This year in review
Massmart’s 2017 financial year was a 53-week trading period which complicates meaningful comparisons with the prior year’s 52-week period. Apart from the paragraph immediately below, my commentary focuses on Massmart’s performance for the current and prior 52-week periods.
For the 53 weeks to 31 December 2017 Massmart’s total sales increased to R93.7 billion, representing a 2.7% growth compared to the 52 weeks to 25 December 2016. Group operating profit, excluding foreign exchange movements and interest, increased by 4.8% to R2.8 billion while headline earnings increased by 14.0% to R1.5 billion.
Total sales for the 2017 52-week period of R92.1 billion represents growth of 1.0%, with comparable store sales declining by 0.8%. Product inflation was 2.0%. These figures mask an improved sales performance in the second half of 2017 which saw three of our four Divisions record higher comparable sales growths than those for the six months to June 2017, and where product inflation fell from 3.2% to 2.0% in the second half of the year. Adjusting for product inflation shows that all Divisions reported higher real comparable sales in the second half. New stores opened in 2017 contributed 0.5% to total sales growth.
Total sales from our South African stores for the 52-week period grew by 1.5%, while comparable sales declined by 0.2%. Total sales from our ex-SA (i.e. our stores across sub-Saharan Africa) stores for the 52-week period grew by 3.5%, with comparable store sales growth of 0.8% (both measured in constant currencies^). The total ex-SA Rand sales decline was 4.8%, which was an improvement on the equivalent first-half figure of an 11.9% decline. This improvement came from stronger sales performances in most stores in those countries and was partially aided by currency movements.
Our expense management remained effective with total expense growth of only 1.2% for the 52-week period while comparable expenses were 1.3% lower than 2016. This incredible performance was however insufficient to neutralise the pressure from soft sales (particularly in Durable goods) and lower gross margins, consequently Group trading profit excluding foreign exchange movements and interest declined by 5.4% to R2.5 billion. Headline earnings increased by 1.6% to R1.3 billion, benefiting partially from lower foreign exchange losses in 2017.
Much has been said about the difficult South African and sub-Saharan African economic environments in 2017. The structural challenges within the South African economy continued to weigh on consumer confidence and spending, although some of the cyclical factors (lower product deflation in Durables and lower Food inflation) contributed positively. Recent sales trends in the South African retail sector are difficult to interpret with, for example, national sales growths as reported by StatsSA being higher than those reported by most JSE-listed retailers. The divergent sales performances across our major product categories reflect the economic pressures on the consumer in South Africa, with total Food & Liquor sales growing at 2.4% for the period while General Merchandise sales declined by 2.5% (albeit with greater product deflation too) and Home Improvement sales grew by 2.4%.
During the 2017 year, 11 stores were opened, representing new space growth of 2.8% and which contributed 0.5% to total sales growth. Our portfolio of 423 stores includes 42 stores outside South Africa producing 8.3% of the Group’s sales.
Later in this letter, I describe the three strategic priorities we are pursuing – improving and growing the core business; sub-Saharan African expansion through opening Builders Warehouse, Game and Masscash stores; and expanding, improving and refining our online/ecommerce offerings in Game, DionWired, Makro, and Builders Warehouse. In the shorter term however, we are emphasising:
- Sustainably lowering our operating costs as a percentage of sales. This is achieved in multiple ways and 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 negotiating favourable lease renewals;
- Maintaining a competitive price-gap against our major competitors across Known Value Items (KVIs). This price-gap is enabled by Massmart’s operating costs (as a percentage 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.
- We continued to increase market shares in many Durables product categories, including major appliances, audio-visual, information technology and gaming
- A number of our Food and Grocery categories grew ahead of the market, including convenience meals, cereals and carbonated drinks
- Superb growth of Online sales, 47% growth over the prior year
- Recorded another bumper Black Friday with over R1 billion in sales
- Private Label sales represent 8.8% of Group sales
- New stores opened, including three outside South Africa, increasing Group trading space by 2.8%
- Effective inventory management saw stock days of 54 at December 2017
Divisional operational review
Massdiscounters comprises the 142-store Food and General Merchandise discounter Game, which trades in South Africa and 11 other African countries; and the 24-store Hi-tech retailer DionWired in South Africa.
By mid-2017 the new GK-POS point-of-sale roll-out was completed successfully across all but three Game and DionWired stores. The more significant SAP ERP system implementation remains on schedule for early 2019. In November 2017, Game launched its online shopping platform using SAP Hybris with a positive response from customers. DionWired will move from its legacy online system to SAP Hybris in March 2018.
Our Fresh roll-out continues with 72 Game stores in South Africa and 17 in other African countries now offering this category, resulting in Food & Liquor sales participation of 23%.
During the year one Game store was opened in Ghana, increasing trading space by 0.6% to 548,544m². We expect to open 16 Game stores over the next two years, including 12 across four ex-SA countries, and one DionWired store in South Africa.
Masswarehouse comprises the 21-store Makro warehouse club trading in Food, General Merchandise and Liquor in South Africa; and Massfresh, which houses the Group’s fresh produce, fresh meat and bakery operations including The Fruitspot.
One new Makro store was opened in Riversands, north of Johannesburg, increasing trading space by 6.0% to 231,021m2. This store includes new merchandise layouts which have attracted great responses from customers. Once the surrounding national road infrastructure is completed, this will develop into another successful Makro store. Over the next two years, we expect to open one Makro store in South Africa.
Online sales grew by 37% and represented 4.0% of Makro’s Durables sales in November and December 2017. The online product range is expanding and now also offers a marketplace solution. In May 2017, we successfully launched the Makro digitised rewards programme mCard.
Massbuild comprises 102 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 six Builders Warehouse stores across Botswana, Mozambique and Zambia.
The product range on the Builders Warehouse online platform launched in March 2017 is being expanded continually. The customer response, particularly from high basket value commercial customers, is very positive and Online sales are accelerating.
Three Builders Superstores were opened in South Africa and one Builders Warehouse store was opened in Zambia, our second in that country. Net trading space increased by 1.6% to 456,313m². There will be six new Builders Warehouse stores opened in Kenya, Mozambique, Swaziland and Zambia over the next two years, and nine stores in South Africa, most of these being the smaller format Builders Superstore.
Masscash comprises 54 Wholesale Cash & Carry stores, and 61 Retail stores trading in South Africa; 13 Cash & Carry stores in Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zambia; and Shield, a voluntary buying association.
In September 2017 the Retail and Wholesale executive teams were combined into a single smaller executive team under the leadership of Kevin Vyvyan-Day. The respective management skills of the two business teams complemented one another and so the new combined executive is balanced and stronger.
For several years effective and fair competition by formal players in the South African FMCG industry, particularly within the lower-margin wholesale channel, has been compromised by declining standards of policing and enforcement by the South African Revenue Services (SARS) and other law enforcement agencies. Amongst other consequences, this has allowed a rapid and pervasive penetration of illicit and grey product, VAT and tax round-tripping and declining VAT compliance. This situation has compromised our competitive positioning in Masscash and Makro. We therefore strongly welcome and support the South African Government’s intention to address the effectiveness of SARS.
Four Retail stores were opened in South Africa and one Wholesale store was opened in Zambia. Net trading space increased by 5.8% to 377,038m². Over the next two years we will be opening 17 new Rhino and Cambridge stores in South Africa, three Wholesale stores in Mozambique and Zambia and one Wholesale store in South Africa.
Detailed commentary on Divisional performance is included in the
Chief Financial Officer’s review
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. Our collaboration efforts are overseen by our Group Commercial Executive, Llewellyn Steeneveldt, and involve core functional areas across each Division – like 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 expanding the skills and experience of our Private Label team.
Since late 2016 the Group Supply Chain Executive, Richard Inskip, has been mandated to improve the Group’s transport, logistics and supply chain capabilities over the long term. In 2017 our supply chain community performed exceptionally and delivered an improved financial performance. Further, we continue to optimise our regional distribution centres and have increased the volume of product moved through the supply chain network to reduce costs and stock holding.
In late 2017 we asked Richard to also take on the newly created Group Chief Information Officer (CIO) role. His skills and experience position him well to ensure that the Group’s IT efforts are coordinated usefully and optimised for better operating cost and business performances. Furthermore, much of the Group’s supply chain work is underpinned by IT systems.
Grow into sub-Saharan Africa
We believe that over the long term several sub-Saharan African countries will record strong real economic growth (i.e. above 5% per annum). This growth will be accompanied by a burgeoning middle-class and increased participation and penetration of modern retail – both of these trends will support strong retail sales growth over the longer term.
At R181 million, our average sales per ex-SA store is more than four times higher than those for many other South African competitors. This allows us to build relatively fewer stores but still attract large markets shares and, importantly, also allows us to keep operating costs as a percentage of sales low in those stores, which enables us to be very price competitive. In the next three years we anticipate increasing net trading space by 76,823m2 representing ex-SA space growth of about 35%. Ex-SA sales currently represent 19% of Massdiscounters total sales, 7% of Massbuild and 9% of Masscash Wholesale respectively.
We recognise the growing presence of online shopping and digital activation in our customers’ lives and the effect it has on their shopping behaviours and needs. Similarly, we are clear that international trends see that customers’ purchases of General Merchandise are increasingly migrating to online platforms. South African online sales represent only 1.5% to 2.0% of sales and we see similar participation rates in those categories we sell online. This participation will definitely grow with the Group’s aggregate online sales growing by 47% for 2017. This was achieved through our four e-commerce points of presence; Makro, Game, DionWired and Builders Warehouse which are all currently using or migrating to the SAP Hybris platform. In November 2017 Game launched its online shopping platform, using SAP Hybris, with a positive response from customers, while Makro’s Online sales grew by 37%. In Builders Warehouse the customer response, particularly from high-basket value commercial customers, is very positive and Online sales are accelerating.
Linked to ecommerce and digital is the provision of a broad array of financial services to our retail customers. Gerhard Hayes, Group Financial Services Executive, has been tasked with the expansion and improvement of our offering including the roll-out of kiosks across our store network providing financial services such as money transfers, gift cards, airtime, 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 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.
Our people and transformation
The contribution of our 48,000 colleagues across sub-Saharan Africa is always noticed and appreciated, especially in the current environment where many of their own families feel the adverse consequences of the weak economy.
We therefore acknowledge and thank our colleagues in all our stores, offices, DCs, and call-centres for their service and support, knowing that the Group’s steadily improving trading and financial 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.
Massmart places exceptional emphasis on the safe distribution of food products to our customers. As part of this we have a dedicated food safety compliance team and follow stringent food safety compliance processes that are regularly audited by an independent external third party. At the onset of the recent listeria outbreak in South Africa we specifically increased the scope and intensity of our testing protocols, liaised with the Department of Health, and participated in the industry-wide information sharing initiatives co-ordinated by the Consumer Goods Council of South Africa (CGCSA). At the time of writing these enhanced safety measures were still in place.
In mid-March 2018 Massdiscounters and Masscash separately made internal announcements signalling their intent to initiate restructures of some of their business functions. This has been done in accordance with requirements of the Labour Relations Act (LRA) and each has initiated a formal facilitated consultation process with their employees on their proposed restructuring in accordance with section 189 of the LRA.
The estimated costs associated with the potential retrenchments arising from the proposed restructuring for the two Divisions amount to R66 million which will be provided for in the Group’s results for the first half of 2018. If we do proceed with these restructure programmes, savings are projected to absorb only about one third of the estimated restructuring costs in the second half of 2018. Full annualised savings will be realised in 2019. A further R25 million may be incurred to align the offices and teams of the Masscash Division, of which R6 million may be spent in the first half of 2018.
In addition, the Massdiscounters Division is considering relocating part of its offices from Durban to Johannesburg in the second half of 2018 which is subject to a separate section 189 facilitated consultation process which Massdiscounters has initiated with the affected employees.
The estimated costs associated with the proposed office relocation covering: refurbishment of existing offices in Durban; moving part of the teams to Johannesburg; and fitting out new offices in Johannesburg, amount to R50 million, and will, if the decision to relocate is taken, be incurred during the second half of 2018 and be once-off in nature. Material qualitative benefits are expected from this move over time through increased Group collaboration, leveraging scale and expertise, integration and transformation, talent retention and attraction, as well as administrative efficiency improvements.
The Group’s sales performance for the first 12 weeks of 2018 has been soft which is a trend noted by other participants in South African retail. Total sales growth is slightly positive while comparable sales growth is slightly negative, with product deflation of -0.4%. Sales growths in Rands from our stores outside South Africa are at similar levels as these Group figures. Food sales growth remains low due to ongoing deflation in commodities, which should move into inflation from April/May 2018. As noted in the CFO letter, this year Massmart is adopting IFRS 15 which will impact our reported sales for this 2018 financial year and beyond. The growth trends referred to above are however reported on the same basis as last year.
Notwithstanding the soft start to 2018, we are hopeful that the 2018 sales environment will improve as various positive factors (the stronger Rand, low inflation and lower interest rates) lift consumer sentiment and spending.
Whilst South Africa’s new political leadership and direction will, in the short to medium term, undoubtedly improve many economic factors, the structural, policy and public sector impediments remain long-term challenges. This is undoubtedly South Africa’s best shot in recent memory at reinvigorating our own social, economic and political progress and prowess, and restoring our place as a key actor on the African continent. We are an excited and proud South African company.
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
29 March 2018
^ Refer to the footnote here