MASSBUILD DIVISIONAL REVIEW

HIGHLIGHTS OF THE YEAR

  • Sales growth of 11.9%
  • Good profit growth from great cost control
  • Our first non-South African Builders Warehouse store performed well
  • Private label strategy gaining momentum

  • Five Builders Warehouse stores acquired in February 2003
  • Three De La Rey stores acquired in June 2005, rebranded to Builders Warehouse
  • Now 28 stores
  • Operating in SA and Botswana
  • Home improvement supplies/tools/building materials
  • SM 5 – 10

  • 14 Servistar stores acquired in June 2005, rebranded to Builders Express
  • Now 27 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 29 stores
  • Operating in SA, Mozambique
  • Building materials/tools
  • LSM 4 – 8

Massbuild continued to deliver good sales and profit growth in a tough trading environment which saw further competitor consolidation. Our African expansion progressed with a new store opening in Botswana and further investment in Mozambique.

Builders Warehouse, Builders Express and Builders Trade Depot delivered a strong performance on the back of increased sales and improved efficiencies in all formats. The fully integrated Massbuild structure enables our different business units to function as part of a centralised organisation but with dedicated format resources employed in areas of strategic differences.

At Builders Warehouse, our sales growth can be attributed to specific events that were aimed at increasing customers’ spend with us. We ensured stock continuity in core ranges and offered customers a full range of products resulting in a one-stop shopping experience enabling them to complete their projects. Our focus on the trade customer has led to significant growth in the building material category in a tough economic climate. The first Builders Warehouse store outside of South Africa was opened in September 2011, in Gaborone, Botswana, and it is performing ahead of expectations.

At Builders Express, the improvement in performance was the result of focusing on the Retail basics. Simple initiatives to ensure stock availability and specific sales campaigns resulted in customers responding well to our offering, generating higher sales.

New Builders Express stores were opened in Bryanston and Amanzimtoti, and the previous Builders Trade Depot Store in Ballito was converted to the Builders Express brand.

Our Builders Trade Depot stores remained focused on offering the correct and complete range of products in all the phases of a building project. Massbuild’s roof-truss strategy was finalised by centralising operations and regionalising the manufacturing and sale of trusses resulting in market share gains. Re-introducing treating tanks and the stocking of hardwoods into the business will further reduce the operating costs of the truss plants.

In Mozambique, our fourth brand, Kangela, reported a decline in sales as a result of the cement over-supply in that country. We are planning new stores in Tete and Maputo and the extension of relevant inventory ranges into each of the regional stores. Structural changes were recently made to better manage the business and Massbuild has committed the necessary resources from an accounting, operational, merchandise and supply chain perspective to ensure profitable growth.

The Massbuild brands

Massbuild operates three main 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, focusing on delivering the core range for all phases of building projects, focusing on contractors.

Massmart acquired five Builders Warehouse stores operating in Johannesburg and Pretoria in 2003, bought and rebranded three De La Rey stores in the Western Cape in 2005 and now operates 27 Builders Warehouse stores in seven provinces in South Africa and one in Gaborone, Botswana. 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 a builders’ supplies yard. The brand is unique in that it is the only home improvement warehouse in South Africa.

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 27 home and garden Builders Express stores in four provinces that cater to home owners and provide a “filler strategy” for the Group – situated in convenient locations with aesthetically pleasing displays, customer-friendly store layouts and offering personalised service and advice.

Builders Trade Depot was formed when 34 Federated Timber stores were acquired and rebranded in 2005. Seven smaller stores have since been closed and after some conversions and acquisitions, Builders Trade Depot now operates 29 stores 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.

The Company acquired Kangela in Mozambique in 2010, and this represents our fourth brand. There are 13 Kangela outlets in Mozambique, with cement and construction materials making up a higher proportion of sales than in South Africa.

Our value proposition

Builders Warehouse and Builders Express are both pioneers in introducing retail principles to the South African home improvement and DIY sector and attaching garden centres to hardware stores. The clean, friendly and uncluttered look and feel of our stores offers customers a shopping experience traditionally not associated with the sector. Our new stores aim to introduce a ‘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 11.7% to our total sales and drove margin growth.

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

The Kangela building materials business is well placed to take advantage of the growing home improvement, DIY and building contractor markets in Mozambique. We believe that building hardware and home improvement as a format has much potential as the African middle-class grows on the back of increased investment and economic growth and development.

Our operating environment

Nationally, average house prices remained static but declined at the upper level. In addition, South African banks remained reluctant to grant residential mortgage advances without substantial deposits, affecting the number of consumers able to buy property.

The building industry also remained under pressure, with building plans approved continuing to decline. The additions and alterations markets also deteriorated, but stabilised at levels above those experienced in the midnineties. These factors combined to make it more attractive for homeowners to improve their existing houses rather than to buy a better house. Home maintenance requirements drove consumers’ purchasing behaviour and the hardware; paint and glass retail sectors saw a significant improvement towards the end of the year.

Financial performance

With comparable sales growth of 10.4% and sales inflation of 1.5%, we achieved solid volume growth of 8.9% in a tough market. Expenses have been well managed during the year with comparable expenses growing at 4.5%. Working capital has been well managed with the supplier funding gap being improved by six days and together with the improved operating performance resulted in a 26.9% increase in interest income despite lower interest rates. This growth was almost entirely offset by the high cost of investment into the African markets and the net result was a 22.7% growth in trading profit before tax, a pleasing outcome in this operating environment.

      2012
52 week
  2011
52 week
  2010
52 week
Sales Rm   8,138.0   7,271.0   6,366.9
Trading profit before interest1 Rm   389.8   315.1   260.5
Trading profit before interest as % sales %   4.8   4.3   4.1
Net finance income Rm   45.5   39.6   31.2
Trading profit before taxation1 Rm   435.3   354.7   291.7
Trading profit before taxation as % sales %   5.3   4.9   4.6
Operating profit before taxation Rm   442.7   368.5   275.7
Operating profit before taxation as % sales %   5.4   5.1   4.3
Inventories Rm   1,198.3   1,062.1   943.6
Inventory days2 days   75   74   74
Net capital expenditure3 Rm   304.9   140.8   143.2
Cash flow from operating activities Rm   209.9   (13.0)   165.4
Number of stores     84   81   76
Trading area m2   406,987   412,996   384,625
Average trading area per store m2   4,845   5,099   5,061
Number of employees     7,390   6,834   6,409
Sales per store4 R000   93,997   86,697   80,495
Sales per m2 R000   19   17   16
Sales per employee R000   1,101   1,064   993

1. Trading profit is earnings before asset impairments, BEE IFRS 2 charges, foreign exchange movements and Walmart costs.
2. The ratios have been calculated using year-end statement of financial position figures.
3. Net capital expenditure is defined as capital expenditure less disposal proceeds.
4. Sales for Kangela are excluded as the business does not have stores.
5. Definitions/explanations to the ratios and terms above can be found here.

Improving efficiencies

There was a focus on improving efficiencies through daily in-store disciplines; margin management; shrink management and expense control. Massbuild managed to contain cost increases at below inflation levels and decreased the rate of inventory shrinkage and scrapping to less than 1.0%, in line with worldclass standards. Expenses were also reined in through better staff scheduling.

The construction of the 35,000m2 Regional Distribution Centre (RDC) in Midrand, Gauteng, progressed well and it is expected to become operational in April 2013. Massbuild’s RDC team visited similar Walmart facilities in the United States to gain experience and insight into operations, especially with regard to inventory forecasting and replenishment, in order to optimise the central warehousing and distribution network.

A new SAP Forecasting and Replenishment system was rolled out across the business, leading to better stock management and improving stock availability.

In order to drive Massbuild towards its desired IT strategy, Massbuild has embarked on a project of consolidating its operations into a single hierarchy on SAP, as well as implementing SAP in Builders Trade Depot, which currently runs on the Kerridge system. This project will be complete by August 2013.

During the year ahead, Massbuild will focus on extracting efficiencies in the supply chain across our African operations.

Investing in human resources

"Massbuild aims to provide a compelling workplace for its employees..."

Finding the right people to deliver on our growth strategy will be a critical success factor as our expected store growth is aggressive. Training and development remains a priority in our human resources plan, especially at supervisory level. All team members are empowered with general product knowledge and undertake training on an ongoing basis. Massbuild aims to provide a compelling workplace for its employees and internal communication remains an important aspect of our mission to create an inspiring workplace in our stores.

We drive the culture in our organisation through the Builders Formula for Success. This culture has been defined by our staff and identifies the behaviours, practices and business principles that drive business success and those that detract from it. This is expressed as a graphic formula and so can be represented visually and verbally. This formula has become integrated into everything we do including the Walmart 3 Basic Beliefs.

The formula is measured quarterly and feedback is provided to our staff as to how we are living the Builders Formula for Success. This formula has not only added tremendous value in integrating our three main Massbuild business units from a people perspective, but has also created the platform to support our everyday business and growth strategies.

Massbuild’s monthly newsletter and monthly staff meetings give an opportunity for employees to provide feedback to management. The monthly birthday breakfasts also allow staff members to interact with the CEO and senior management at head office and provide channels for staff to generate new ideas and provide feedback to management.

We continue to encourage our staff to be tested for cholesterol, HIV, diabetes and high blood pressure through our Impilo programme. More than 370 staff members (permanent and temporary) underwent voluntary HIV testing and 58 employees are currently on antiretroviral treatment. In conjunction with Impilo, an employee-assistance programme is being launched in September 2012 that will further benefit staff by providing advice and support for psychosocial, legal and financial well-being.

Massbuild remains committed to the development and training of our staff. During the past year a total of 16,366 days of training were undertaken, not only meeting current training and development needs, but ensuring succession planning and meeting new store staff requirements internally.

A total of 3,942 permanent employees underwent training of which 81.9% were from designated groups. Courses ranged from a basic five-day induction programme, through to specialist technical skills training and a suite of management and leadership development programmes for junior through to 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.

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, 482 staff from junior non-supervisory to senior management attended financial management training and 83 managers attended an Interaction Management course, our primary leadership training for all managers.

Massbuild places a strong emphasis on health and safety training. A total of 1,205 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 24.4% at senior management level (2011: 21.5%); 52.1% at middle management level (2011: 52.8%); and 72.0% at junior management level (2011: 68.2%). While representation at junior management level 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 fairly considered for career opportunities. Supervisory Development Learnership programmes have been implemented as a vehicle for a structured approach to supervisory level advancement.

We improved our performance on the BBBEE scorecard to 59.13 points and are a Level 5 contributor. We continue to work with our suppliers to improve their BBBEE credentials, driving transformation backward 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.

Last year Massbuild’s CSI budget was distributed as follows: Education and Community Development (80%); Staff Volunteer Programme (15%); and welfare and ad-hoc projects (5%).

Builders Warehouse sponsored vegetable tunnels by donating 30 tunnels to disadvantaged schools across the country. These enable schools to grow vegetables such as spinach and tomatoes and assist them to feed underprivileged children. The project forms part of the Massmart feeding scheme project.

We also supported the Lap-desk programme which provides lap-desks to schools lacking desks and formal infrastructure, mainly in rural areas. Massbuild donated 8,520 lap-desks to disadvantaged schools across the country.

Massbuild partnered with MNet Cares and renovated a cottage at the St. Mary’s Children’s Home in Rosettenville, south of Johannesburg. We also helped build a school in Cosmo City outside Johannesburg, providing 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 Cafe and The Coffee Stops concept, where we sponsored ambitious and talented unemployed youngsters to start their own businesses. Builders Warehouse Polokwane opened a coffee shop this year and this brings the total to nine Coffee Stops and 16 Hot Dog Cafe franchises operating at selected Builders Warehouse stores.

   

Builders Warehouse, Northriding.
 
Builders Express, Bryanston.
 
Builders Trade Depot, Soweto.

Investing in our environment

"... we met our target of reducing electricity consumption by 12% across Massbuild's operations..."

Our carbon footprint is measured on an annual basis by a verification agency and we met our target of reducing electricity consumption by 12% across Massbuild’s operations over the period. This was made possible by using technologies to monitor electricity consumption in each store, enabling us to implement measures to further reduce consumption. Our new stores are built with energy efficiency as a key consideration and they utilise the latest technology, including clear roofing panels that maximise natural light without affecting the ambient temperature of the store. Each Builders Warehouse store is also fitted with water tanks to harvest rainwater, which we use to water plants in our garden centres.

Massbuild has worked closely with Eskom and has 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. Eco-wise has a complete offering – from solar geysers to rooftop water tanks for rain water harvesting.

Massbuild implemented a store-based waste management programme which promotes recycling. A waste management policy has been standardised 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; compact fluorescent lamps; rechargeable and standard batteries. The disposal of the non-recyclables is also auditable and in line with waste management legislation.

We have implemented green procurement guidelines for all merchandise. All 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 product categories that are endorsed as environmentally-friendly, including paint, timber, light bulbs and panel heaters.

Builders Trade Depot, Soweto

Opportunities in Africa

GRANT PATTISON
CHAIRMAN

LLEWELLYN WALTERS
CHIEF EXECUTIVE

THASHMI DOORASAMY
HR DIRECTOR

DON FRIESON
NON-EXECUTIVE DIRECTOR

NEVILLE HATFIELD
MERCHANDISE DIRECTOR

GUY HAYWARD
NON-EXECUTIVE DIRECTOR

CHRIS LOURENS
OPERATIONS DIRECTOR

ZANDILE MANANA
MARKETING DIRECTOR

MICHAEL SPIVEY
NON-EXECUTIVE DIRECTOR

ANDRE STEYN
BUILDERS EXPRESS DIRECTOR

ANDRIES STRYDOM
BUILDERS TRADE DEPOT DIRECTOR

CHRIS TUGMAN
IT DIRECTOR

SIMON WHITE
FINANCIAL DIRECTOR

ILAN ZWARENSTEIN
NON-EXECUTIVE DIRECTOR

The Africa team has been strengthened, with a designated merchandise manager appointed to focus on supply chain and inventory issues at a country level and a regional operations manager with sole focus on the African operations. Our learnings around stock availability; range; and regionallyrelevant marketing at our new store in Botswana will be invaluable as we plan to open a store each in Zambia and Mozambique in 2013.

Massbuild’s marketing strategy in Africa will be on store-specific promotions and relevant promotional pricing. A comprehensive action plan has been developed to ensure we are the market leader in specific categories. Suppliers will be approached to participate in weekly promotions to help grow basket size and foot traffic and the on-time delivery reliability of key suppliers is being tracked. The top 20 selling products have been identified per department and these will be monitored to ensure on-shelf availability and best price in the market.

Risks and rewards

Stagnant housing prices and little or no Government infrastructure spending remain the biggest risks to growing our business. 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 take market share in this highly competitive sector.

Unfortunately, there were a number of armed robberies at some of our stores and tragically a customer was shot and killed by fleeing armed robbers at our Rivonia store in February 2012.

Future outlook

Massbuild’s five-year plan includes roll-out of new stores, revamping or relocating others and aligning our brands to service key markets.

There are opportunities for Massbuild to benefit from the experience of Walmart and our staff will look to share knowledge and experience with the worldrecognised retailer.

As Massbuild seeks to find innovative ways to meet our customers’ needs, we will look to increase the convenience factor for our contractor customers by offering online catalogue services. Good progress has been made around the development of an e-commerce strategy to provide customers with more choice and advice, a development which will be a first for the hardware sector.