This year in review
Massmart’s total sales were R91.3 billion, an increase of 7.7% over the prior year. Comparable stores’ sales growth was 5.4%, with product inflation of 6.7%. Currency weakness and challenging operating environments saw total sales growth from our non-South African stores slow to 11.2% (13.4% in constant currencies) from 23.2% for the six months to June 2016.
Good margin management and excellent expense control resulted in Group trading profit, excluding foreign exchange movements and interest, growing by 11.9% to R2.6 billion, while headline earnings increased by 15.6% to R1.3 billion.
Much has been said, both externally and elsewhere in this Integrated Annual Report, about the difficult South African and sub-Saharan African economic environments in 2016. It is likely that the period from early 2016 to mid-2017 will represent South Africa’s economic low-point in the decade to 2020. The divergent sales performances across our major product categories reflect the economic pressure within the South African consumer environment, with total Food & Liquor sales growing at 11.7% for the year while General Merchandise grew by 1.5% and Home Improvement/DIY total sales grew by 5.6%. Sales in General Merchandise and, to lesser extent, DIY were negatively impacted by very low discretionary spending by consumers.
Since 2014 many African economies have been adversely affected, to varying degrees, by a strong US Dollar, weak commodity prices, their own currency weakness, and undiversified industrial/manufacturing bases. Compounding this is that drought conditions in southern Africa remained severe and sales growths in this region slowed noticeably in the latter part of 2016. Slightly more than 50% of the Group’s ex-SA sales are non-Food (General Merchandise and Home Improvement) and the difficult economic conditions therefore exacerbated these categories’ performances. In Rands, the Group’s total sales growth ex-SA was 11.2% while comparable stores’ sales growth was 3.1%. At a category level these comparable sales growths were 9.4% in Food but 0.6% in non-Food, reflecting the adverse conditions of the ex-SA consumer economies.
Most Massmart divisions performed well in the tough South African consumer environment where we effectively managed the fine line between growing sales and maintaining profitability, whilst controlling cost growth in the face of severe cost pressures.
During the 2016 year, 19 stores were opened, including two outside of South Africa, representing new space growth of 3.7%. Our focus on optimising the Group’s store footprint continued with ten stores being closed, resulting in a net space increase of 1.2%. Our portfolio of 412 stores includes 39 outside South Africa 8.7% of the Group’s sales. Ex-SA sales currently represent 19.0% of Massdiscounters’ total sales, 7.9% of Massbuild and 13.3% of Masscash Wholesale respectively. We expect to open 11 new stores outside South Africa during 2017-18 representing 26% space growth.
Later in this letter, I describe our four strategic priorities we are pursuing, namely: improving and growing the core business; growing Retail Food and Builders’ formats in South Africa; growth into sub-Saharan Africa; and ecommerce. In the shorter-term however, we are emphasising:
- Holding operating costs as a % of sales as low as feasible. This is achieved in multiple ways but key focus areas include supply chain and logistics’ efficiencies, reducing store construction and in-store operating costs, effective labour-scheduling of our store employees, and an intense focus on the procurement costs of our goods-not-for-resale;
- Maintaining a competitive price-gap against our major competitors across Known Value Items (KVI’s). This price-gap is enabled by Massmart’s operating costs (as a % of sales) being the lowest in South African retail;
- Working closely with key suppliers to ensure that we invest energy and resources into areas of common interest, including supply chain efficiency, to ensure their products reach their desired target markets cost effectively; and
- Being selective about our South African store footprint: only opening stores that we are confident will be sustainably profitable and closing those with permanently compromised profitability.
Overview of financial performance
In his report included here, our Chief Financial Officer, Johannes van Lierop, addresses in useful detail the key financial issues necessary to understanding and interpreting the Group’s 2016 performance.
Divisional operational review
Game: 141-store General Merchandise discounter and Food retailer. Trades in South Africa, Botswana, Ghana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Tanzania, Uganda and Zambia
DionWired: 24-store Hi-tech retailer. Trades in South Africa
Total sales for the year increased by 5.3% and comparable sales grew by 1.5% with product inflation of 4.8%. South African total and comparable sales growths were higher in the second half of 2016 while ex-SA sales growth in Rands slowed dramatically given the economic conditions and our higher proportion of non-Food sales.
Our two-year focus on Game’s merchandise execution and addressing in-store and supply chain costs manifested in a strong trading margin and expense performance, and so Massdiscounters’ trading profit before interest and tax increased by 54.8%.
DionWired had an exceptional year with good sales, despite a very challenging environment, and an impressive profit performance.
In the last quarter of 2016 we successfully trialled the new SAP point-of-sale system in 12 Game stores in South Africa. We have therefore started the next phase of the point-of-sale roll-out, with all Game and DionWired stores in SA likely to be converted by June 2017. The more significant SAP ERP systems’ implementation remains on schedule for mid-2018. In time this implementation will support improved in-store processes and inventory management, improve customer engagement and relationship management, enable an online offering, and provide a platform to offer ancillary financial services.
Our Fresh roll-out continues with 88 Game stores now offering this category. Although not yet in all stores, Food & Liquor sales participation is already 23% and is achieving comparable growth of 11%.
Four Game stores, two in South Africa and one each in Kenya and Zambia were opened during the year, whilst two DionWired stores were opened and two closed, increasing trading space by 2.3% to 545,094m². We expect to open eight Games stores during 2017-18, including six across four ex-SA countries, and two DionWired stores in South Africa.
Makro: 20-store Makro warehouse club trading in Food, General Merchandise and Liquor. Trades in South Africa
Massfresh: houses the Group’s fresh produce, fresh meat and bakery operations including The Fruitspot, an established wholesaler and distributor of fresh and cut fruit and vegetables.
Total sales for the year increased by 11.0% and comparable sales grew by 7.6% with product inflation of 6.5%. Total sales growths in Food & Liquor are higher than 11% while the much lower General Merchandise sales are reflective of soft discretionary spending.
There were significant cost pressures within the business, including new store pre-opening costs of R17.4 million, resulting in an increase in trading profit before interest and tax of only 4.4%.
Online sales more than doubled for the year and we continue to expand and improve the online offering including now offering a virtual marketplace in General Merchandise.
New Fruitspot facilities, which will improve our internal and external distribution efficiencies, were opened in Cape Town and Durban in the latter part of 2016.
The April 2016 opening of a new Makro store near Carnival Mall, east of Johannesburg, and an extension to the Strubens Valley store, in Johannesburg West, increased trading space by 11.3% to 217,907m². In late 2017 we expect to open our 21st store in South Africa in the north of Johannesburg.
Massbuild comprises 99 stores, trading in DIY, Home Improvement and Building Materials, under the Builders Warehouse, Builders Express, Builders Trade Depot and Builders Superstore brands in South Africa; and five Builders Warehouse stores in Botswana, Mozambique and Zambia.
Massbuild grew total sales for the year by 5.6%, with comparable sales increasing by 1.7% and product inflation of 4.7%. Sales growth in our South African stores improved slightly in the second half of 2016 as a result of more effective promotions and good merchandise execution while our ex-SA stores’ sales growth in Rands decelerated markedly given the weakening economies in those countries.
Given the sales pressures and despite good expense control, the increase in Massbuild’s trading profit before interest and tax was 2.7%
A pilot online offering for our contractor customers has progressed well. The online proposition is exceptional with rich data and broad functionality, and was opened for browsing to the general public in early 2017. In late March 2017 we opened the site to online purchases by all customers and the initial response has been exceptional.
One small Builders Warehouse store was closed in Mozambique. Two Builders Express stores and two Builders Superstores were opened; and one Builders Trade Depot store was closed in South Africa. Net trading space remained similar to 2015 at 449,212m². There will be four new Builders Warehouse stores opened in both Mozambique and Zambia during 2017-18, with a number of the Massbuild brands planning new store openings in South Africa.
Masscash comprises 54 Wholesale Cash & Carry and 57 Retail stores trading in South Africa; 12 Cash & Carry stores in Botswana, Lesotho, Mozambique, Namibia and Swaziland; and Shield, a voluntary buying association trading in South Africa, Botswana, Namibia and Swaziland.
Total sales increased by 7.5%, comparable sales increased by 7.9% with product inflation of 9.3%. Lower-income consumer demand was slightly mitigated by high Food inflation, particularly in commodities.
In February 2016 one of our biggest Cash & Carry stores, Jumbo in the south of Johannesburg, was destroyed by fire. We were fully covered by insurance, as described in the Chief Financial Officer’s review, and expect to open the rebuilt store in April 2017. This is why this Division’s comparable store sales growth exceeds total store sales growth.
Competition and price-pressure were intense in both Retail and Wholesale but both businesses responded assertively and effectively. The retail formats, Cambridge and Rhino, performed well, growing comparable sales above 10% and gaining market share. Effective margin management and good cost control enabled Masscash to grow trading profit before interest and tax by 28.2%.
Four Wholesale stores were closed; and eight Retail stores were opened and two closed, resulting in net trading space decreasing by 4.3% to 356,531m². Over the past three years we have closed 12 Cash & Carry stores with a view to driving higher sales through fewer, more efficient, stores. In 2017-18 we will be opening 20 new Rhino and Cambridge stores in South Africa, and one Wholesale store in Zambia.
Improve and grow the core South African business
There are two broad dimensions to this objective – one, to improve the profitability of, and to continually seek new growth avenues for, each of the divisions; and two, to ensure that we collaborate across the divisions, i.e. intra-Group to reduce cost duplication and inefficiency. To this end, the profit improvement in Game and Masscash Wholesale and Retail were great performances and a tribute to those management teams and staff. Our collaboration efforts are overseen by our Group Commercial Executive, Llewellyn Steeneveldt, and involve our core functional areas across each Division – like IT, Real Estate, Merchandise and Private Label – working together. Collaboration takes many forms: negotiating with a single supplier across the Group for best price and service; aligning around a single instance of the product master-data; or enforcing a peer-review for new IT projects.
In early 2017 we appointed a Group Supply Chain & Logistics Executive, Richard Inskip, with a mandate to improve the Group’s transport, logistics and supply chain capabilities over the long-term. Our supply chain community has already done good work in this area – evidenced by the sharp improvement in the Group’s inventory levels which reduced by five days from December 2015.
Expand further into Food Retail and the Fresh categories
We remain excited by the long-term growth opportunities presented by both Retail Food and Builders Warehouse in South Africa. Although still low, we believe that Builders Warehouse has the largest market share in South African Home Improvement/DIY and we will continue to roll-out this very strong retail offering through three formats – Builders Warehouse, Builders Express and Builders Superstore. Retail Food, already a R15 billion sales category across the Group, is being rolled-out through adding the Fresh category to Game and Makro stores, and by opening more Rhino and Cambridge stores on a regional basis.
Growth into sub-Saharan Africa
As noted elsewhere, our 2016 sales growth from our ex-SA stores was strong at 11.2% (and 13.4% in local currencies) which is well above the 8.0% total sales growth reported from our South African stores for the same period. Ex-SA sales currently represent 19.7% of Game’s total sales, 7.9% of Massbuild and 13.3% of Masscash Wholesale respectively.
We are optimistic, but measured, about the long-term growth opportunities across selected African countries and expect to open 11 new stores, representing 26% additional space, in five countries outside South Africa during 2017-18. Despite the current economic headwinds facing sub-Saharan Africa ex-SA, the major regions of south, west and east Africa are forecast to grow ahead of South African economic growth.
We are alive to the growing presence of online shopping and digital activation in our customers’ lives and the effect it has on their shopping behaviour and needs. Similarly, we are clear that internationally customers’ purchases of General Merchandise, are increasingly migrating to online platforms. It is estimated that in South Africa online sales represent only 1.5% to 2.0% of sales and we see similar participation rates in those categories we sell online. It is likely however, that this participation will grow rapidly and, indeed, in Makro online sales doubled in 2016 compared to the prior year. In response Massmart has built both B2B and retail online offerings covering: General Merchandise and Liquor in Makro; DionWired’s Hi-tech merchandise range; Builders Online; and, in Masscash, Shield’s B2B platform.
Linked to ecommerce and digital is the provision of a broad array of financial services to our retail customers. An executive with many years’ experience in this area, Gerhard Hayes, joined the Group in 2015 and much work is underway to expand and improve our offering including the roll-out of kiosks across our store network providing financial services such as prepaid electricity, Lotto tickets and airtime purchases.
The Board and Executive Committee
My Board and Executive Committee colleagues remain a source of great counsel and support. At Board level we have ready access to skills and experience across diverse areas including international retail, corporate governance and risk, public policy and transformation, and real estate. This counsel, of course, extends beyond me to our Executive Committee colleagues and senior management. I thank and acknowledge the support the business and I have received from my Board colleagues, and I recognise the quality of the leadership, strategic debate and operational execution that comes from my Executive Committee colleagues.
With effect from 31 August 2016, the Deputy Chairman of our Board, Chris Seabrooke, handed over the chairman roles of the Audit and Risk Committees to Moses Kgosana and ceased to be a member of both committees after 16 years of membership.
After 2.5 years on the Massmart Board, Walmart-appointee Andy Clarke resigned with effect from 22 February 2017. Andy’s deep retail experience contributed significantly to the Group’s retail thinking and execution, especially on Fresh and online, and we thank him for his valuable service.
In August 2016, we announced that Albert Voogd was joining as the Massdiscounters Chief Executive Officer (CEO). Outgoing CEO Robin Wright, whose drive and energy played a very significant part in the improved Game performance, has retired but will continue to work with Massmart on specific projects.
With effect from November 2016, Joe Ralebepa joined the Group as General Counsel and the Massmart Holdings Company Secretary, replacing Mike Spivey who, after six great years at Massmart, returns to an executive role with Walmart International. Mike played a significant role in upweighting the effectiveness and contribution of the legal community within Massmart and in helping the Group participate usefully within the Walmart International business, governance and legal fraternities.
Richard Inskip joined the Group in January 2017 as Group Supply Chain & Logistics Executive to focus on leveraging the Group’s transport, logistics and supply chain.
Our people and transformation
The contribution of our 48,000 colleagues never goes unnoticed or unappreciated, especially in the current environment where likely many of them, and their own families, are feeling the adverse consequences of the weak economy. We would like to acknowledge and thank every colleague for their service and support, including those in our administrative offices and distribution centres, knowing that the largest part of the Group’s improving performance comes from their efforts.
For a business to be sustainable it must reflect, and be responsive to, the needs, nature and direction of the society within which it operates. We believe that diversity and transformation make a business stronger, more resilient and more responsive. As a major South African corporate, we continue to focus on the transformation of our senior and executive management.
Sales update and outlook
For the 13 weeks to 26 March 2017 Massmart’s total sales growth was 0.5% over the prior year’s period and comparable store sales decreased by 1.7%. Sales performance outside South Africa remains weak with Rand total sales growth of -17.4% and comparable sales growth of -19.4%, while in constant currency these figures are -1.9% and -2.1% respectively. South African total and comparable sales growths are 2.5% and 0.2% respectively. Given our large wholesale businesses, the Group’s sales performance for the 13 weeks has been adversely impacted by Easter falling in April 2017 compared to March in 2016. This Integrated Annual Report was finalised a day after the announcement of several changes to key roles in the South African Cabinet. This development may increase policy uncertainty in South Africa, potentially with negative consequences for the economy, and thus it is extremely difficult to currently provide any useful short- to medium-term economic or performance outlook.
Our appreciation and gratitude is due to all our stakeholders for their support for, and contribution and commitment to, Massmart during this period.
Chief Executive Officer
31 March 2017