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Online Annual Report 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Massbuild divisional review

Despite a substantial slowdown in the South African construction and home improvement sectors which materially affected our trading, Massbuild continued to outperform its competitors in its chosen markets. In addition, we significantly strengthened our management team and clarified our strategic direction including establishing the trading positions of each of the three brands. Efficiency improvements came from a new auto-replenishment inventory system in Builders Warehouse, the outsourcing of our transport fleet and a focus on cost containment across the business.

During the year, we opened one Builders Warehouse store, one Builders Express store, converted one Builders Warehouse to a Trade Depot, opened a Trade Depot and acquired and integrated a three-store chain in the Eastern Cape into the Trade Depot structure.

The Massbuild brands

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

Massmart acquired five 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 22 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 brand 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 17 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. During the past financial year, Builders Express was 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 with the conversion, new store and acquisitions to date, Builders Trade Depot now operates 32 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.

Our value proposition

Builders Warehouse and Builders Express are both pioneers in introducing retail principles to the South African home improvement sector and attaching garden centres to hardware stores. The clean, friendly and uncluttered look and feel of our stores offers customers a shopping experience traditionally not associated with the sector. 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 hand tools and Builders Pride, have become household names, with our customers assured of stringent quality control and best supplier practices.

In both the residential and commercial property markets Builders Trade Depot’s value proposition to customers will be our unique ability to consistently offer an appropriate professional range focused on the building structure at a highly competitive basket price combined with exceptional contractor support services in a customer relationship driven environment.

Our operating environment

Consumer confidence reached an all-time low as residential property prices declined, interest rate increases cut into disposable income, and the prospect of job losses in certain sectors loomed large. Compounding this, the banks tightened their lending criteria in response to the weakening economic environment. The adverse impact of this on retail sales was to some extent offset as customers began spending more time entertaining at home and continued maintaining their properties which resulted in the growth in sales of essential maintenance and renovation products, for example, paint and plants.

The Builders Warehouse strategy in this environment was to focus on appropriate pricing on the products that mattered most to our consumers and to implement an everyday low price strategy on key items. We also maintained promotional activity to drive traffic through our stores. The result was that while our sales growth was muted, this growth exceeded that of most of our competitors suggesting that we gained market share.

Looking ahead, we believe that the demand for residential housing and general hardware will continue to grow across the country, creating a future pipeline for improvement and maintenance products.

While Builders Trade Depot had same success with contractors operating in the commercial and low-cost housing market, overall conditions in the building industry remain under pressure and the business and our customers battled. The period has been used to expand the footprint into under-serviced areas through a combination of new stores and acquisitions.

Financial performance

To make comparisons with the prior financial year meaningful, all current year income statement figures in this review are compared to the equivalent figure for the prior year’s 52-week period.

			2009	2008	2008	2007
			52 week	52 week	53 week	52 week
Sales	Rm		5,604.6	5,563.0	5,662.9	4,948.3
Trading profit before interest 3	Rm		222.6	368.0	390.2	368.1
Trading profit before interest as % sales	%		4.0	6.6	6.9	7.4
Operating profit before interest	Rm		228.8	367.9	390.1	363.0
Operating profit before interest as % sales	%		4.1	6.6	6.9	7.3
Net finance costs	Rm		47.5	42.1	42.9	16.8
Trading profit before taxation 3	Rm		270.1	410.1	433.1	384.9
Trading profit before taxation as % sales	%		4.8	7.4	7.6	7.8
Operating profit before taxation	Rm		276.3	410.0	433.0	379.8
Operating profit before taxation as % sales	%		4.9	7.4	7.6	7.7
Inventories	Rm		801.4		852.5	829.3
Inventory days	days		73		77	86
Net capital expenditure 1	Rm		145.3		138.8	101.2
Cash flow from operating activities	Rm		137.1		265.5	277.5
Number of stores			71	68		64
Trading area	m2		357,589	344,388		294,039
Average trading area per store	m2		5,036	5,065		4,594
Number of employees			6,074	6,625		6,400
Sales per store	R000		78,938	81,909		77,317
Sales per m2	R000		16	16		17
Sales per employee	R000		923	840		773
1   Net capital expenditure is defined as capital expenditure less disposal proceeds. 2   The ratios have been calculated using year-end balance sheet figures. 3    Trading profit is earnings before asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements.

The Division reported total sales of R5.6 billion, representing growth of 0.7%. Comparable sales decline was 3.7% and annual sales inflation was estimated at 11.4%.

Trading profit before interest and taxation of R222.6 million was 39.5% lower than the prior year. Working capital management improved which positively impacted interest received and trading profit before taxation of R270.1 million was 34.1% below the prior year. We made significant progress in reducing our stock holdings by approximately 25% from its peak at 18 months ago. In Builders Warehouse, total stock dropped from R707.5 million to R638.9 million, and is down from R938.3 million at its peak, despite two stores being added to our portfolio.

Capital expenditure of R149.7 million was 7.1% lower than last year after opening two new stores, refurbishing existing stores and installing CCTV security at selected sites.

Trading profit before tax return on sales

Actual 2009	Medium-term target	International benchmark
4.8%
	6.0% to 9.0%	10.0%

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

Massbuild is a cyclical business, with its sales linked primarily to growth in the South African bonded residential housing market. This cyclicality requires that there be a range for the medium-term target margin. Wiser from our experience of the first economic downturn that Builders Warehouse and Trade Depot traded through under Massmart ownership, we believe that the Division’s trading profits will not be as badly affected in future downturns. In addition, with the tighter cost controls and working capital efficiencies, we are confident that the Division can readily achieve the higher target trading margins.

Improved efficiencies

This year Builders Warehouse and Builders Express increased its focus on core supply chain competencies particularly within the area of merchandise planning and replenishment. Much of the improvement in stock profile, stock availability and inventory reduction can be attributed to the implementation of the SAP auto-replenishment functionality. With our 70% of our stock now centrally auto-replenished, we have more of the right stock available at the right place, at the right time to meet our customers’ requirements or needs.

The reduction in trading hours in the Western Cape and improved labour scheduling resulted in a reduction of full-time equivalents (FTE) and a 0.7% year-on-year reduction in personal costs in comparable stores. The number of FTE staff was reduced by 508, which was achieved without any retrenchments. Transportation is not our core business and during the year our fleet of 66 trucks was taken over by a third party service provider. By the end of the year, comparable stores were 0.3% down on a year-on-year basis.

Upgrading IT

During the year we commenced our upgrade of the SAP Business Intelligence system, as well as finalised the planning and scoping phase of our SAP R/3 upgrade. Both systems are anticipated to provide improved functionality and reporting, as well as securing our IT footprint for future business requirements and enhancements. Both upgrades will go live during the 2010 financial year.

Opportunities in Africa

Limited competition in the home improvement, D-I-Y and building contractor markets in Africa make the continent attractive from a long-term expansion perspective. SADC countries including Zambia, Namibia, Botswana, Zimbabwe, Angola and Mozambique have been identified as potential markets for this expansion as they are characterised by a lack of consolidation and poor existing offerings. We plan to open our first stores in some of these markets in the next three years.

Investing in Human Resources

One of the biggest challenges in our industry is retaining skilled staff. Pleasingly, during the past year our permanent staff turnover dropped significantly following initiatives to improve management, leadership and communication across all levels. Discussion forums were introduced where staff could raise and escalate issues for management attention. On the training and development front, 70 employees graduated from our learnership programme, which we run in conjunction with the Department of Labour.

We made excellent progress on our BBEEE rating. Verified by the external rating agency, Empowerdex, our overall score improved from 28% to 40% and we intend to reach 45% to 50% in the coming year.

The use of the Tip-Offs line to identify fraud and unethical behaviour across our business has increased. During the year 62 incidents were highlighted, investigated and resolved.

Investing in our community

Each year hundreds of thousands of household batteries are disposed as municipal solid waste which, when dumped in landfills, contaminates soil and water. In an effort to address this, Builders Warehouse began the rollout of battery disposable units at some of its stores last year. We hope to expand the project and provide facilities for customers to dispose of their lightbulbs in an environmentally friendly way too.

Stores continue to promote energy efficient and green technologies as part of our environmental programme and merchants have proactively engaged with suppliers to determine which of their products have achieved independent environmental endorsements. These marked 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, have grown over the past year and we are now focused on improving environmental awareness amongst our customers.

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

Builders Warehouse sponsored 2,600 lapdesks for students at disadvantaged schools. The ergonomically designed, durable desks fit neatly on students’ laps, whether they are seated in a chair, on a bench or on the floor. The platform accommodates a textbook and a writing pad.

Each lapdesk is printed with a design and message that makes the portable desks an ideal medium to deliver information on social issues to hard-to-reach communities.

In an effort to contribute to the fight against crime, we supplied 100,000 portable emergency lights to Business Against Crime for the use of the South African Police.

Builders Warehouse embarked on the fourth 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 ie painting, tiling, bricklaying.

Builders Warehouse also sponsored 90 high density vegetable tunnels to 30 disadvantaged schools across the country. The tunnels are able to grow vegetables such as spinach and tomatoes and assist in feeding less privileged children coming to school on an empty stomach. The project forms part of the broader Massmart feeding scheme project.

Builders Warehouse continued its support of the Hot Dog Cafe and The Coffee Stops concept, where we sponsor ambitious and talented but unemployed youngsters to start their own businesses. This year another six Coffee Stops were opened and 17 Hot Dog Cafe franchises operated at selected Builders Warehouses, Game and Jumbo stores.

Risks and rewards

Finding affordable sites of the appropriate size for our big-box stores remains a challenge, particularly in KwaZulu-Natal. The smaller Builders Express stores however, offer the opportunity to penetrate more established areas and gain market share from competitors.

Builders Trade Depot provides a channel for the division to expand into the lower LSM building contractor market through expanding its smaller store format into townships and rural locations.

Builders Warehouse and Builders Express should benefit from better management of our trade customers with a dedicated trade desk and call centres to enhance customer interaction, as well as innovative Private Label products that have had huge success and will be expanded.

Future outlook

The recovery of the South African residential housing market is expected to underpin Massbuild’s future growth. We expect to see some signs of recovery in the first two quarters of calendar 2010 as the benefits of the lower interest rate environment start to take effect. In the meantime, management is focused on driving initiatives to better understand consumer demand, finding new store sites, managing costs, optimising inventory levels and streamlining our in-bound supply chain including buying, forecasting and replenishment systems. Our relative performance during this past period shows that we are well positioned to take advantage of the upturn when it arrives.

Operational Review

• The economy over the year
• Massdiscounters divisional review
• Masswarehouse divisional review
• Massbuild divisional review
• Masscash divisional review
• Channel and Shared Services review