MASSWAREHOUSE DIVISIONAL REVIEW

HIGHLIGHTS OF THE YEAR

  • Sales up 20.8% to R15.4 billion
  • Acquisition of Fruitspot completed
  • Three new Makro stores opened
  • Food Retail offering being rolled out

  • Now 16 stores in South Africa
  • Food, liquor, general merchandise
  • Liquor and general merchandise LSM 6-10 and Food LSM 2-6

Masswarehouse continued to grow its footprint while maintaining a good margin performance across all major categories. Makro’s Food achieved sales of almost R7.0 billion, while Liquor achieved sales of more than R2.7 billion, cementing our position as a leading distributor of consumer goods to the South African mass market.

During the period we focused on new stores, building the Food Retail offering, and integration with both Walmart and our new acquisition, Fruitspot.

We successfully opened three new stores during the year: Polokwane; Montague Gardens (Cape Town); and Nelspruit and the Makro Milnerton store was converted to a Distribution Centre. Since the June 2012 year-end, we have opened another two stores: Cape Gate in August 2012; and Bloemfontein in September 2012. We also expanded the Johannesburg Makro Distribution Centre by 11,000m2 to 27,000m2.

The integration of Masswarehouse into the Walmart family has been positive, with the projects related to culture, governance and value completed. The resultant positive impacts include leverage through the global organisation’s resources; processes and merchandise availability; culture alignment as well as enhanced co-operation with other divisions in the Massmart Group. We will continue to work closely with the integration team to leverage further synergies.

Consistent with our strategy to grow our fresh fruit and vegetable proposition to customers, we finalised the acquisition of Fruitspot during the year and have made significant progress in integrating the business from both an administrative as well as an operational perspective.

The introduction of the Makro store credit card, funded and administered by third-party credit provider RCS, provided additional impetus to the business. Whilst this is currently small, we monitor the performance closely and hope it grows rapidly in the coming financial year.

The Makro formula

The Makro model is unusual in that it sells General Merchandise to retail customers while much of its Food and Liquor is sold to wholesale customers. This blend gives the brand a robustness that enables it to trade comfortably through most economic cycles. The big-box warehouse club format with our no-frills approach keeps costs down and provides the platform for our highvolume, low-margin sales offering of quality branded merchandise. Our customer database of Makro store cards used at the point of purchase helps us to keep track of the spending patterns of our 2.1 million active members and we communicate regularly with them through targeted promotional material.

Our value proposition

Makro’s offerings are tailor-made to fit a variety of customer needs across all our merchandising categories.

Our Food offering caters to wholesale shoppers ranging from informal traders and grocery store owners to hoteliers, restaurateurs, offices and schools. Wholesalers account for up to 80% of Makro’s food sales and most shop during the week for the convenience of our wide range of good-value, quality consumables. At weekends, our focus shifts to promoting good buys for retail food and grocery shoppers who can achieve substantial savings on their monthly household basket compared with other mass retail outlets.

Our liquor offering also caters to both the retail and wholesale customer. Makro’s liquor outlets, immediately adjacent to our main outlets, continue to increase their range of premium brands especially in wine and whisky. These products are sold at a low margin to maintain and grow our share of the market. At the same time we have maintained a strong presence of beer and budget brands for liquor wholesalers looking for good value.

Operating environment

Makro is a predominantly cash-focused business and consumers’ spending power is therefore integral to our performance. Lower nominal income and employment growth, coupled with higher inflation meant consumers had less real disposable income during the period. A combination of higher food, fuel and electricity prices may erode consumers’ purchasing power for some time, however the relatively low interest rate environment and growth in unsecured credit should provide some support to consumer spending in the year ahead.

Food inflation firmed to 6.3% and we experienced 4.0% inflation in the Liquor business. The trend of deflation within General Merchandise continued, with average prices down 4.9% over the financial year.

Financial performance

A solid trading performance was reflected in sales for the year totalling R15.4 billion, up 20.8% over the previous year. Comparable sales growth was 11.6% and product inflation was measured at 1.9%. Trading profit before interest and tax grew by 12.8%, lower than sales growth due to the cost of opening new stores.

Operating profit before tax increased from R780.5 million to R910.2 million and this included new store pre-opening expenses of R37.6 million.

Liquor was the fastest-growing category with sales up 21.2% on the previous year while General Merchandise grew 18.5% and Food (with the inclusion of Fruitspot), 21.2%.

Capital expenditure for the year amounts to R318.9 million, up from R188.4 million spent in 2011. The net working capital cycle worsened slightly by 4.5%, from the impact of new stores and higher food inflation.

      2012
52 week
  2011
52 week
  2010
52 week
Sales Rm   15,370.6   12,722.9   11,501.2
Trading profit before interest1 Rm   844.5   749.0   685.4
Trading profit before interest as % sales %   5.5   5.9   6.0
Net finance income Rm   61.8   54.2   57.8
Trading profit before taxation1 Rm   906.3   803.2   743.2
Trading profit before taxation as % sales %   5.9   6.3   6.5
Operating profit before taxation Rm   910.2   780.5   738.5
Operating profit before taxation as % sales %   5.9   6.1   6.4
Inventories Rm   1,793.2   1,239.2   1,161.0
Inventory days2 days   51   42   44
Net capital expenditure3 Rm   318.9   188.4   77.3
Cash flow from operating activities Rm   76.5   (7.3)   246.3
Number of stores     16   14   13
Trading area m2   146,026   128,417   118,208
Average trading area per store m2   9,127   9,173   9,093
Number of employees     3,519   2,877   2,644
Sales per store R000   960,663   908,779   884,708
Sales per m2 R000   105   99   97
Sales per employee R000   4,368   4,422   4,350

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. The above results exclude Makro Zimbabwe. Details can be found in note 8.
5. Definitions/explanations to the ratios and terms above can be found here.

Improving efficiencies


Makro, Montague Gardens

Masswarehouse remained focused on managing expenses and reducing the cost base in line with our strategy of being a low-cost, low-margin, highvolume business. We introduced several cost-saving initiatives to reduce overall building costs as well as ongoing maintenance costs and managed to keep comparable expense growth to only 12.9% for the year.

We continued our focus on replenishment and forecasting systems and processes, to ensure optimal stock positions. Our investment in the inbound supply chain via Makro Logistics Services further supports the aim of lowering the landed cost of product in our stores.

We have worked hard to build and strengthen a supply chain that supports this low-cost, high-efficiency approach. We aim to be our suppliers’ preferred route to market, providing their consumers with access to product at the lowest possible cost.

Investing in our human resources

Masswarehouse employs 3,499 people across our operations. Our internal training and development initiatives aim to enhance productivity, customer service and operational efficiencies.


INTERNAL TRAINING AND DEVELOPMENT INITIATIVES ENHANCES:

  • Productivity
  • Customer service
  • Operational efficiencies

With a number of new stores opening during the period, 289 staff underwent rigorous “new store” training covering skills such as customer service, stock control, receiving and detail checking, reporting, business rules and procedures and discounting. The result was that staff operated at high productivity levels during the openings as well as during peak trading periods. Increased management presence in all receiving departments assisted with stock management, helped improve administration and combated operational shrinkage.

To ensure that our stores comply with the highest occupational health and safety standards, we undertook an internal skills audit of our lifting machine operators and used assessors accredited by the Transport Education & Training Authority (SETA) to conduct specialised training. This programme will be rolled out throughout the business in the coming year.

The Consumer Protection Act remains a priority and regular performance meetings are held to assess progress and report back on any incidents raised.

Our transformation plan focuses on four areas: recruitment and selection from designated groups; training and development of black employees; affirmative action to source and identify talent; and employing people with disabilities. Diversity training for both management and employees is a key component of our transformation strategy.

Our BBBEE score was 65.7% this year (2011: 73.8%) making us a Level 4 contributor. More than 86.8% of our staff members are black and more than 37.9% are black women.

"Masswarehouse ensures the development of a strong pipeline of talent across all management levels by offering our staff marketrelated remuneration, providing rewarding incentive schemes and world-class training and development opportunities."

Masswarehouse ensures the development of a strong pipeline of talent across all management levels by offering our staff market-related remuneration, providing rewarding incentive schemes and world-class training and development opportunities. Although our remuneration packages for employment equity candidates at top and senior management may be above market-related salary packages, a major challenge remains the retention of senior management from these designated groups. In total, 14.7% of our senior managers and 37.5% of top management are black, compared with 77.8% at skilled technical level and 50.0% of professionally skilled staff.

Masswarehouse believes in empowering employees through educational opportunities and sponsored a number of employees to study in tertiary institutions through our bursary programme. In addition, a total of 2,102 (permanent) and 1,867 (non-permanent) employees undertook various training courses last year. This included 129 black employees who were included in fast-track skills development programmes and 226 participants who enrolled in learnerships. We also employed 62 people with disabilities and 32 employees with a hearing disability were enrolled in Adult Education and Training learnerships.

Through our Impilo Wellness and Careways support programme, voluntary HIV/Aids counselling and testing was provided to 684 members of our staff. We now support 45 staff on antiretroviral treatment.

Masswarehouse prides itself on its open lines of communication and encourages feedback from all levels of staff. We communicate with our staff through a variety of channels including newsletters and executive communication sessions. Members of executive management visit all stores monthly where they interact with management and staff. Formal reviews with each of the merchandise Divisions at head office level are also held. The CEO conducts six-monthly briefings of larger groups and certain milestones are celebrated throughout the year such as long service awards. Senior executives gather on an annual basis for discussions and briefings on developments in Masswarehouse and the greater Massmart Group.

Makro, Montague Gardens

Investing in our community

"We look to support sustainable programmes that are not solely dependent on hand-outs..."

Masswarehouse’s Corporate Social Investment is focused on making an impact on the lives of the poorest of the poor in the communities in which we operate. Each Makro store sponsors and supports initiatives within their immediate vicinity, and builds relationships with recipients. Particular areas of focus are nutritional support, education and environmental sustainability. We look to support sustainable programmes that are not solely dependent on hand-outs or hand-holding for continuity; the aim is to have a project gain a momentum of its own.

We support the Excellence in Schools programme through the respective provincial governments, and donated R300,000 to the Departments of Education in each of the Gauteng, Western Cape and KwaZulu-Natal Provinces. A further R240,000 was donated to The Tomorrow Trust which supports orphaned and poor children with their studies to help them pass school exams and to prepare for tertiary education opportunities.

The Izzi Trust used the R500,000 donation from Makro to prepare and distribute meals for financially-disadvantaged children. Other nutritional support was provided via the African Children’s Feeding Scheme, who received R600,000 from Makro; in this way we provided more than 500,000 meals to financially stressed families this year.

We continue to support the Starfish Greathearts Foundation, as well as Wildlands Conservation Trust who are doing impactful work through their Trees for Life programme.

The SUCCEED (Supporting Caregivers and Centres in Early Childhood Development) Project is a collaboration between Makro and Hope Worldwide, and has as its objective the building of capacity of ECD centres that serve vulnerable children, so that the children in their care receive the stimulation, education, protection, development and nutrition to fulfil their potential. We have committed almost R4.0 million to December 2013, of which R1.1 million was donated in the year under review. To date we have engaged 20 centres in the programme and nine centres in Diepsloot, five centres in Zandspruit and six centres in the Daveyton area, caring for a total of 1,301 children.


"...collaboration between Makro and Hope Worldwide, and has as its objective the building of capacity of ECD centres that serve vulnerable children..."

During the report period we made more than R82.0 million is early payments to black-owned suppliers to help them better manage their cash flow. Approximately 7.5% of our total procurement spend is on black-owned businesses.

During the year Makro initiated an owner-driver scheme, aimed at improving customer service and developing small businesses. To date the roll-out of the project has been completed in the Gauteng region and we anticipate completing the national roll-out by December 2012.

Investing in our environment

Masswarehouse remains at the forefront of improving energy efficiency in the retail environment with energy-saving initiatives saving approximately 700,000 KWh per month across our new stores.

We began replacing jumbo freezers with more efficient glass door freezers, where appropriate. High speed vertical doors with insulation and better temperature control were also installed in some stores to conserve energy and improve cold chain efficiencies in the receiving areas of our fresh produce departments. Technology that enables condensate water from refrigeration units to be reclaimed and heat generated by refrigerant gas to be channelled back for use in the buildings’ hot water systems was also installed to help green our operations and preserve frozen stock more efficiently.

We also retrofitted the trading floors in some stores to make better use of natural light. Lighting controllers were installed to switch off trading floor lights when not required. Makro replaced existing metal hydralite fittings in new existing stores with LED high bay light fittings. The LED lights are 58% more efficient than high bay lights and have a longer life span, in turn reducing maintenance costs.

Masswarehouse undertook an evaluation process with Eskom on energy-saving upgrades for existing Makro stores. Once the evaluation and rebate scheme is complete, an upgrade proposal will be forwarded to the Board for approval.

The recycling of dry waste generated income for the Division of R1.8 million (2011: R1.5 million).

Makro, Montague Gardens

Risks and rewards

GRANT PATTISON
CHAIRMAN

DOUG JONES
DIVISIONAL MANAGING DIRECTOR

BRUCE CAYZER
FOOD DIRECTOR

DON FRIESON
NON-EXECUTIVE DIRECTOR

GUY HAYWARD
NON-EXECUTIVE DIRECTOR

GARRY HENDRY
LIQUOR DIRECTOR

DERICK KALAN
GENERAL MERCHANDISE DIRECTOR

GERT LOURENS
OPERATIONS DIRECTOR

CHRIS NEZAR
MARKETING DIRECTOR

PIETER SCHOEMAN
IT DIRECTOR

MIKE SPIVEY
NON-EXECUTIVE DIRECTOR

LLEWELLYN STEENEVELDT
NON-EXECUTIVE DIRECTOR

DONOVAN WRIGHT
HR DIRECTOR

ILAN ZWARENSTEIN
NON-EXECUTIVE DIRECTOR

With the introduction of our Food Retail offering, food safety remains a key focus for Masswarehouse.

To ensure control and improve on current standards, service contracts have been initiated with independent specialists to perform audits on food safety and handling as well as occupational health and safety audits. Each Makro site’s occupational health and safety performance is audited bi-annually and food safety reviews are conducted each quarter.

The first round of independent inspections was completed and we employed a bio-technologist to assist operations in implementing processes and standards. In addition, we updated and revised our Food Safety Management Manual which is used for training. We are also set to introduce food safety standards and requirements to which all suppliers and sub-contractors will have to adhere in future.

The impact of the Consumer Protection Act on customer complaints remains relatively low and we continue to deal with complaints efficiently and appropriately.

Future outlook

We plan to open two Makro stores per year until 2015, giving us a footprint of 23 stores in South Africa.

Initiatives for the year ahead include rolling out our Food Retail offering and new butchery design across all Makro stores. We also plan to complete the integration of Fruitspot and drive growth and cross-selling opportunities across the business.

Our e-commerce plan is expected to be finalised shortly and we aim to create an online retail store by mid-2013. This will also enable us to enhance the use of social media and digital direct marketing vehicles to drive footfall into both our online and bricks and mortar stores, as well as better align our product marketing to consumer needs. We plan to implement a mobile solution to facilitate sales, team operations as well as improve customer service to resale traders.

In the year ahead, Masswarehouse will continue to build momentum and maximise operating income, exploring new business areas, new categories of customer and optimising the returns on the trading space in our stores.