MASSCASH DIVISIONAL REVIEW

HIGHLIGHTS OF THE YEAR

  • Wholesale stable and performing well
  • Cambridge Food continued to grow in competitive market
  • Progress made with Food Retail offering in Wholesale
  • Growth of franchise brands, especially Saverite supermarkets

  • 14 CCW stores acquired in
    June 1998
  • 6 Jumbo stores acquired in
    April 2001
  • 22 Brown and Weirs stores acquired in July 2010
  • Two chains combined under CBW format from July 2001
  • Now 80 Masscash Wholesale stores
  • Operating in SA, Botswana, Lesotho, Namibia, Swaziland
  • Food/liquor/groceries/ethnic cosmetics R LSM 2 – 6

  • 15 Rhino Cash and Carry Group stores acquired 1 March 2012
  • Now 43 stores
  • Operating in SA
  • LSM 2 – 5

  • 378 members acquired
    1 March 1992
  • Now 495 members and
    552 outlets
  • Operating in SA, Botswana, Namibia, Swaziland
  • Food/groceries
  • LSM 2 – 6




Jumbo, Crown Mines

 

 

"We have adopted a multi-faceted approach to transforming our business including aligning our training interventions with succession planning and talent management."

During the period Masscash continued to invest further in its Retail business, in line with its strategy to target Food Retail at the lower LSM groups. Both Divisions have carved out niches for themselves in a highly competitive market as they seek to o er consumers the best value. Masscash is now positioned to deliver an attractive Retail Food proposition based on everyday low prices through high-volume low-cost stores positioned both in and outside prime township shopping mall sites and major commuter nodes.

Retail Division

In the three years since it launched, Cambridge Food has grown into a business with 43 stores and an annualised turnover in excess of R5 billion. We plan to double this over the next five years through new store openings and the growth of our existing stores.

Some of our competitors responded to the growing presence of Cambridge Food with aggressive pricing strategies, but with our low-cost model Cambridge Food continued to provide low prices on the items that matter most to our customers.

Cambridge Food focused on delivering a consistent and value-driven brand message to all our customers through several campaigns and at all times giving customers a compelling deal.

Marketing campaigns created in-store excitement and contributed to the building of the Cambridge Food brand leading to increasing spontaneous awareness of the brand and substantial improvements in our price perception.

The store development team made significant progress in designing a store prototype that requires less capital investment.

Effective March 2012, we completed the acquisition of the Rhino Cash and Carry Group, which gave us 15 additional stores located mostly in southern KwaZulu-Natal and the Eastern Cape. We opened five new stores and converted a further two stores to the Cambridge Food brand, and closed two small stores in keeping with our focus on larger format stores. We expect to open four new Rhino stores in the next 18 months.

Wholesale Division

Traditionally, the lower LSM markets have not been served well in the Food Retail category. Most of our wholesale customers, many of whom are spaza shop owners, are not geared to sell fresh produce to their customers, lacking the necessary skills and infrastructure, such as fridges. We believe however, that this is rapidly changing with the increase in electrification of township and outlying areas.

We have therefore continued to invest in building the Food Retail category so that we increase our share of our customersí basket.

Masscash purchased the remaining minority shareholding of Rahme, our Johannesburg-based fruit and veg distribution business and took control of all operational aspects. Rahme now forms a key part of the Groupís produce initiative being run as Massfresh.

The Saverite franchise base increased to 104 stores with a healthy pipeline of new stores. Our focus is on enhancing our Food Retail offering; launching a Saverite private label; and focusing on distribution capability to drive efficiencies for us and our customers.

To kick-start the establishment of our Saverite franchise business, in 2010 we bought 14 Score stores across the country. After experiencing difficult trading in almost all the stores, we have now sold or closed most of these stores.

After it failed to deliver on expected supply chain efficiencies, we are in the process of selling the Mozambique-based business, Kawena, back to its original shareholders. The assets and liabilities have been classified as held for sale in the statement of financial position. We believe however, that opportunities remain for Masscash and the Kawena owners to work together in the areas of logistics, distribution and warehousing in that country. We are building a cash and carry store in Xai Xai that should open during 2013.

The Masscash brands

Masscash consists of a Wholesale Division with cash and carry food and cosmetics businesses and Retail food outlets which target the lower LSM groups. Our Wholesale Division consists of CBW Holdings, Jumbo Cash and Carry, Trident, Cellshack and Shield whilst our Retail Division is consolidated under the Cambridge Food banner and the Rhino Cash and Carry Group.

CBW and Trident wholesale 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 495 members who own wholesale or retail food businesses in South Africa, Botswana, Namibia and Swaziland.

We offer wholesale customers with formal operations the ability to trade under national retail brands such as Saverite, Multisave, Powersave and Liquorland. Our marketing team offers 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, all our outlets are consolidated under the Cambridge Food brand. Cambridge Foodís mission is to help its customers save money every day so that they can live better. Food Retail service departments, consisting of an on-site bakery, butchery and fresh fruit and vegetable offering form an important component of our Cambridge Food retail offering.

Our value proposition

All our stores apply the trading philosophy of supplying the right range of products at competitive prices to low- to middle-income wholesale 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 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 stores are conveniently located and offer the best quality and affordable prices.

Operating environment

During the past year national employment increased marginally by 1.5%; real wage growth measured in at 3.4%; and there was a 5.5% increase in the number of social grant recipients, coupled with a nominal increase of 5.3% in grant payouts. These factors helped buoy consumer spending in the lower-income groups. Although CPI is currently within the 4% ñ 6% range, currently high international prices for grains will flow into the South African food market, including proteins, and we expect food inflation to increase, possibly into low double-digits. This will put lower-income consumers under pressure. Growth in real wages, employment and social grant payouts is expected to slow in 2012/13, but to remain positive.

Food inflation continued to positively influence our trading results during the period assisting sales and margin growth.


Financial performance

    2012
52 week
  2011
52 week
  2010
52 week
Sales Rm 22,894.8   19,623.7   17,418.0
Trading profit before interest1 Rm 281.2   374.8   469.1
Trading profit before interest as % sales % 1.2   1.9   2.7
Net finance income Rm 21.0   16.9   26.5
Trading profit before taxation1 Rm 302.2   391.7   495.6
Trading profit before taxation as % sales % 1.3   2.0   2.8
Operating profit before taxation Rm 273.9   404.6   498.4
Operating profit before taxation as % sales % 1.2   2.1   2.9
Inventories Rm 1,954.3   1,613.6   1,354.4
Inventory days2 days 34   33   31
Net capital expenditure3 Rm 314.2   244.0   95.6
Cash flow from operating activities Rm 586.9   93.3   154.1
Number of stores   123   105   97
Trading area m2 382,101   351,929   321,210
Average trading area per store m2 3,107   3,352   3,311
Number of employees   11,245   9,276   8,395
Sales per store4 R000 160,762   158,289   148,927
Sales per m2 R000 52   47   45
Sales per employee R000 2,036   2,116   2,075

1.  Trading profit is earnings before asset impairments, BEE IFRS 2 charges, foreign exchange movements, loss on disposal of business, assets classified as held for sale 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 Shield, Cellshack, Saverite and Kawena are excluded as they do not have stores.
5. Definitions/explanations to the ratios and terms above can be found on here.


The Division reported total sales of R22.9 billion, representing growth of 16.7%. Comparable store sales increased by 11.6% with estimated product inflation of 6.1%.

This Division traded hard in a competitive environment and invested heavily in Food Retail stores, skills, distribution, IT systems and brand-building. This investment came at a cost, compounded by some operational errors and a failed small acquisition. Trading trends in the final quarter to June 2012 were encouraging and both the Wholesale and Retail parts of this Division are poised for growth. We look forward to improving profitability from the Wholesale Division, bolstered by food inflation, whilst investing for growth in the Retail Division. The low comparable sales growth, coupled with cost growth associated with the aggressive investment in structure and capacity in the Retail Division, cause trading profit before taxation of R302.2 million to be 22.8% lower than the prior year.

Total capital expenditure of R317.7 million for the year was significantly higher than the prior yearís R259.3 million mainly as a result of the acquisitions and refurbishments discussed above.

Improving efficiencies

Extracting efficiencies remains a key focus of the Masscash business, with the implementation of an integrated stock system planned to improve invoicing accuracy, remove manual interfaces and result in major cost savings in our distribution centres. The system has been successfully rolled out to all Wholesale and Retail stores, with the final roll-out into Gauteng in the coming financial year.

We successfully piloted an enhanced buying functionality for Saverite members and pilot tested the integration of cash and carry and Shield deals into the Saverite membersí buying system, giving them the ability to order inventory off their system. Once all enhancements have been made, this will greatly improve Saverite membersí buying and administration processes.

Our regional distribution centres have tight physical controls and efficiencies have been improved through the input of Massdiscounters and Walmart experience and learnings.


Cambridge Food, Baragwanath Hotel, Soweto

ATTENDED COURSES RANGING FROM BASIC RETAIL TRAINING TO SOFT SKILLS DEVELOPMENT AND DIVERSITY AWARENESS, TO HEALTH-AND-SAFETY AND INFORMATIONTECHNOLOGY TRAINING

Investing in our human resources

We continued to invest significant resources in up-skilling and training our staff. In total 683 employees attended courses ranging from basic retail training to soft skills development and diversity awareness, to health-and-safety and information-technology training. Adult Basic Education and Training remains an ongoing offering for our employees and we granted 284 learnerships to black staff.

Culture training was a Walmart priority for the year and we successfully trained the entire leadership team to roll out the culture awareness programme to all stores.

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 score at 59.5 points, as verified by Empowerdex. Finding appropriate equity candidates for senior management positions remains a challenge, with only 24.1% of our senior managers being black and 41.5% of professionals and middle-managers. Masscash employs 63 people with disabilities.


Cambridge Food,
Baragwanath Hotel, Soweto

We continue to run a successful mentoring programme and during the current period nine previously disadvantaged graduates were successfully promoted to more challenging roles. Our Business Process team has been transformed, with all analysts being black as well as the majority of the support team.

During the next financial year the first Cambridge Food learnership grants will allow 80 unemployed people to train in basic retail skills and 50 currently employed staff to enrol in a programme geared for supervisory roles in the areas of receiving, front office and supermarkets.

In support of the Massmart Impilo programme, we launched the Masscash HIV/Aids programme. Many of our stores are in rural areas where HIV infection rates are high and the rate of HIV-positive Masscash employees on an HIV management programme increased from 487 to 696, partly due to an increase in our staff complement through acquisitions. We offered voluntary counselling and testing services to all our employees, of whom 14.3% chose to be tested.

We have an ownership mentality in our national, regional and store leadership teams, all of whom are empowered to trade and who 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 with us, thus retaining important entrepreneurial talent in the business.

We 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 stores.

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 a container kitchen sponsored by Masscash. During the financial year we donated 15 more kitchens to schools and community centres throughout the country, adding to the 52 already in place. Each container costs about R67 000 to convert and a Masscash store then ëadoptsí a container and provides a safe and hygienic food preparation environment for volunteers to prepare and distribute food to hungry school children. Cambridge Food partnered on a pilot basis with Foodbank, an NGO that distributes food that has passed its sell-by date but which is still safe to eat, to the underprivileged.

GRANT PATTISON
CHAIRMAN

NEVILLE DUNN
DIVISIONAL MANAGING DIRECTOR OF MASSCASH WHOLESALE

KEVIN VYVYAN-DAY
DIVISIONAL CHIEF EXECUTIVE
OF CAMBRIDGE FOODS

JANE BRUYNS
HR DIRECTOR

DON FRIESON
NON-EXECUTIVE DIRECTOR

GUY HAYWARD
NON-EXECUTIVE DIRECTOR

DINO HOLMES
FINANCIAL DIRECTOR OF MASSCASH WHOLESALE

PEARL MAPHOSHE
NON-EXECUTIVE DIRECTOR

EBEN MARE
FINANCIAL DIRECTOR OF CAMBRIDGE FOODS

MIKE MARSHALL
BUSINESS SYSTEMS AND
PROCESS DIRECTOR

JON MARTINEK
MERCHANDISE DIRECTOR

MIKE SPIVEY
NON-EXECUTIVE DIRECTOR

LLEWELLYN STEENEVELDT
NON-EXECUTIVE DIRECTOR

ROBIN WRIGHT
GROUP FOOD EXECUTIVE

ILAN ZWARENSTEIN
NON-EXECUTIVE DIRECTOR

Masscash also funded and assisted in the construction of 32 hawker stands and a covered walkway for the local hawkers trading outside the Mabopane Cambridge Food store.

Store-specific community outreach initiatives included providing food for a school for disabled children, providing soup to customers and engaging with the local police forces. Cambridge Food also hosted 11 cake-decorating competitions for local pre-primary schools across the country, painted the Greyville Pre-primary School in KwaZulu-Natal and sponsored two school signs.

Opportunities in Africa

For several years Masscash has traded in Namibia and Botswana and our operations have performed well. We plan to expand our presence in Mozambique through a store in Xai Xai and use this as a base to develop a wholesale and retail footprint in the rest of the country.

Masscash intends to expand into the rest of Africa once we have bedded down our existing operations.

Risks and rewards

The roll-out of our Food Retail offering was accompanied by a focus on food safety. A food safety management system was implemented and training was conducted in all stores.

All private label products include a customer care number and calls are directed to a call centre. We plan to develop a framework for the management of all customer complaints and compliments.

Future outlook

We anticipate a continuation of the aggressive trading amongst the corporate food retailers serving the low-income customer. However, we are cautiously optimistic about our growth over the next year. The LSM 2 ñ 6 market remains highly fragmented, and Masscash is well-positioned to offer new retail formats and to expand our current footprint to better supply food, cosmetics, liquor, cigarettes and cellular to lower-end consumers.

To ensure future growth, Masscash will focus on building its Retail Division, expanding the wholesale range to include meat as well as fruit and vegetables, growing the franchise formats and expanding into Africa. Our strategy is to open 10 more stores through our Rhino acquisition each year as we seek to grow our footprint nationally. The Company will also seek to develop the quality and depth of its new store pipeline and the speedy conclusion of binding agreements to secure approved sites.


Jumbo, Crown Mines