe the fundamental strategy remains sound and valid. The Strategic Action Plan remains focussed as:

  • Leadership and Transformation development
  • Grow core business (comparable stores)
    • Customer-focussed Trading
    • Supply Chain Development
    • Private Label Development
    • Financial Services
  • Retail Food (Cambridge Foods, Saverite, Foodco, Makro Food Retail)
  • New Categories
  • Organic growth in SA and Africa
  • Sustainability (Governance, Climate Change, BBBEE, CSI)
  • Integration

The final point of Integration is obviously new, otherwise the Strategic agenda remains unchanged, but will be enhanced by Walmart's ownership.


14 weeks to 2 October 2011
Total stores 14.7%
Comparable sales 8.0%


Massmart’s total sales increased by 14.7% for the first 14 weeks to 2 October 2011, with product inflation averaging 0.7%. Comparable sales increased by 8.0% for the same period.

With the first quarter's sales indicating a return to stability with growth in all categories and Divisions, the financial year ahead looks to be solid. Management will have to balance operating discipline with the investment in growth and the speed of Integration. We will also have to balance the sometimes divergent interests of different stakeholders.


In addition to the usual thanks to all Massmart colleagues, we would also like to thank Massmart Board members, old and new, our advisors, our Walmart colleagues, our suppliers, and our shareholders, old and new, for their advice and support over a very significant period in Massmart’s life.

Over the past year, we have engaged more than usual with Regulators, Government, Union leadership, Industry and NGOs. We have appreciated the constructive engagement and were also appreciative of the general support we enjoyed. At times we have disagreed, but in those disagreements we always learnt and, where necessary, changed our views. We thank you for your input.

To our customers, the most sincere thanks. You can rely on the fact that the entire Massmart supply chain will be focusing our attention on helping you save money, so that you can live better.

GM Pattison
Chief Executive Officer

5 October 2011