MASSDISCOUNTERS DIVISIONAL REVIEW

HIGHLIGHTS OF THE YEAR

  • Opened 13 new stores, our most ever
  • Increased Foodco stores from four to 20
  • Grew sales in Africa by 23.1% and DionWired by 37.9%
  • Piloted online shopping at DionWired

  • 26 stores acquired 1 July 1998
  • Now 107 stores
  • Operating in SA, Botswana, Ghana, Malawi, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia
  • General merchandise, Food Retail and FMCG
  • LSM 5 – 10

  • 20 Dion stores acquired 31 May 1993
  • Dion stores rebranded to Game stores in 2000
  • Launched greenfield DionWired concept stores in 2006
  • Now 15 stores
  • Operating in SA
  • General merchandise
  • LSM 8 – 10

Against the backdrop of global economic uncertainty, the weakness of the South African currency and ongoing product deflation, Massdiscounters again gained market share and recorded double-digit sales growth. We delivered our highest trading profit before tax (excluding foreign exchange movements) of R813.0 million, representing growth of 4.0% on the prior year.

Management’s attention was focused on the opening of new stores across the Division. We opened seven Game SA stores, our second Game store in Nigeria and DionWired extended its footprint with a further five stores in South Africa. In addition, 20 Foodco stores are now operational. This was the highest number of stores opened in one year by Massdiscounters.

During the year, we rolled out our differentiated food offering, Foodco, which provides a narrow, but relevant assortment of items. This roll-out extends to both new stores and the conversion of existing stores. We managed to achieve this while stabilising and improving the supply chain for perishable and fresh goods. The Foodco format has enjoyed broad customer acceptance and we have seen much success, particularly in stand-alone locations and sites that cater to the value-seeking consumer.

LiquorMart was included with the Foodco format renewal to complete our offering and increase foot traffic to our general merchandise stores. We now have six LiquorMart stores, which are performing in line with expectations. Liquor licence approvals by the authorities remain a challenge, particularly in Gauteng.

We increased the footprint of DionWired to 18 stores by opening five stores during the year, in some of the higher LSM retail locations in South Africa including Nicolway, Blue Route, Tygervalley, Canal Walk and Boksburg. This is now a national brand with wide customer acceptance. DionWired successfully trialled their regional online shopping in Gauteng. The pilot met our objectives of proving the case for online shopping and providing critical information about this new channel. We finalised and tested data processes, security, payment gateways, call-centre management, and logistics relating to DionWired.co.za and, effective July 2012, have launched it nationally. We now plan to redesign the Game website.

From a Game SA marketing perspective, we continued to focus on annual events, whilst improving relevance of regular campaigns and communication with our customers. The proven "What’s the Big Deal?" birthday event for Game ran during the period and utilised multiple communication mediums in innovative ways, including using an unprecedented 23 TV channels at the same time. In addition to the weekly distribution of the Game leaflet into over five million homes, awareness of the campaign was also achieved through the use of bulk SMS messages, a mobisite, weekly emailers, daily Facebook activity, advertising on 10 radio stations and in-store signage.

In Game Africa, our strategy has been redefined with a targeted approach per country, based on individual market demands, local product and media opportunities. Initiatives creating in-store excitement and shopper entertainment proved particularly successful.

The positioning of DionWired was supported through advertising on premium TV channels, creative use of print media and consistent in-store execution.

Looking ahead, we will continue to refine our advertising strategy and as a discounter, use innovative marketing techniques to be more disruptive in the market place, drive events and grow brand activity on social networks.

The growth in our customer databases is significant and is due mainly to new initiatives within existing mediums such as our websites and enhanced use of social media platforms. We also plan to take advantage of the database we have developed through our private label credit card, supported by independent consumer credit company, RCS.

Private brands remain an important strategic initiative, offering our customers more opportunity to save money, and the Foodco private brand has been well accepted by our customer base. Walmart private brands such as Mainstays and Great Value are being introduced into the business.

The Massdiscounters brands

Massdiscounters 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. Traditionally Game has been a discounter of General Merchandise, but our format renewal, with the introduction of Foodco, has pushed the brand towards a multi-category format. We now have 94 Game stores in South Africa and 13 in Africa, bringing our total footprint to 107. We also have 18 DionWired stores, which sell middle- to upper-end electronics and appliances across South Africa.


Game, East Rand Mall, Boksburg

Game

At Game our positioning offers customers the widest range of branded products, at the best price, for a given set of product specifications. We ensure that customers are assured of the best value at every logical price point. The Game trading model is promotionally-driven, with five million copies of our weekly promotional leaflets distributed in South Africa. By working closely with our suppliers and benchmarking ourselves against competitors, we are able to offer our customers well-priced products representing great value.

Currently 20 Game stores provide a food offering under the Foodco sub-brand, providing further everyday value to our customers. Over the next few years, we intend to roll out Foodco to most Game stores.

DionWired

DionWired’s product displays create an easy, exciting and interactive shopping experience, offering the latest in-home entertainment, computing, video and digital photographic equipment and appliances. DionWired sells complete technological solutions, often demonstrating the interconnectivity of the latest innovations and products in-store. The Tech experts manning our in-store Tech Smart service centres are on hand to offer the best advice and onsite repairs and services.


DionWired, Nicolway, Bryanston

Although all our products are competitively priced, DionWired’s proposition is not founded on price alone. Our main proposition is to offer the widest range of some of the world’s leading and discerning brands such as Apple, Smeg, Miele, Marantz, Bose and Onkyo to the South African higherend consumer.

Operating environment

Inflationary pressure in food commodities, fuel and utilities, and mediocre job-creation adversely affected the South African middle-income consumer. Consumer confidence was further impacted by moderate wage growth and a static residential property market. All these factors combined to contain consumer spending.

Despite this trading environment, Massdiscounters continued to gain market share across most product categories. With the market having become extremely competitive, aggressive promotional activity across the retail sector has become the norm and our value-for-money offering continued to appeal to customers in this uncertain economic environment.

Contrary to expectations of the Rand softening during the financial year, it remained strong. High product deflation experienced in some categories positively impacted sales of products such as televisions and computers. There is a hidden cost to this high sales volume growth, in the form of greater throughput in the Massdiscounters’ supply chain and stores, with the concomitant higher logistics costs.

Financial performance

Massdiscounters reported total sales of R14.8 billion, representing growth of 11.0%. Comparable sales growth was 4.4% and sales deflation of 3.3% was recorded. By containing comparable expense growth at 6.3%, we were able to deliver trading profit before tax, excluding foreign exchange movements, of R813.0 million, representing a growth of 4.0% on the prior year.

The weakening of the Rand against other African currencies resulted in higher Rand sales and profits from those countries. This year sales growth recovered to a positive 23.1% and African sales growth in own currency was positive, with double-digit sales growth of 16.5% for the year, while trading profits increased by 43.6% in Rand terms and 36.8% in own currency.

DionWired achieved sales growth of 37.9% with sales deflation of 15.1%, therefore achieving real growth of 53.4%.

      2012
52 week
  2011
52 week
  2010
52 week
Sales Rm   14,805.7   13,332.5   12,164.9
Trading profit before interest1 Rm   749.8   744.0   612.8
Trading profit before interest as % sales %   5.1   5.6   5.0
Net finance income Rm   63.2   38.0   47.6
Trading profit before taxation1 Rm   813.0   782.0   660.4
Trading profit before taxation as % sales %   5.5   5.9   5.4
Operating profit before taxation Rm   719.4   749.7   586.9
Operating profit before taxation as % sales %   4.9   5.6   4.8
Inventories Rm   2,661.2   2,283.8   2,134.7
Inventory days2 days   89   84   85
Net capital expenditure3 Rm   505.9   336.3   285.1
Cash flow from operating activities Rm   (136.1)   81.6   290.6
Number of stores     125   113   102
Trading area m2   415,186   387,594   355,423
Average trading area per store m2   3,321   3,430   3,485
Number of employees     9,972   8,445   8,876
Sales per store R000   118,446   117,987   119,264
Sales per m2 R000   36   34   34
Sales per employee R000   1,485   1,579   1,371

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. Definitions/explanations to the ratios and terms above can be found here.

Improving efficiencies

SUPPLY CHAIN DEVELOPMENT:

Supply chain development through Regional Distribution Centres (RDCs) is a key strategic initiative to improve overall business efficiencies, reduce costs and improve in-stock levels for customers.

To further enable the RDC implementation, a Strategic Supply Chain Integration department has been established. They will act as the custodian of supply chain-related processes and systems by ensuring alignment and optimisation across merchandise, logistics and store operations, with the customer being at the centre. Our suppliers are being integrated into the RDC network, and many are starting to understand the benefits of using our network.

The Cape RDC performed well, servicing 24 stores in the Cape region, including Foodco stores. The Gauteng RDC now services 74 stores and is also operating successfully. Racking in the facility has been extended to accommodate larger volumes of stock. In July 2012 the KwaZulu-Natal RDC was successfully relocated to Riverhorse Valley from Pinetown.

Managing expenses remains important with personnel cost increases driven by new store openings; the statutory increase in the temporary wage tariff; as well as additional positions created at head office. An initiative to identify and implement payroll and labour scheduling IT systems will position us to have an integrated human resources system; access control; payroll- and labourscheduling capabilities.

Our integration with Walmart created opportunities to leverage this global retailer’s processes to improve our capabilities. Activities are under way to obtain a better understanding of the Walmart IT architecture and roadmaps in order to evaluate them against our business strategies and align them with our systems’ roadmaps. This will allow us to obtain maximum leverage from Walmart systems while minimising disruption to our business operations.

IT operations received a boost with the appointment of a Strategic Architecture Manager to head up the architecture strategy. The initial focus of this team will be in the Finance and Logistics business areas, including an evaluation of key IT systems as part of a five-year review cycle. In line with our "Best of Suite" IT strategy, a JDA Demand Forecasting tool is being implemented and a Promotions Planning and Optimisation module will be 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 Talent department spearheads various initiatives to align our organisational culture with leadership development..."

Massdiscounters aims to provide a strong leadership pipeline and to maintain a stable employee relation environment. The Talent department spearheads various initiatives to align our organisational culture with leadership development, and our recruitment processes aim to find a balance between education, exposure and experience of new employees.

Arising from the June 2011 Competition Tribunal ruling on the Walmart/ Massmart merger, all 503 employees retrenched in a Massdiscounters 2010 re-engineering project linked to the RDC investment and re-alignment, have been contacted and offered alternative employment within the Massmart Group. A total of 222 retrenched employees have accepted new positions in Massdiscounters and across the Group.

In July 2012, we also signed a two-year wage agreement with the South African Commercial, Catering and Allied Workers Union (SACCAWU).

Massdiscounters achieved a BBBEE score of 77.4, retaining our Level 3 status, something about which we are very proud.

Game, East Rand Mall, Boksburg

Investing in our community

Supporting projects that improve the education of disadvantaged children remains a priority for Massdiscounters.

Our headline initiative to support nutrition for disadvantaged school children is our Amalunchbox project – being the distribution of mobile kitchens built into converted shipping containers. Now in its fifth year, Amalunchbox was born from the belief that “you can’t teach a hungry child”, and we work together with the Department of Education to make their national School Nutrition Programme more effective. We achieved a milestone during the financial year when we handed over our 100th Amalunchbox container kitchen. We estimate that these kitchens provide 20 million meals per year to hungry learners.

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 across 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 R1,000 each and Game donated R1.2 million to schools during the year. One of the ways we raise funds for the Tools to Teach project is through our Gift Wrap service during the December festive period, with Game shoppers raising R800,000 to part fund this initiative. This project lives together with Tools to Play, a similar initiative but one that is more focused on the provision of carefully selected toys to support early childhood development.

Another programme which received great coverage was the East Coast Radio Toy Story with Game, an initiative to raise funds and donate toys to children in orphanages and hospitals over the festive period.

Our DionWired Smartboard project provides high technology smartboards to schools catering for children with disabilities.

Game also distributed 8,100 mosquito nets as part of an initiative to prevent malaria in Africa. The donated nets are distributed to those who are most vulnerable, including pregnant mothers and small children. Treated with longlasting insecticide, the nets have an estimated success rate of reducing malaria by up to 60%.

Investing in our environment

INFORMED CONSUMER CHOICES:

We continued to drive energy efficiency 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 screens have been replaced with energy efficient LCD screens and our Gauteng RDC lighting operates with motion detectors, reducing our energy consumption.

Our RDCs will be equipped to manage waste and will use third-party waste management service providers, thereby reducing emissions and consolidating waste.

As consumers became more aware of their choices and impact on the environment, we introduced an energy-wise initiative in the major appliance category. We also now show the environmental specifications of products in our advertising pamphlets so that consumers can make more informed choices about the products they buy.

DionWired, Nicolway, Bryanston

Opportunities in Africa

Massdiscounters’ new store pipeline in Africa looks promising after many years of hard work. We remain confident that we can double our African store footprint by 2016. The uptake of our Foodco offering in African cities has been overwhelming.

Our priorities remain: achieving a consistent supply chain; range improvement; and sufficient scale to ensure we offer consumers a complete shopping experience.

The unprofitable Mauritius store was closed in December 2011.

GRANT PATTISON
CHAIRMAN

JAN POTGIETER
CHIEF EXECUTIVE

NORMAN DRIESELMANN
CHIEF FINANCIAL OFFICER

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

MARK TURNER
AFRICA DIRECTOR

TYRONE VIEIRA
MERCHANDISE DIRECTOR

ILAN ZWARENSTEIN
NON-EXECUTIVE DIRECTOR

Risks and rewards

General controls in our business remain good. Of the 250 calls received through our ethics line during the period, a large proportion of the calls (73%), related to issues governed by the Labour Relations Act or were HR-related, rather than relating to criminal or unethical behaviour.

We continue to keep a close eye on the Labour Relations Amendment Bill and the Basic Conditions of Employment Amendment Bill, part of several changes to labour laws that were first proposed in 2010 and have been under protracted negotiation in the National Economic and Development Labour Council (Nedlac). To minimise risk, Massdiscounters does not use labour brokers in our stores. We continue to evaluate the impact of the amendments as they relate to non-standard employment contracts.

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

Future outlook

Over the next 18 months, Massdiscounters will focus on bedding down many of the changes implemented over the past three years. With 17 Game stores to open in South Africa, two in Africa and four new DionWired stores, we expect our aggressive growth strategy to continue 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 focus on a unique customer experience, as well as our extensive bouquet of services, will differentiate the brand on a national basis as discerning customers seek value and solutions in their purchases.

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 our customers in this challenging market.

The evolution of the Foodco brand will follow three phases as we grow scale and volumes and continue to seek opportunities in the planning, sourcing and distribution of fresh produce. We plan to open or convert 18 more Foodco stores in the next 18 months, bringing the total to 38 Foodco stores by December 2013.