operational review -...

62 Massmart Annual Report 2010

Operational Review

Operational Review

63Massmart Annual Report 2010

Operational R

eview

Makro Silver Lakes

64 Massmart Annual Report 201064 Massmart Annual Report 2010

OPERATIONAL REVIEW 62The Economy over the Year to June 2010 65Massdiscounters Divisional Review 66Masswarehouse Divisional Review 74Massbuild Divisional Review 82Masscash Divisional Review 90Channel and Shared Services Review 98

Operational Review


THE ECONOMY OVER THE YEAR TO JUNE 2010

This report provides a brief summary of the key economic trends and developments that

formed the backdrop to the Group’s 2010 fi nancial year. All information has been extracted

from reports from the Stellenbosch Bureau for Economic Research which, in turn, relies on

data released by StatsSA.

LOOKING BACK

The South African economy emerged from recession during Massmart’s June 2010 fi nancial year. Growth in national Gross Domestic Product (GDP) turned positive in the third quarter of the 2009 calendar year (being the fi rst quarter of the 2010 fi nancial year). The much-anticipated recovery in overall consumer spending was however, delayed and so only recorded positive growth in the fi rst quarter of 2010 (the third quarter of the Group’s 2010 fi nancial year), after declining during the whole of the 2009 calendar year. This positive domestic economic news fl owed from the declining South African interest rate environment and the gradual recovery of the global economy, albeit that the latter is still beset with much uncertainty.

The South African Reserve Bank (SARB), which follows an infl ation-targeting methodology that infl uences monetary policy, has steadily lowered commercial interest rates since December 2008 as consumer infl ation began to decline. From that date, interest rates have dropped by a cumulative 550bps to March 2010 (now 600bps following a further 50bps drop in September 2010).

South African consumer infl ation, measured as Consumer Price Infl ation (CPI), has been on a downward trajectory and was 4.2% at the June 2010 fi nancial year-end, and was still lower in July 2010 (3.7%). This improvement has largely been caused by the continued Rand strength.

As shown in the graph below, South African national real retail sales growth declined steadily from June 2006 following the fi rst interest rate increases. This declining growth turned negative in May 2008 and remained negative for most of 2009. The fi rst positive national real retail sales growth was reported in January 2010 and this has recorded positive growth since then.

LOOKING AHEAD

Although there remains some uncertainty about the sustainability and longevity of the global economic recovery, the 2011 South African economic outlook for consumer spending appears benign, positively infl uenced by the likelihood of low infl ation, low interest rates, steady rates of employment and fi rmer house prices for the period to June 2011.

National infl ation (CPI) is forecast to average 4.6% for the 2010 calendar year and 5.5% for 2011. Consequently, interest rates may only increase for the fi rst time in the third quarter of 2011 – suggesting that there may be steady and low interest rates for the Group’s June 2011 fi nancial year, which will be positive for consumer spending on general merchandise and home improvement products.

Growth in real fi nal household consumption expenditure is forecast to recover from a low of -3.1% in 2009 (calendar year), to 2.5% in 2010 and 3.6% in 2011.

National retail sales (% monthly real growth)

June 2006 June 2007 June 2008 June 2009 June 2010-10

-5

0

5

10

15

Operational Review


Operational ReviewDionWiredHyde Park


MASSDISCOUNTERS DIVISIONAL REVIEW

Although market conditions across Africa continued to be

challenging, Massdiscounters reported pleasing sales growth,

driven by double-digit growth in Game South Africa. During

the year under review, we grew South African comparable

sales by 10.9%, while growth in comparable store expenses

was negative. This is a result of more than 18 months

of stringent cost control, which enabled us to fund our

re-investment in price aggression.

Throughout the recession we reinforced our positioning by making our value-offering more compelling and relevant through smarter merchandise selection and innovative marketing campaigns. We also focused on building our portfolio of private brands to provide a lower price-point alternative for cost-conscious consumers.

At DionWired we continue to deliver more choice and value and offer differentiated merchandise ranges that inspire and excite our customers. We are South Africa’s leading electronics destination store and strive to attract customers through being informative and friendly.

The building of the 70,000m² Gauteng regional distribution centre (RDC) was completed in June 2010 and will service 68 stores encompassing all Gauteng DionWired, Game SA and Game Africa stores in the SADEC region. By closing or consolidating all existing Gauteng warehouses and storage facilities, we will be able to extract important effi ciencies and achieve signifi cant savings once fully operational.

Signifi cantly, 2010 marked the 40th year of trading for Game and we celebrated with various birthday campaigns. ‘What’s the Big Deal?’ was well executed, boosting sales by 40% over the promotional period, helping us to gain market share and achieve growth rates not experienced since 2002.

THE MASSDISCOUNTERS BRANDS

Massdiscounters operates two retail formats: Game and DionWired. Game is a discount retailer of general merchandise FMCG, and non-perishable groceries for home, leisure and business use, operating throughout South Africa and in twelve major cities in sub-Saharan Africa. DionWired is a South African electronics and appliances speciality store catering for the middle- to upper-end income consumer. During the past fi nancial year we opened seven new Game stores, bringing its footprint to 91 stores and opened fi ve new DionWired stores taking the total number of DionWired stores to 11.

GameAt Game our positioning offers middle-income (LSM 5 – 10) customers the widest range of branded products at the best price. The Game business model is promotionally driven, with fi ve million leafl ets distributed each week. Our market-leading sales volumes and strong vendor collaboration allow us to offer our customers very well priced products that represent great value.

DionWiredThe DionWired slogan is ‘Experience the future’. DionWired’s product displays create an easy, exciting and interactive shopping experience, offering the latest in leading branded home entertainment, computing, digital photography and appliances. DionWired sells complete technological solutions, thereby demonstrating the interconnectivity of the latest product innovations. The IT experts servicing our in-store service centre, the ‘Propeller Heads’, are on hand to offer the best advice, upgrades and onsite repairs and services.

f 26 stores acquired 1 July 1998f Now 91 storesf Operating in SA, Botswana,

Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia

f General merchandise and FMCGf LSM 5 – 10

Insight Living Standards Measure (LSM)The South African Advertising Research Foundation (SAARF) Living Standards Measure (LSM) has become the most widely used segmentation tool in South Africa. It is a means of segmenting the South African market that cuts across race, gender, age or any other variable used to categorise people. Instead, it groups people according to their living standards.

f 20 Dion stores acquired 31 May 1993

f Dion stores rebranded to Game stores

f Launched greenfi eld DionWired concept stores in 2006

f Now 11 storesf Operating in SAf General merchandisef LSM 8 – 10

Operational Review



Although our products are well priced, DionWired’s retail positioning is not primarily as a discounter. Our main proposition is to offer the widest range of some of the world’s biggest and leading brands such as Apple, Smeg, Miele, Marantz, Hewlett Packard and Sony to middle- to higher-end consumers (LSM 8 – 10) who demand exceptional value and a great shopping experience.

This concept, launched in 2006, has proved to be exceptionally successful and during the year we almost doubled the store base and so established a national footprint. Much time was spent understanding and refi ning the business model and we are excited about the brand’s potential and future plans. We repositioned the brand’s relevance to distinguish between different customer segments and differentiated the brand in a busy market-place.

OPERATING ENVIRONMENT

During tough times Game customers seek value in terms of price and quality, and the past year was no different. Despite South African interest rates having been reduced by 550 basis points since December 2008, consumer debt as a proportion of household income has not reduced signifi cantly which negatively affected the disposable income of many of our consumers. There was however, resurgence in demand for durable and semi-durable goods in the second half of the year, as the lagged positive effect of the interest rate cuts began to kick in. Contributing to this was the fact that we experienced 4.2% product defl ation for the 2010 fi nancial year.

Game benefi ted from the soccer mania that hit the country with the 2010 FIFA World Cup boosting sales. Incremental sales during the tournament were approximately R120 million, driven mainly by the sale of fl at screen and high defi nition televisions but also soccer gear and accessories.

We introduced a new look and feel to our design and layout at selected Game stores and intend rolling this out to all future stores. Our offerings in the hi-tech and multi-media categories were also broadened and enhanced to better service upper LSM consumers. We also launched a ‘Merchandise 2010’ initiative, which focuses on signifi cantly enhancing our ranges in the Top 20 stores while reducing the ranges in the smallest sites.

We continue to seek out and introduce the world’s leading consumer brands alongside the aggressive rollout of private label. Private label products now make up 11.4% of our sales, exceeding our short-term target of 10%.

Our African operations were negatively affected by the stronger Rand in two ways, fi rst, it pushed up imported product prices in those African countries and, second, caused us to report lower Rand profi ts from those countries. In the previous fi nancial year, of course, we experienced the reverse effect when the Rand initially weakened for much of the year. The Rand volatility also contributed to large changes in the translation effects of the African balance sheets. Despite the diffi cult trading environment, our profi tability ratios remain intact and we believe that our business model for Africa remains sustainable.

Highlights

f Strong performance by Game SA with profi ts up 20%

f DionWired now a national brand with 11 stores

f New 70,000m² Gauteng regional distribution centre operational

f Level 4 B-BBEE contributor

Group contribution

Massdiscounters

Masswarehouse

Massbuild

Masscash

26

37

22

13

14

34

24

Sales (%)

Trading profit before taxation

(%)

ding profit ore taxation

(%)

30

Operational Review


Store progress

Game

Opening balance 87

Stores opened 7 Amanzimtoti (KwaZulu-Natal) Ballito (KwaZulu-Natal) Alberton (Gauteng) Lenasia (Gauteng) Mokopane (Limpopo) Nelspruit (Mpumalanga) Phuthaditjhaba (Free State)

Stores closed (3)Wynberg (Gauteng) Nelspruit (Mpumalanga) Nelspruit CBD (Mpumalanga)

Total stores in 2010 91

DionWired

Opening balance 6

Stores opened 5 Hyde Park (Gauteng) Grove (Gauteng) Woodlands (Gauteng) Nelspruit (Mpumalanga) Somerset West (Western Cape)


FINANCIAL PERFORMANCE

2010 2009 2008 2008 52 week 52 week 52 week 53 week

Sales Rm 12,164.9 11,206.0 10,129.8 10,406.5 Trading profi t before interest3 Rm 642.7 680.0 627.9 661.8 Trading profi t before interest as % sales % 5.3 6.1 6.2 6.4

Operating profi t before interest Rm 539.3 584.4 690.7 724.5 Operating profi t before interest as % sales % 4.4 5.2 6.8 7.0

Net fi nance costs Rm 47.6 66.6 57.5 58.6 Trading profi t before taxation3 Rm 690.3 746.6 685.4 720.4 Trading profi t before taxation as % sales % 5.7 6.7 6.8 6.9

Operating profi t before taxation Rm 586.9 651.0 748.2 783.1 Operating profi t before taxation as % sales % 4.8 5.8 7.4 7.5

Inventories Rm 2,134.7 1,856.0 1,766.8 Inventory days days 85 81 83

Net capital expenditure1 Rm 285.1 212.2 208.8 Cash fl ow from operating activities Rm 290.6 110.5 (6.2)

Number of stores 102 93 90 Trading area m2 355,423 341,687 338,285 Average trading area per store m2 3,485 3,674 3,759 Number of employees 8,876 9,469 9,817

Sales per store R000 119,264 120,495 112,553Sales per m2 R000 34 33 30Sales per employee R000 1,371 1,183 1,032

1 Net capital expenditure is defi ned as capital expenditure less disposal proceeds.2 The ratios have been calculated using year-end balance sheet fi gures.3 Trading profi t is earnings before asset impairments, BEE transaction IFRS 2 charges and

foreign exchange movements.4 Defi nitions/explanations to the ratios and terms above can be found on page 47.

The Division reported total sales of R12.2 billion, representing respectable growth of 8.6%. Comparable sales growth was 3.2% while our annual sales infl ation was -4.2%. Given the diffi cult consumer environment, the total sales growth in Game South Africa of 15.2% was pleasing (10.9% comparable) and was at the upper-end of the market growth. African store total sales decreased by 5.1% in local currencies (and by 23.0% in Rands).


hile our annual sales infl ation was -4.2%. e total sales growth in Game South Africa and was at the upper-end of the market

y 5.1% in local currencies (and by 23.0%

Game

DionWired

11

1

1

1

1

111 1

1

1 1

1

1

111

1

11

351

111

1

55 3555 3333555 6

15515

1

1

1

1

1

111

12

1

1

111

222

1115

2

212

2

1

1

1

Operational Review



Trading profi t before interest and taxation of R642.7 million was 5.5% lower than the prior year. This excludes the impact of net foreign currency translation losses caused by weaker African currencies. These translation losses are mostly unrealised non-cash amounts that arise from the translation of certain balance sheet items in the African Game stores and are materially infl uenced by the movement in the exchange rate on the date of the fi nancial year-end compared to that of the prior year. Massdiscounters executives are managed and rewarded on profi t growth excluding the impact, positive or negative, of these foreign exchange movements.

Trading profi t before taxation was 7.5% lower than the prior year. The Division’s resultant return on sales (profi t before taxation/sales) of 5.7% was satisfactory given the diffi cult South African consumer environment. Inventory levels were well managed with stock days at 84.9 and the total inventory balance was 15.0% higher than the prior year, the result of sales growth and new store openings.

Capital expenditure of R285.7 million was higher than the prior year’s R213.6 million, with the increase mainly relating to the expenditure on the Gauteng RDC, as well as ongoing IT investments and store refurbishments.

Trading profi t before tax return on sales has been calculated using profi t before tax adjusted for asset impairments, the BEE IFRS 2 charge and net foreign exchange movements.

IMPROVING EFFICIENCIES

With the 70,000m² Gauteng RDC operating from July 2010 and the 19,500m² Western Cape RDC being fully operational from 2008, we are well positioned to extract effi ciencies from our in-bound supply chain. More of the key parameters we set originally have been met and, in many cases, exceeded. Western Cape stores that were supplied by that RDC saw in-stock service levels 1% – 2% better than those stores that were supplied by off-site facilities and direct supplier deliveries. Cost savings were achieved from the closure of the now unnecessary off-site storage facilities.

TRADING PROFIT BEFORE TAX RETURN ON SALES

Actual 2010

5.7%Medium-term target

International benchmark Wal-Mart ex-food

8.0% 7.4%

Operational Review


With two of the three RDCs in our planned national distribution network now operational, we expect further effi ciencies when the Durban RDC is completed in June 2012. With the opening of our RDCs, our back-of-store systems and processes underwent a complete overhaul and certain jobs such as data capturing and receiving became redundant. Despite our best efforts to fi nd alternative staffi ng models, we regrettably had to retrench 504 people in June 2010 as a result of this change in the business model.

We improved business productivity by increasing sales per employee and reducing expenses as a percentage of sales. These developments are the fruit of three years of space- and employee-optimisation initiatives. Space planning, which studies the most profi table use of shelf-space and generally results in more shelf-space being available, allows for new product offerings, such as food, in selected Game stores. This will appeal to customers seeking convenience, value and excellent pricing.

In terms of information technology, we switched from ‘Best of Breed’ to ‘Best of Suite’ to reduce complexity and improve our long-term agility and effi ciency. New Thin Client hardware was deployed into all stores. This new hardware is cheaper to deploy and support as well as being less prone to abuse by users and more resistant to viruses. We entered into a long-term partnership with JDA that will see the replacement of the Just Enough replenishment software with JDA Demand and Fulfi lment software. We plan to implement a further two JDA modules over the next three years to optimise our enterprise planning, price and markdowns processes.

A new innovative mobility solution was piloted in two stores which comprises a handheld device and printer that allows for previously desk-bound activities to be completed more effi ciently on the fl oor. This is the fi rst step in a process that will see us introduce technologies to reduce queues and boost customer service in the next year.

INVESTING IN OUR HUMAN RESOURCES

Our Retail Academy forms the crux of our programme to develop our leadership pipeline. An assessment centre evaluates employees on a range of metrics including a work sample test, psychometric assessment, EQ and IQ tests. Training consists of four tiers, with each tier aligned to a level on the National Qualifi cations Framework. Massdiscounters also participates in various learnership projects.

We embarked on an unprecedented project with the Wholesale and Retail SETA where we developed a ‘recognition of prior learning’ initiative. This project gives team members the opportunity of receiving a national qualifi cation through the South African Qualifi cations Authority.

Read more More information on the Group’s investment in Human Capital can be found on page 108

Corporate Accountability

Operational Review

Gauteng RegionalDistribution Centre

DionWiredHyde Park



Massdiscounters also made good progress with our B-BBEE strategy, improving our score from 58.6% to 68.8% from Level 5 to Level 4, externally verifi ed and audited by Empowerdex. Encouragingly, 94% of our junior managers, 85% of middle managers and 53% of senior managers are black. In addition, of the total 65 employees on learnerships, more than 98% are black.

We also partnered with the Wholesale and Retail SETA, Outlearning and the Thabo Mbeki Trust for disabled persons to host disabled persons on the SETA’s Operations Learnership. Ten learners successfully completed phase 1 in various Gauteng stores. The project not only provided work experience for disabled learners, but also sensitised Game team members to the needs of disabled employees. We hope to roll out the programme nationally next year.

In the area of enterprise development, we ensure early payment to black suppliers and have achieved 100% in this area on the scorecard.

INVESTING IN OUR COMMUNITY

Supporting projects that improve the education of disadvantaged children remains a priority for Massdiscounters. 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 around the country. Game donated R1.2 million in stationery kits to schools during the year under review. One of the other ways we raise funds is through our Gift Wrap service during the December 2009 festive period and Game shoppers raised R800,000 through this initiative last year. In 2009, we launched Tools to Play, with the handover to disadvantaged communities in KwaZulu-Natal of 45 play-kits packed with educational toys. Each play-kit contains 60 educational toys that enhance early childhood development.

We also support the Game Vodacom Wheelchair Project, which provides wheelchairs to disabled schoolchildren. This year we donated wheelchairs valued at R1.2 million to 400 children around the country. Game and DionWired also raised R1.1 million for the National Council for Persons with Disabilities in South Africa by selling Casual Day stickers at stores.

Through our Smile initiative, staff members who volunteer their services with a registered charity can apply for R5,000 worth of Game products to donate to the charity.

In 2010 Game entered 40 teams of employees, comprising 196 swimmers, in the Midmar Mile Company Relay as part of Game’s commemorative 40th birthday. Game has supported this event for many years and donates R1,000 to charity for each swimmer who completes the race.

We have sponsored eight top performing learners from Umlazi Comtech School on full bursaries for the past four years. This year the learners will complete Grade 11 and depending on their academic performance in Grade 12, we intend to provide them with bursaries to attend a tertiary institution of their choice.

DionWired upgraded the learning environment of more than 100 blind and partially sighted learners from Filadelfi a Secondary School in Gauteng through sponsoring the school with state-of-the-art computer equipment and specialised software to the value of R205,000.

DionWired also aided learners at KwaZulu-Natal’s Browns School by donating high-tech Smart Boards that revolutionise special-needs education. Our R192,000 investment provided a massive pre-loaded resource library enabling teachers to tap into lessons and information from around the world that have been created using special software tailor-made for children with learning disabilities.

INVESTING IN OUR ENVIRONMENT

We continued to drive energy effi ciency at stores and warehouses with a particular focus on using the latest technologies in our lighting and cooling systems. In the next fi nancial year we will launch a company-wide environmentally-focused programme that will give guidance to all our merchandise, marketing and operational activities.

We endeavour to introduce and promote green products where possible to encourage consumers to become more aware of their options and the impact of their choices

Read more More information on the Group’s investment in Corporate Social Investment can be found on page 112


Read more More information on the Group’s investment in Climate Change and Environment can be found on page 110


Operational Review


on the environment. For example, compact fl uorescent light bulbs are featured in our weekly promotions and we have introduced private label rechargeable batteries under the Logik brand. These have been co-branded with the Eco-wise brand to expand our green product range.

OPPORTUNITIES IN AFRICA

Our strategy in Africa is to grow our footprint by venturing into new countries and extending our store base in countries in which we currently trade. We hope to open a further seven stores in the next three years.

Because we offer a wide range of quality products under one roof, backed by guarantees and excellent service, our stores are attractive to African customers. Having established and managed operations in a number of countries, we are better able to understand risks and opportunities as regards the legislation and regulatory environment. The multiple stores also enable us to build our brand equity.

RISKS AND REWARDS

In addition to traditional media such as newspaper and television, increasingly community portals and social media represent new ways of communicating with our customers. Game’s 40th Birthday campaigns utilised this approach, which integrated different media types to drive consumers into a network of media options. This provides direction for future marketing efforts.

A pilot introducing a no-frills, well-priced, convenient food offering in some of our Game SA stores will be launched.

We also aim to increase the contribution of private label sales in our stores to 15% over the medium term. Having attracted cash-strapped consumers, we hope to be well positioned to retain them as the economy recovers and their purchasing patterns potentially broaden.

The Consumer Protection Act will come into operation during the next fi nancial year and we have put plans in place to mitigate associated risks. A quality control offi ce within our merchandising section was established and an electronic supplier management process was activated. We already meet most of the Act’s requirements pertaining to marketing initiatives, store policies and customer promises. New store customer policies have been documented and staff members have undergone training to ensure that we comply with all legal requirements.

Our business remains susceptible to foreign exchange rate fl uctuations. We manage this by regularly repatriating cash, undertaking currency sensitivity analyses and maintaining optimal funding and management of the foreign operations’ balance sheets. We also drive up private label sales and engineer new products at more competitive price-points to protect ourselves against a weakening of the Rand and ensuing product infl ation.

Whilst Massdiscounters remains primarily a cash business, credit sales doubled after we launched the Game private label credit card. Administered and fi nanced by a third party, RCS, the card has increased equity in the Game brand and helped us to take market share from other credit retailers. Credit sales remain at less than 6% of total sales.

FUTURE OUTLOOK

Game SA and DionWired remain focused on differentiating their market positioning and entrenching world-class retail disciplines and technology as part of their day-to-day operations.

The Western Cape and Gauteng RDC networks are expected to deliver more supply chain effi ciencies, which include improving customer service through bolstering stock levels. These will be further enhanced when the Durban RDC completes the national network.

With four DionWired stores opening in the next year, 13 Game SA stores in the next two years, and seven stores opening in Africa over the next three years, we expect our new stores to extend our brands into the communities, making our lowest prices and after-sales service guarantees more accessible to more customers.

Massdiscounters directorate

Grant PattisonChairman

Jan PotgieterChief Executive

Richard FullerStore Operations Director

Ann HansenFinancial Director

John HartIT & Logistics Director

Guy HaywardNon-executive Director

Richard MillsonMarketing Director

Rogany RamiahHuman Resources Director

Llewellyn SteeneveldtNon-executive Director

Mark TurnerAfrica Director

Tyrone VieiraMerchandise Director

Ilan ZwarensteinNon-executive Director

Operational Review


Operational ReviewMakro

Silver Lakes


MASSWAREHOUSE DIVISIONAL REVIEW

Despite trading in a diffi cult consumer market in South

Africa, Masswarehouse delivered a solid performance

with four Makro stores achieving record sales in excess of

R1 billion for the period under review. The Division also

achieved R4 billion worth of general merchandise sales and

more than R2 billion in liquor, both for the fi rst time.

Despite the national retail chains continuing their expansion into the liquor market, it was a noteworthy achievement that we reported 17.8% sales growth in liquor and therefore gained market share. We also managed to reduce our average stock holding by R37 million or 3.2% of inventory, while substantially increasing in-stock service levels and rolling out forecasting and replenishment IT systems across our business.

Makro stores successfully implemented a 2010 FIFA World Cup-related merchandise and sales strategy, helping to drive R70 million worth of sales during the tournament.

Our two stores in Bulawayo and Harare in Zimbabwe have been excluded from our fi nancial fi gures since 2007.

THE MAKRO FORMULA

The Makro retail model is unusual in that it sells general merchandise to retail customers, while most 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 high-volume, low-margin sales offering of quality branded merchandise. Our customer database generated by customers’ Makro store cards used at the point of purchase helps us to keep track of the spending patterns of our 1.5 million active members and we communicate regularly with them through targeted promotional material.

OUR VALUE PROPOSITION

Makro’s offerings are tailor-made to fi t 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, offi ces and schools. Wholesale customers account for up to 75% 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 to other mass retail outlets.

Our liquor offering also caters to both the retail and wholesale customer. Our liquor outlets, immediately adjacent to our main outlet, 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 in beer and budget brands for liquor wholesalers looking for good value.

OUR OPERATING ENVIRONMENT

It was another tough year for retailers and the impact of the nationwide job losses in 2009 affected both the food and liquor side of our business. This was compounded by general merchandise experiencing recessionary trading conditions while the food category experienced high defl ation. Consumer confi dence improved somewhat in the second half of the fi nancial year, partly as a result of the World Cup, and so we saw an increase in the demand for general merchandise from early 2010.

Operating margins came under pressure, driven by a shift towards greater promotional spending by customers, heightened competitor discounting in the market and disinfl ation within the food category. Faced with these trading challenges, we managed to rein in

f Now 13 stores in SAf Operating in SA, Zimbabwef Food/liquor/general merchandisef Liquor and general merchandise

LSM 6 – 10 and food LSM 2 – 6


Operational Review



expenses and reported expense growth of only 4.8%, well below infl ation. This was despite slightly higher volumes through our stores and huge increases in electricity tariffs. Personnel costs grew just 2.8% and we managed this through tighter labour scheduling and by reducing headcount through natural attrition, without resorting to retrenchments.

Operating margins contracted slightly in 2010. All three major categories’ margins declined, with the greatest decline being in General Merchandise. The exception was our cellular business where margins improved as a result of a change in mix from contract to pre-paid business, a direct consequence of the 2009 introduction of the new Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA).

The impact of the 2010 FIFA World Cup changed the momentum of our sales patterns not only across obvious categories such as soccer balls and television sets, but also in food and liquor as corporate customers increased their entertainment spend during the tournament.

In previous years, Makro saw sales to foreign customers from neighbouring countries grow rapidly, this trend however, slowed as a result of the stronger Rand and with economic activity declining in Zimbabwe.

During the year we refurbished our largest and most profi table store, Germiston. Our new store in Vanderbijlpark will open in October this year (2010).








Net capital expenditure1 Rm 77.3 102.3 153.7Cash fl ow from operating activities Rm 246.3 145.5 286.3


Sales per store R000 884,708 854,031 762,462 Sales per m2 R000 97 94 84 Sales per employee R000 4,350 3,958 3,578


foreign exchange movements.4 The above results exclude Makro Zimbabwe. Details can be found in note 8 on page 179.5 Defi nitions/explanations to the ratios and terms above can be found on page 47.

Highlights

f General merchandise sales reach R4 billion for the fi rst time

f Improved B-BBEE rating to Level 4 contributor

f Dropped stock levels and improved service levels

f Four new stores to be opened in next four fi nancial years

Group contribution

Massdiscounters

Masswarehouse

Massbuild

Masscash

26

30

37

22

13

14

24

Sales (%)


(%)before taxation

(%)14

34

Operational Review


Makro

2

2 1

1 2

43

Store progress

Makro

Opening balance 13 No store movement during the current year –

Total stores in 2010 13 * Excluding two Zimbabwean stores, deconsolidated since 2007.

Sales for the year totalled R11.5 billion, up 3.6% over the past year. Food and Liquor contributed 63.3% to total sales (2009: 63.6%) and General Merchandise 36.7% (2009: 36.4%).

Trading profi t before interest and taxation of R700.8 million was 1.7% lower than the prior year and grew below sales growth. Working capital management remains a strength of Makro and this year was no exception. Due to lower commercial interest rates, trading profi t before taxation of R758.6 million was 5.5% lower than the prior year. The Division’s resultant return on sales (profi t before tax/sales) of 6.6% was very satisfactory given the diffi cult South African consumer environment.

Capital expenditure for the year amounted to R77.5 million, down on the R102.6 million spent in 2009. This was partly due to delaying some replacement and refurbishment in recognition of the diffi cult business environment. Material investments during the year included R15.7 million for various store refurbishments (2009: R34.1 million); R11.3 million on IT replacements and upgrades (2009: R19.9 million); and R16.2 million on the construction of the new Vanderbijlpark store of which only a small portion of the spend is included in 2010. In addition, R4.1 million was spent on an Eskom Demand Side Management project to install energy-effi cient lighting in all stores.

A reduction in closing inventory of R1.8 million (0.2%) compared to June 2009 was achieved despite higher volumes and increased cost of stocks. A 20% improvement in the Stock Funding Ratio (an indicator of the level of inventory funded by trade payables) was also achieved. There was a six-day improvement in stock turns and seven-day improvement in the working capital cycle, resulting in an increase of R194.7 million in cash at year-end.



Actual 2010


International benchmark Metro AG C&C

7.0% 5.0%

Operational Review




We continue to drive process optimisation by leveraging our existing IT infrastructure and applications. An advanced SAP Forecasting and Replenishment solution that was fi rst implemented 18 months ago, continued to be steadily rolled out across suppliers and we were able to signifi cantly reduce stockholding in the stores while at the same time increasing in-stock service levels.

During the reporting period we streamlined the in-bound supply chain, implementing a revised logistics process whereby stock ordered from suppliers was picked up at the supplier’s premises or warehouse as opposed to being delivered to Makro stores by the supplier. The initiative was successfully piloted with our key sugar suppliers and will be expanded across more product categories in the coming year.

When we moved to our new purpose-built head offi ce in Sunninghill, Sandton, in April 2010, we deployed the latest network and telephony infrastructure. The move to an IP-based telephony solution is in partnership with Alacatel-Lucent and Cisco. This has established a platform for future IP-based communications across Makro and the Massmart Group.

We continue to refresh our technology by replacing point of sales devices across three stores towards the end of 2009, with no disruption. The new devices not only limit potential down-time, but enhance customer service and enable us to deploy more energy-effi cient technologies across our stores.

In order to improve pricing accuracy and enhance customer service, we successfully implemented an Electronic Shelf Edge Labelling solution at the Makro Woodmead liquor store and will look to roll it out to other stores.

INVESTING IN AFRICA

Our operations in Zimbabwe remain deconsolidated from our fi nancial results. Our stores in Bulawayo and Harare are profi table but will require large investment to enable them to carry suffi cient stock to grow signifi cantly. Uncertainty around that country’s proposed Indigenisation legislation has meant that we have had to delay this

Operational Review


investment for the time being. If enacted, it appears that this legislation would force foreign-owned companies to sell a majority shareholding to indigenous Zimbabweans.

We continue to look for attractive investment opportunities, including opening new Makro stores on the rest of the continent, though fi rst and foremost we remain focused on growing in the South African market.


The retention of quality management and staff remains a priority for our division. We maintain low levels of staff turnover due to our policy of offering our staff fair and market-related remuneration, rewarding incentive schemes and consistent world-class training and development opportunities.

We performed exceptionally well with our B-BBEE scorecard, improving from a Level 6 contributor at 50.4% to a Level 4 contributor with 65.6%. Our pipeline of black employees is robust, with 78% of our skilled technical staff; 51% of professionally skilled staff; 16% of our senior management; and 25% of top management being black.

With staff turnover being low, one of the biggest challenges is to fi nd suitable empowerment candidates at the top, senior and professionally qualifi ed management levels. There are however, a number of programmes in place to develop future talent across all levels including those targeting graduates, school learners, as well as junior and senior management.

During the reporting period, ten employees graduated with a Retail Management Diploma and three cadets completed their BCom degrees. We also granted loans to black wholesale customers of R4.5 million and made more than R45 million in early payments to black owned suppliers.

In addition, we provided training, marketing expenses and discounts to various Banner Groups. These members meet to select products for upcoming specials and members’ Makro cards are loaded with details of the promotional prices. SMS alerts are sent to them when their discounts have been activated. In this way we’ve helped many small entrepreneurs grow their businesses.



Operational Review

Makro Silver Lakes




Each Makro store sponsors CSI initiatives that help the local communities in which they operate. At a divisional level Makro continues to sponsor 500 meals a day through the African Children’s Feeding Scheme which reaches children in poor communities in Soweto. We also provide food to the Centurus Trust Feeding Scheme which serves 400 meals a day to children in the farm schools around Hartebeestpoort Dam near Johannesburg.

In keeping with our focus on sponsoring projects that improve education, we donated R1.2 million in vouchers for 35 schools in the Excellence in Education Awards, an initiative which recognises the exceptional improvement in a school’s Matric results. The vouchers can be used to buy stationery, educational aids and sports equipment.

Makro also partners the Starfi sh Foundation and the Thandanani Community-based Organisation which provide support to orphaned and vulnerable children affected by HIV/Aids.

The division supports the Vacation Schools initiative, which is run by the Tomorrow Trust. This project provides mentors as well as educational and community support to students from vulnerable households to bolster their secondary studies.


Building our new Makro store in Vanderbijlpark has given us the opportunity to install the latest energy-saving technologies. Most exciting is the store’s 100% green refrigeration plant. This will not only consume just half of the energy required by traditional refrigeration processes, but will also use sophisticated technology to reclaim all heat generated by the refrigeration units to heat hot water geysers. The building will also utilise high effi ciency freezer glass doors and automated sliding doors to reduce the energy needed to keep our products cold by 70%, as well as using natural lighting for the trading fl oor, saving approximately 48,000Kwh per month. Motion detectors activating the overhead lighting will also be installed in all offi ces.

In conjunction with Fujitsu IT Company, Makro E-waste container hubs at all Makro sites have been widely used by the public. The containers provide a way for customers to safely dispose of their electronic waste such as laptops, desktops, printers, monitors and cell phones. These are then reused, recycled or deployed, preventing hundreds of kilograms of electronic waste ending up in the country’s landfi lls.

We were also the fi rst retailer in SA to embark on a programme with Eskom where rebates were offered to customers who exchanged their old electric cooking appliances for gas cookers. Eskom is also currently undertaking a light bulb exchange programme at various Makro stores.

We now offer three recycled stationery brands under the brands Remarkable, Renewed and Recycled. These are available in the stationery department as part of our Eco-wise offering.

Wherever possible, our merchants are requested to support products that are green, such as ensuring that the wood used by suppliers is from sustainable forests and is certifi ed by the Forest Stewardship Council (FSC).

As part of our sustainability drive, we embarked on a store-wide IT infrastructure and server consolidation project utilising the latest virtualisation technology. This helped us to signifi cantly reduce the infrastructure required to operate stores successfully and to reduce each store’s carbon footprint. The approach will now be adopted for all future store rollouts and technology upgrades.





Operational Review


RISKS AND REWARDS

The South African economic environment remains uncertain and volatile. In this environment, knee-jerk responses by our competitors and suppliers to slash prices can disrupt commercial activity. We mitigate this risk by sticking to our model of driving volumes off a low-cost structure.

Any future weakening in the value of the Rand will lead to higher infl ation in food and general merchandise, and therefore possibly higher interest rates too, and so we remain focused on managing our costs and pricing accordingly.

Some South African provinces have still not fi nalised their liquor regulations and our attorneys remain engaged with the authorities to address licence-related issues.

In order to meet the requirements of the forthcoming Consumer Protection Act, training sessions were held to help educate staff and vendors about the new regulations. All our buyers and merchants have attended and a website has been created where vendors can download quality assurance certifi cates.

We also appointed a new ethics offi cer during the reporting period who manages all ethics-related calls to our tip-off line. Most of the 64 calls received were related to HR issues and almost all calls suggesting potential fraud or misappropriation were investigated and shown to lack foundation.

During the year we also designed, implemented and embedded a Makro Risk Framework to provide a structure within which risk management, risk reporting, compliance, governance and internal control self assessment can be managed and directed.

FUTURE OUTLOOK

Our strategy at Makro remains one of securing a greater share of our customers’ discretionary spending. We do this by offering more exclusive deals and focusing on everyday low prices. By being 7% – 8% cheaper on a basket of goods and not limiting quantities, we are able to reduce the overall cost of a monthly shop for our customers, making sure customers see value in a bulk buy and that they keep coming back.

Makro’s new store in Vanderbijlpark represents another excellent growth opportunity as we will be able to access an entirely new customer base.

Makro will also utilise the buying power of our commercial clients. By supplying them with a wider range of products, from their offi ce equipment right down to their tea and coffee, and by expanding our service delivery, we plan to drive mutual growth with our top suppliers and business customers over the coming year.

Masswarehouse directorate


Kevin Vyvyan-Day Chief Executive

Bruce Cayzer Food Director


Garry HendryLiquor Director

Doug JonesFinancial Director

Derick Kalan General Merchandise Director

Gert LourensOperations Director

Chris NezarMarketing Director

Pieter SchoemanIT Director



Operational Review


Operational ReviewBuilders Warehouse

Kempton Park


MASSBUILD DIVISIONAL REVIEW

Massbuild delivered solid sales growth over the reporting

period, despite the national Hardware, Paint and Glass

categories experiencing a negative sales growth year. Our

three brands, Builders Warehouse, Builders Express and

Builders Trade Depot, operating in different market segments,

protected our business from the diffi cult economic conditions,

which more severely impacted many of our competitors.

Builders Warehouse and Builders Express reported an exceptional performance, with strong comparable sales growth which suggests large market share gains. Due to negative comparable sales growth however, Builders Trade Depot reported lower profi t than the prior year which was representative of the lack of business opportunities available to building contractors generally.

We introduced our new Builders Warehouse store format consisting of 4,000m² of retail space and 4,000m² of yard space in Bedworth Park, Vanderbijlpark. Although smaller than traditional Builders Warehouse stores, these stores stock the entire range of our bigger stores and we expect them to have a higher return on sales per square metre.

Massbuild also opened a Builders Trade Depot store in Ballito, KwaZulu-Natal and acquired three ex-Mica stores (two in KwaZulu-Natal and one in Norwood, Gauteng). We have rebranded these as Builders Express stores and expect them to trade well in their chosen markets.

We plan to open three new Builders Warehouse stores over the coming fi nancial year, including our fi rst store in KwaZulu-Natal at Riverhorse, as well as new format stores in Witbank and Woodlands in Pretoria.

THE MASSBUILD BRANDS

Massbuild operates three complementary brands: Builders Warehouse, which operates large DIY and home improvement stores in major urban areas; Builders Express, a chain of smaller neighbourhood home and garden improvement stores; and Builders Trade Depot, a chain of building contractor outlets located in industrial sites in peri-urban and urban areas.

Massmart initially acquired fi ve 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 24 Builders Warehouse stores in seven provinces. 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 builders’ supplies yard. The format is unique in that it is the only home improvement warehouse in the country.

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 21 home and garden Builders Express stores in four provinces that cater to home owners. They have a strong focus on convenient locations, aesthetically pleasing displays, customer-friendly store layout and personalised service and advice. Builders Express is integrated into Builders Warehouse with a single management structure.

Builders Trade Depot was created when 34 Federated Timber stores were acquired and rebranded in 2005. Seven smaller stores have since been closed and, after the store conversions and acquisitions to date, Builders Trade Depot now operates 31 outlets 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.

f Five Builders Warehouse stores acquired in February 2003

f Three De La Rey stores acquired in June 2005, rebranded to Builders Warehouse

f Now 24 storesf Operating in SAf Home improvement supplies/tools/

building materialsf LSM 5 – 10

f 14 Servistar stores acquired in June 2005, rebranded to Builders Express

f Now 21 storesf Operating in SAf Home improvement supplies/tools/

building materialsf LSM 5 – 10

f 34 Federated Timbers stores acquired in June 2005, rebranded to Builders Trade Depot

f Now 31 storesf Operating in SA, Mozambiquef Building materials/toolsf LSM 4 – 8


Operational Review




Builders Warehouse and Builders Express are both pioneers in introducing retail principles to the South African DIY and home improvement sector and attaching garden centres to hardware stores. The clean, friendly and uncluttered look and feel of our stores offer customers a shopping experience not traditionally associated with the industry. Our new stores aim to introduce ‘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 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 8% to sales at higher margins, a trend that we expect to continue.

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 relationship-driven environment.

OUR OPERATING ENVIRONMENT

Despite a weak residential property market and negative growth in national Building Plans Passed and Buildings Completed data, Builders Warehouse and Builders Express managed to readily grow sales and to capture signifi cant market share, particularly in the additions and alterations market.

While growth of new housing developments remained sluggish, we saw an increase in smaller residential repair- and alterations-oriented projects. We believe that this was indicative of consumers spending more time at home and wanting to improve the look of their homes. Given the diffi cult environment, our product solution and format gave us the ability to remain relevant to our customers as we continued to provide a one-stop, project-complete product offering.

Our wide product offering means we remain relevant to customers through their life stages – whether they are graduates decorating their fi rst home, a married couple tackling home improvement projects or retirees scaling down. During the year we managed to take market share from competitors, especially independent operators, who found it diffi cult to optimally manage stock levels and cash fl ow during the recession. We also actively campaigned in the contractor market and were able to gain new customers, despite limited work availability, as many contractors changed their focus to maintenance work.

Historically we focused on advertising our brands, but over the past year we began to build brand associations across logical product ranges. Because our stores straddle all aspects of home improvement and construction, from garden tools to plumbing and electrical products, we are able to create common categories and project-complete ranges across our different businesses.

To maintain our price perception we operate an ‘everyday low pricing’ strategy, which applies to more than 200 key items through our stores. We undertake regular ‘shop-outs’ of our competitors and communicate differences in prices on a basket of goods to our merchants and buyers. While this information is analysed centrally, we give our store managers fl exibility to roll out price cuts so that they are able to offer their customers competitive pricing in their particular store.

Although our Builders Warehouse and Builders Express stores target customers in the LSM 5 – 10 range, our Builders Trade Depot stores target a wider target market as they supply contractors who build houses in the wealthier income bands, as well as affordable housing. The successive interest rate decreases over the past two years have meant that our customers do have more money in their pockets, although generally debt levels remain high.

In a tight economy, customers look for stricter cost management on building projects and are able to do this by better managing material and labour costs. By trading in convenient locations and opening our doors seven days a week, we offer a convenient way for customers to control their cost of materials. During the past year, we saw sales in most categories increase, with paint particularly delivering excellent growth across all the Builders brands.

Highlights

f Double digit sales growth achieved in diffi cult market

f Launched new store formatf Acquired Kangela in Mozambique f Branding opportunities maximised

Group contribution

Massdiscounters

Masswarehouse

Massbuild

Masscash

26

30

37

22

13

34

24

Sales (%)


(%)14

Operational Review


Store progress

Builders Warehouse

Opening balance 22

Stores opened 2 Bedworth Park (Gauteng) Kempton Park (Gauteng)


Builders Express

Opening balance 17

Store opened 1 Stellenbosch (Western Cape)

Stores acquired 3 Shelley Beach (KwaZulu-Natal) Umhlanga (KwaZulu-Natal) Norwood (Gauteng)


Builders Trade Depot

Opening balance 32

Store opened 1 Ballito (KwaZulu-Natal) Store acquired 1 Willowvale (Eastern Cape) Stores closed (3)Durban (KwaZulu-Natal) Witbank (Mpumalanga) Somerset West (Western Cape)


Apart from developing the new regional store format, we will look to establish stores which are conveniently situated for customers to make smaller purchases. These ‘stores amongst the roofs’ will be positioned as neighbourhood hardware stores under the Builders Express brand.







Inventories Rm 943.6 801.4 852.5 Inventory days days 74 73 77

Net capital expenditure1 Rm 143.2 145.3 138.8 Cash fl ow from operating activities Rm 165.4 137.1 265.6


Sales per store R000 80,495 78,938 81,809 Sales per m2 R000 16 16 16 Sales per employee R000 993 923 840


foreign exchange movements.4 Defi nitions/explanations to the ratios and terms above can be found on page 47.

Builders Warehouse

Builders Trade Depot Builders Express

Massmart Annual Report 2010

ore asset impairments, BEE transaction IFRS 2 charges and

e ratios and terms above can be found on page 47.

1

11

1 11

51

111

11

1 11

1

1

1

4

1

31

11

1

1

11

1

11

1

14

449

1

1

1411

1

92

1

111

1

21111

23

111 1

111

1 22

11

Operational Review



The Division reported total sales of R6.4 billion, representing growth of 13.6%. Comparable sales increased by 3.4% and annual sales infl ation was estimated at 1.8%.

Trading profi t before interest and taxation of R277.3 million was 24.6% higher than the prior year. Despite working capital management improving, lower commercial interest rates reduced interest received and so trading profi t before taxation of R308.5 million was 14.2% above the prior year. In Builders Warehouse, total stock increased by 11.8% from R565.9 million to R632.9 million mainly as a result of sales growth and the two new stores.

Capital expenditure of R145.9 million is consistent with the prior year (R149.7 million) and arose by opening two new stores, refurbishing existing stores and installing CCTV security at selected sites.



We continued our aggressive management of costs at store level, from managing our resources more effi ciently to better staff training and improving productivity levels.

During the year we also embarked on a process to improve supply chain effi ciencies and appointed independent advisors to assist with the development of our supply chain strategy. Much of the improvement in stock profi le, stock availability and inventory reduction can be attributed to the 2009 implementation of the SAP auto-replenishment software. With approximately 70% of our stock now auto-replenished centrally in


Actual 2010


International benchmark Home Depot/B&Q

7.0% to 9.0% 10.0%

Operational Review


Builders Warehouse, Builders Express, and auto-replenishment trials in Builders Trade Depot, we will have more of the right stock available at the right place, at the right time to meet our customers’ requirements.


A number of programmes were implemented to improve staff morale, productivity and to build a positive culture amongst our staff. To encourage employees to work as a team, be goal driven and to drive effi ciencies, we introduced a team building exercise called Home Team Heroes to take advantage of the hype generated around the 2010 FIFA World Cup. Staff members were assessed on a range of measures including customer service, respect for their colleagues and timeous attendance to all outstanding issues and stood the chance of winning a car. Teams competed at regional level, linking across the business. As a result of this, and other initiatives, our annual staff turnover has dropped from 17% to 12% over the past year in Builders Warehouse and from 31% to 26% in Builders Express.

Our performance on our independently verifi ed B-BBEE scorecard for Builders Warehouse and Builders Express combined, moved from 40.2% to 50.7%, securing our position as a Level 5 contributor from Level 7. Builders Trade Depot achieved 46.1% during the same period, becoming a Level 6 contributor. We have also been pushing our suppliers to improve their B-BBEE credentials, driving transformation into our supply chain.


Massbuild provides support to a range of corporate social investment initiatives, which focus on developing enterprises and improving education in disadvantaged communities.

Builders Warehouse continues to sponsor vegetable tunnels, and erected 90 tunnels that reach 30 disadvantaged schools across the country. These enable schools to grow vegetables such as spinach and tomatoes to feed less privileged children.

Builders Warehouse continues its support of the Hot Dog Café and The Coffee Stop concepts, where we sponsor ambitious talented, but unemployed, youngsters, to start their own businesses. This year one Coffee Stop was opened and 16 Hot Dog Café franchises opened at selected Builders Warehouse and Builders Express stores.





Operational Review

Builders TradeSoweto

Builders WarehouseKempton Park



We embarked on the fi fth consecutive year of partnership with Men on the Side of the Road and Primedia to provide training to 50 men and women focusing on skills development aligned to our industry such as painting, tiling and bricklaying.


Through our Eco-wise range we help to empower our customers to better manage their water and electricity usage. We provide a complete offering – from solar geysers, to water tanks for rainwater collection – to enable them to reduce their carbon footprint and impact on the environment.

Our stores continue to promote energy-effi cient and green technologies as part of our environmental programme and buyers and merchants engage proactively with suppliers to determine which of their products have garnered independent environmental endorsements. These endorsements indicate to consumers that the products comply with a published set of environmental criteria. Sales of Eco-wise products, which include energy-saving light bulbs, continue to grow.

Our new store designs make use of energy-effi cient technologies including innovative roofi ng panels that make use of natural lighting. This has been implemented in the new Builders Warehouse Bedworth Park store and the new Builders Trade Depot Ballito store. It is intended to implement this process in the new Woodlands and Witbank Builders Warehouse stores with an anticipated decline in electricity usage of 10,000kWa/month. This roll-out will continue in Builders Warehouse over the next three to four years, and Builders Trade Depot stores will be investigated for a similar rollout.

19 Builders Warehouse stores with adjacent garden centres are fi tted with water tanks to harvest rainwater, which we use to water our nurseries. In Builders Express, where possible a smaller system will be rolled out in 2011, whilst this process is still being investigated in the Builders Trade Depot stores.

We also started to provide battery disposal units at some of our Builders Warehouse stores. During the coming year we will expand this initiative so that customers can also dispose of fl uorescent tubes and power tool batteries. We hope next to provide facilities that enable our customers to safely dispose of insecticide bottles.


Limited competition in the home improvement, DIY and building contractor markets in Africa make the continent attractive from a long-term expansion perspective. Builders Trade Depot acquired 13 Kangela stores in Mozambique during the reporting period and we will look to improve trading in the existing stores and to open more stores in the coming years.

In early 2010 in Namibia, we signed a deal to purchase Pupkewitz Megabuild, a Windhoek-based business with 16 stores around the country. This transaction is still conditional upon the Namibian authorities’ approval. Builders Warehouse stores in Botswana and Zambia are also in the pipeline – sites have been established and plans are being fi nalised.

RISKS AND REWARDS

General stagnation in the national Hardware, Paint and Glass categories as well as a slowdown in new building plans, buy-to-let property purchases, and delays in government’s affordable housing programme could negatively affect Massbuild’s business. Apart from benefi ting from market share gains, we are also well positioned to take advantage of the growth in the additions and alterations business, which we believe, will shield our business.



Operational Review


We embarked on a feedback survey using the latest cell phone technology, which included interviewing 900 consumers and employees. We also held focus groups with particular customer groups, such as plumbers and electricians, to determine what they wanted to see in our stores. The process yielded useful information about our customers’ buying patterns and shopping experiences. We plan to use this to change our in-store processes to better meet our customers’ requirements and expect this to inform our marketing strategy over the next few years.

We make every effort to ensure that we are 100% compliant with the Occupational Health and Safety Act. Nearly half of our stores store bulk material on high racks and during the year an unfortunate incident occurred where a customer was injured while shopping at one of our stores. We arranged for treatment at a private clinic and provided compensation as well as an ex-gratia payment for her pain and suffering.

As with many businesses in South Africa, we face the risk of armed robberies aimed at our cash, especially during the Festive season. We have introduced drop safes into all our stores and outsourced cash management and collection to a third party to protect our stores from being targeted.

FUTURE OUTLOOK

We expect some improvement in the South African residential housing and commercial sector, with continued growth in the additions and alterations market, as well as an increase in demand for affordable housing, to underpin sales going forward. The energy-effi cient home improvement market is also set to drive sales, as consumers struggle to manage increasing electricity costs. Longer term, our focus remains on creating an enjoyable shopping experience for our customers, to build consumer loyalty across all sectors and to move closer to our strategy of being the number one home improvement and building materials business in southern Africa.

Massbuild directorate


Llewellyn WaltersChief Executive andManaging Director (Builders Warehouse)

Madeline ChalmersSupply Chain Director

Th ashmi DoorasamyHuman Resources Director

Neville Hatfi eldMerchandise Director


Chris Lourens Operations Director

Alex Rymaszewski Store Development Director

André SteynDirector (Builders Express)

Andries StrydomDirector (Builders Trade Depot)

Chris TugmanIT Director

Simon WhiteFinancial Director


Operational Review

Builders ExpressRobindale, Randburg


Operational ReviewJumbo

Crown Mines


MASSCASH DIVISIONAL REVIEW

For the year under review, Masscash continued to outperform

its wholesale competitors despite the effect of very low food

infl ation and the impact of the South African job losses in

2009 which affected our core consumer market’s spending

power. We made a number of acquisitions in support of

our retail strategy of offering customers high quality and

affordable products in the most convenient locations. To this

end, we bought the remaining 49% interest in Cambridge

Food, a controlling interest in Sunshine supermarkets and a

controlling interest in Astor, which comprises a combination

of retail and wholesale outlets.

In addition to these acquisitions, we opened three new retail stores during the year, two Astor stores in Soweto, Gauteng, and one Cambridge store in KwaMashu, KwaZulu-Natal. All retail stores will be rebranded under the Cambridge Food brand by the end of the next fi nancial year.

We also bought controlling interests in DF Scott, Finro and Mikeva – all wholesale businesses operating in the Eastern and Western Cape.

Kawena wholesales food in Mozambique and this acquisition is part of our intent to grow a wholesale and retail footprint into sub-Saharan Africa, starting with those countries closest to South Africa.

We sold the cellular contract base of CellShack as we believe it did not fi t the Masscash core business model.

THE MASSCASH BRANDS

Masscash consists of wholesale food and cosmetics business interests as well as retail outlets, all of which target the lower LSM groups. Our Wholesale Division consists of CBW, Jumbo Cash & Carry, and Shield as well as a number of independent wholesalers operating under their own brands. Our recently formed retail division consists of the Thaba Cash & Carry, Sunshine, Cambridge and Astor brands.

CBW wholesales 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 456 members who own wholesale or retail food businesses in South Africa, Botswana, Namibia and Swaziland.

We also manage the brands of a number of our wholesale customers. At the lowest end of the market, we provide marketing support such as supplying signage and leafl ets to spaza shop and shebeen owners through our Banner Group initiative. Masscash owns the rights to these brands and logos.

We offer wholesale customers with more formal operations the ability to trade under national retail brands such as Saverite, Multisave, Powersave and Liquorland. Our marketing team offers wide-ranging support to these supermarkets and bottle stores, assisting owners with marketing initiatives such as designing of leafl ets, signage and implementing national television and radio advertising campaigns.

f 378 members acquired 1 March 1992

f Now 456 members and 517 outlets

f Operating in SA, Botswana, Lesotho, Namibia, Swaziland

f Food/groceriesf LSM 2 – 6

f 14 CCW stores acquired in June 1998

f 22 Brown and Weirs stores acquired in July 2001

f Two chains combined under CBW format from July 2001

f Now 91 storesf Operating in SA, Botswana,

Lesotho, Mozambique, Namibia, Swaziland

f Food/liquor/groceries/ethnic cosmetics

f LSM 2 – 6

f Six Jumbo stores acquired in April 2001

f Now six storesf Operating in SAf Food/groceries/ethnic cosmeticsf LSM 2 – 6


Operational Review



On the retail side, the three-store Thaba Cash & Carry was acquired in 2007 as part of our strategy of developing a model to serve wholesale and retail customers in the same store. Cambridge Food, with six stores, was acquired in 2008, while Top Spot and two Sunshine stores were acquired in July 2009. Service departments, made up of an on-site bakery, butchery and fresh fruit and vegetable offering, is an important component of this retail offering.

We are in the process of consolidating all 20 of our retail outlets under the Cambridge brand.


All our stores apply the 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 important general merchandise ranges. Our private label food brands, Econo and Heritage, offer our customers exceptional value and the assurance of stringent quality and safety controls. Our retail stores are well located, close to high traffi c commuter nodes, and offer the best quality at affordable prices.

OPERATING ENVIRONMENT

An estimated one million jobs were lost in South Africa in 2009 as a result of the global recession, affecting not only our customer base which is made up mainly of traders, but in turn their customers. This, coupled with sales defl ation of 0.6% which included defl ation in commodities such as oil, rice and maize, resulted in a decline in profi tability as expense infl ation was closer to 7%.

The underlying causes of commodity defl ation include volatility of agriculture supplies driven by global warming, bio-fuels, extreme climatic conditions and the stronger Rand. A strengthening Rand typically reduces the price of imported categories such as rice and oil. In addition, the record South African maize crop has seen the price of this staple food fall from R1,700/ton to R1,100 by June 2010.

The tightening of the credit market did not impact our business as much as the formal retailers as our customers are generally less credit-sensitive. Many of our customers rely on social grants to fund their purchases and government’s increased expenditure on grants from 3.2% of South Africa’s Gross Domestic Product to 3.5% was therefore welcomed.

Over the long term we face increased competition in our chosen markets, with the major retail chains targeting the lower LSM sector more aggressively. However, we believe that to date they have been less successful in developing the appropriate smaller-store format for this market and so it continues to be dominated by independent retailers and informal traders who typically have a lower cost base and an owner-manager mindset. Masscash continues to service these independent retailers effi ciently through our cash and carry and voluntary buying group formats.

Our retail offering made good progress, assisted by the decision to bring all retail stores under the Cambridge brand. A more contemporary design to appeal to our customers was introduced and the new ‘look and feel’ will be rolled out fi rst to all new stores and then to older acquired ones in a refurbishment programme.

‘Fresh’ departments, offering meat as well as fruit and vegetables, have proven very successful in enticing customers and optimising trading margin. Our customers depend on public transport and therefore shop for dry groceries and perishable products several times a week, and so we have dedicated more trading space in our Cambridge stores to perishable goods.

In addition, our private labels programme reported 25% sales growth, with the new lines (fi sh and chicken) performing particularly well.

Highlights

f Retail offering expandedf Focused on three key regions Developing a single national brandf Wholesale division-wide full suite IT

system rolled outf Kawena in Mozambique acquired

Group contribution

Massdiscounters

Masswarehouse

Massbuild

Masscash

26

30

37

22

13

14

34

24

Sales (%)


(%)

Operational Review


Store progress

CBW

Opening balance 73

Stores opened 2 Durban (KwaZulu-Natal) Isipingo (KwaZulu-Natal)

Stores acquired 16Port Elizabeth (Eastern Cape) Willowvale (Eastern Cape) Roodepoort (Gauteng) Roodepoort (Gauteng) Newtown (Gauteng) Soweto (Gauteng) Soweto (Gauteng) Johannesburg CBD (Gauteng) Johannesburg CBD (Gauteng) Pretoria (Gauteng) Mokopane (Limpopo) Tzaneen (Limpopo) Piet Retief (Mpumalanga) George (Western Cape) Mossel Bay (Western Cape) Manzini (Swaziland)

Total stores in 2010 91Jumbo

Opening balance 6No store movement during the current year









Net capital expenditure1 Rm 95.6 117.7 91.1 Cash fl ow from operating activities Rm 154.1 308.0 163.4


Sales per store R000 148,927 163,047 158,023 Sales per m2 R000 45 48 45 Sales per employee R000 2,075 2,565 2,729


foreign exchange movements.4 Shield is shown as average sales to each independently owned outlet (ie this represents only

a portion of the outlet’s sales).5 Defi nitions/explanations to the ratios and terms above can be found on page 47.

93MaMassmart Annual Report 2010

ms above can be found on page 47.

CBW Jumbo

112

1

1

391 1

11

11

2

1

111111

11

1

21111

1

1

11

1

11

11

1 1

1 11

11

2

2

1

1

1

12

21

1

2

98

10

Operational Review



The Division reported total sales of R17.4 billion, representing growth of 14.5%. Comparable sales growth was 1.1% and our annual sales defl ation was 0.6%. Acquisitions during the year caused the signifi cantly higher total, compared to comparable, sales growth.

Trading profi t before interest and taxation of R483.6 million was 0.4% higher than the prior year. This growth was achieved by a steady sales performance, boosted by maintaining our low-cost operating structure, the positive effect of the higher net margin retail food stores and the loss in the prior year of the very low margin cigarette sales.

Net interest received declined, despite better working capital management, due to lower commercial interest rates. Debtors remain well controlled and stock levels increased by 25.7% to R1.4 billion representing 30.9 days.

Total capital expenditure of R98.3 million for the year was 18.6% lower than the prior year’s R120.8 million. In addition, the total amount invested in acquisitions totalled R154.0 million.


As wholesale food volumes tend to be constant, the Division’s sales performance is materially affected by the level of sales infl ation. As infl ations slows or moves into defl ation, the Division’s ability to hold its trading profi t margin comes under pressure and, with defl ation, will even reduce. As the higher net margin Retail Cash and Carry stores gain momentum however, the target profi t margin may be increased above 3.0%.


Actual 2010


International benchmark Makro South America

3.0% 3.0%

Operational Review



Masscash serves its customers through low-cost stores located in areas which are easily accessible. Our low-cost base is essential for maintaining our competitive pricing.

To support this, our management structure is decentralised, but with centralised support in terms of accounting systems, supplier relations and business management. This facilitates a marketing strategy where ranges, pricing and promotional support, as well as trade credit, are specifi cally tailored for the individual requirements of local customers and markets. A fl exible purchasing strategy coupled with the leveraging of Group volumes facilitates the procurement of products at the lowest price.

The store-by-store rollout of our point-of-sale IT system, Arch Retail, continued during the fi nancial year and will signifi cantly enhance the use of management information and fundamentally improve the way we do business. We began rolling out the Arch Retail Management System in 2009 and 70 stores now have access to it. The system allows for a common masterfi le of stock data across the Division and seamlessly integrates with the Division’s accounting and fi nance functions. Through the stock masterfi le, the new system provides our buyers with powerful reporting functionality, thereby improving the quality of their information when assessing sales trends and negotiating with suppliers.


We continued to invest signifi cantly in up-skilling and training our staff. Employees attended courses ranging from soft-skills development to diversity awareness and health and safety. Adult Basic Education and Training remains an ongoing offering for our employees and we granted 126 learnerships to black staff.

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

We have an ownership mentality across our national, regional and store leadership teams, all of whom are empowered to trade and who are incentivised through profi t sharing at various levels. Minority partners that previously sold a majority share in



Operational Review

JumboCrown Mines

CambridgeKwaZulu-Natal



their businesses to Masscash are accommodated and, for the most part, continue to operate successfully within the Division, thus retaining important entrepreneurial talent in the business.

Masscash achieved a Level 5 B-BBEE score at 59.1% from Level 6 at 50.3%, audited by Empowerdex, driven higher mainly by improvements in skills development. Finding appropriate equity candidates for senior management positions remains a challenge, but with some progress being made this year.

For several years we have implemented a staff HIV/Aids programme, with the objective of encouraging our employees to test their HIV status and thereafter offering free counselling and antiretroviral therapy. Approximately 233 of our employees now access ARV treatment through the Company’s treatment programme. In 2009, 859 staff underwent voluntary counselling and testing.

Masscash trading hours do not require that we employ a large number of non-permanent staff and as a result concerns around labour broking do not affect our business.

INVESTING IN OUR COMMUNITIES

Masscash supports projects that focus on building food security and improving educational outcomes for disadvantaged students.

Thousands of children continue to receive a balanced meal at container kitchens sponsored by Masscash. During the reporting period we donated 16 more kitchens to schools throughout the country, adding to the 17 already in place. Each container costs about R67,000 and a Masscash store then ‘adopts’ a container and provides food on an ongoing basis for volunteers to prepare and distribute to school children.

At Kromhoek, we sponsored 11 grandmothers who support their orphaned grandchildren as well as donating R12,000 to grandmothers in the Valley of 1,000 Hills who also take care of Aids orphans.

Masscash provided ongoing support to the Dinelei Crèche, the Joshuas and other projects in the inner city of Johannesburg.

During the reporting period we trained 30 home-based crèche principals through the African Self Help Group Soweto. We also donated more than R500,000 to the Wildlands Trust in support of their Treepreneur project which provides food in exchange for indigenous tress to reforest areas and create carbon credits.

Staff members volunteer their time on several projects including an Easter drive to collect children’s books from staff to donate to the Baragwanath children’s ward. Our employees partnered Mpumelelo School, one of the poorest schools in Gauteng, launching a feeding scheme and supplying computers for disadvantaged learners. Masscash staff members are now working towards setting up a school library on the premises.


For several years we have had a presence in Namibia and Botswana and, as a fi rst step into Portuguese-speaking Africa, we acquired the Kawena group of stores in Mozambique. We intend to use this as a base to develop a wholesale and retail footprint in the rest of that country. Our operations in Botswana experienced a diffi cult year as the political and economic situation in Zimbabwe normalised and so cross-border demand decreased.

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



Operational Review


RISKS AND REWARDS

Continued high unemployment, defl ation particularly in commodities, and the risk of a ‘double-dip’ recession could affect the discretionary spend of our customers through further job losses. We also face increasing competition from retailers penetrating the lower LSM groups. We are confi dent that the Masscash model which is underpinned by a low-cost philosophy will continue to play a signifi cant role in the food supply chain.

Service departments and perishable categories account for an increasingly large part of our customers’ grocery baskets. This presents an opportunity for us to grow in these areas and to build a business that differentiates itself from existing national players. A single, powerful national retail brand will also provide signifi cant benefi ts.

Uncertainty around South African provincial liquor legislation continues to present a challenge, with several stores battling to get licences processed. Periodic xenophobia also remains a concern as many of our customers are foreign nationals.

FUTURE OUTLOOK

The LSM 2 – 6 market remains highly fragmented but 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. Future growth will focus on building our Retail Division, expanding the wholesale range to include meat and fruit and vegetables and growing the franchise and Banner Group formats.

Masscash directorate


Robin WrightChief Executive

Jane BruynsHuman Resources Director

Jay CurrieRetail Director

Neville DunnOperations Director


Dino HolmesFinancial Director

Pearl MaphosheNon-executive Director

Michael MarshallBusiness Systems & Process Director



Operational Review

Cambridge Kwa MashuKwaZulu-Natal


Divisions

Massmart Holdings

ChannelForums

Shared Services

CHANNEL AND SHARED SERVICES REVIEW

We believe that the value of the Massmart Group is greater

than the sum of its parts. This philosophy underpins

Massmart’s approach to collaboration across the Divisions

which is facilitated and implemented by our Channel and

Shared Services functions.

CHANNEL

The Channel function provides a secure and structured place for our Divisions to share information and collaborate in a way that we believe will materially benefi t the Group. This is done primarily by organising forums, in particular areas of competence and interest, which bring together the best and most senior skills in the Group in each functional area. These forums are chaired by members of the Group Executive Committee and consist of both trading and functional forums.

Each forum is tasked with performing four key functions.

The fi rst, and most important, is identifying common opportunities across Divisions where the capability and resources of the Group can be leveraged to increase profi ts or reduce costs across some or all Divisions in a way that could not be achieved by any Division acting independently. This can take the form, for example, of sharing private label products, collaborating on product sourcing, supplier negotiations to reduce the cost per unit from shared vendors, or building shared supplier relationships.

Secondly, forums are also used to reach agreement on common standards that are important for Divisions to adhere to. In addition to this, forums assign and monitor Group representation on external standards and industry bodies and engage government in legislative processes relevant to our industry.

Thirdly, forums perform a peer review function to improve performance. Massmart Divisions assess each other for adherence to agreed Group standards and operating norms, and ensure appropriate measures are adopted to mitigate against risks material to the Group.

Lastly, forums function as a place to share internal and externally sourced learning. Divisional level data is gathered, analysed and benchmarked at Group level, then presented and debated at the various forums, and experiences across Divisions that will materially advantage the Group are shared. Processes piloted in one Division can be rolled out in another. External learning takes the form of presentations from conferences, visiting other local and international retail sites, gathering market share data meaningful in tracking Divisional category performance against competitors and monitoring competitor activity through supplier and market intelligence. Regular presentations to forums from outside experts keep Group and Divisional executives up to date with the latest developments in our industry and operating environment.

Trading forumsOur trading forums consist of the Food, Liquor, General Merchandise and Cellular Forums. During the year, Massmart’s trading forums continued to consolidate meaningful commercial objectives such as operationalising the key legislative requirements arising from the Consumer Protection Act, Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA), Foodstuffs, Cosmetics and Disinfectant Act (FCD Act), Tobacco Act and Medicines Act. Internal product category reviews and joint strategic supplier reviews continued to be key focus areas.

Following on the successes of the prior year, key strides were made in our Food Safety Management System piloted in Makro, including enhancements made to our product recall processes. Notable achievements of the trading forums this year included the vendor conferences held across the country to prepare our vendors for the enactment of the Consumer Protection Act.

Trading forums continued to consolidate meaningful commercial objectives such as:

f Joint strategic supplier reviewsf Internal product category reviewsf Collaboration in respect of environmentally

sustainable practices

Trading forums consist of:

f Foodf Liquorf General merchandisef Cellular

Operational Review


Functional forums focus on the management of skills and the procurement of resources and services required to support key Group-wide activities:

f Technology, Information and Process (TIP)f Operationsf Financef Human Resources

The Shared Services teams provide services to the Divisions that can be provided more effi ciently as a group than Divisions can source individually:

f Supplier contract negotiation and administration

f International commercef Employee benefi tsf Shared Private Label management

Functional forumsOur functional forums are the Technology, Information and Process (TIP), Operations, Finance, and Human Resources Forums. These focus on the management of skills and the procurement of resources and services required to support key Group-wide activities.

The HR Forum continued its focus on training and development and talent management. The Massmart Corporate University, a virtual institution, is the primary institution for the deployment and management of our development programmes (Executive Development Programme, Leadership Development Programme, Graduate Development Programme, Functional Skills Training).

The TIP Forum steered the Group through a number of successful signifi cant IT projects over the year and continues to implement COBIT which is an internationally accepted IT Governance Framework recommended by the King III Report on Corporate Governance. The Operations Forum focused primarily on collaboration in respect of environmentally sustainable practices.

SHARED SERVICES

The Shared Services teams provide services to the Divisions that can be provided more effi ciently as a group than Divisions can source individually. These services are requested by the Channel forums and are ultimately accountable to these forums for their performance. These services must respond to divisional needs and be of higher value – measured as quality, cost and benefi t – than can be sourced externally or generated inside the Division. A Shared Services team’s relationship with the Divisions is one of a service provider that must strive for excellence and become the best among competitors. The Divisions are their customers and their reason for existing.

Shared Services currently includes: Supplier Liaison and Administration; International Commerce; Employee Benefi ts and Shared Private Label management.

The Supplier Liaison and Administration team achieves savings by negotiating supplier contracts at Group level. The International Commerce team handles the treasury and logistics aspects of importing products directly to be sold across our Divisions. The Shared Private Label team manages various brands that are private or exclusive to Massmart and shared across trading Divisions. These brands have achieved category penetration ranging from 7% to 84% across the Group.

Operational Review

operational review -...

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