Our operating environment
In South Africa, which accounts for 91.3% of the Group’s total sales, the year was characterised by volatility in the political, regulatory and economic environment. This had a negative effect on consumer and business confidence, impacting discretionary spend and, as a result, Massmart’s sales.
Massmart is in a unique position because we serve all consumer segments from LSM 1 to LSM 10 and our merchandise assortment is comprised 44% Durables and 56% Food & Liquor. As such, persistently high levels of unemployment (27.1%), limited GDP growth (0.8%) and low consumer confidence and spending weighed down on our business. The hike in fuel prices negatively impacted consumer spending, as did the decision by the South African government to increase the Value-Added Tax (VAT) rate for the first time in 25 years.
The appointment of a new president, Cyril Ramaphosa, in February 2018 unleashed a sense of optimism in South Africa. However, 2018 remained a year of political uncertainty as new leadership found its feet.
The strengthening of dialogue that is evident between business and government encourages us as we recognise that it will take a combined effort between government, labour and business to urgently grow South Africa’s economy, create jobs and position South Africa as a valued investment destination.
We are supportive of President Ramaphosa’s investment programme, which has a target of attracting R1.2 trillion in new foreign investment over five years. Economists have hailed this initiative, which is part of a bigger programme to revive the economy, as the beginning of the ‘new dawn’ for South Africa after years of low growth and policy uncertainty.
Phumzile Langeni, who sits on our Board, together with Trevor Manuel, Mcebisi Jonas and Jacko Maree are part of the President’s special envoys on investment tasked with engaging domestic and foreign investors around economic opportunities in the country. I personally attended the investment roundtable held in New York in September 2018 ahead of the investment conference that was held in Johannesburg in October 2018, where President Ramaphosa announced a combined amount of R290 billion in investment in South Africa. This was in addition to the R400 billion received from the investment drive ahead of that conference. These investments are a positive sign that investors are warming up to President Ramaphosa and his message that South Africa is open for business.
Announcements regarding visa requirements, energy supply, land reform and that land expropriation will be undertaken in a responsible way that does not affect food security or agribusiness, are supportive of Ramaphosa’s call to investors.
Commitment has also been shown to uncovering corruption in South Africa – within nine months of his presidency, President Ramaphosa had set up a total of four commissions of inquiry all related to the abuse and ‘capture’ of state resources in South Africa. Urgent action is however required with regards to the challenges facing State-Owned Enterprises (SOEs), in particular Eskom, and towards regaining an investment grade rating for the country. As leaders we need to unite around national interests, look ahead and ask what needs to be done to ensure a ratings upgrade.
Given that democracy has been entrenched over the past 25 years, I believe that South Africa’s national elections, to be held on 8 May 2019, will be free and fair. I am optimistic that with a strong and efficient government, policy certainty and better functioning SOEs, South Africa’s fortunes will turn.
Massmart is an Africa optimist and our ex-SA growth plans remain on track. Our strategy has always been deliberately cautious and measured because we believe in the long-term proposition of the continent. Africa’s growth, while tempered, is on a gradual upward trajectory. Average GDP growth was 3.5% in 2018 and Africa is anticipated to grow by 4% in 2019 and by 4.1% in 2020. Mild commodity price improvement and improved macro-economic stability is expected, yet structural transformation constraints remain a challenge.
I am encouraged by the results achieved by our African businesses. Total sales from the Group’s stores outside South Africa grew by 3.9% in constant currencies, while in Rands total ex-SA sales increased by 3.7%. The Group added over 13,000m2 of trading space outside of South Africa during the period. In the next three years we anticipate opening 13 new stores ex-SA, representing a 7.8% compounded annual growth rate of new space, concentrated specifically in Kenya and Zambia.
While the external environment was beyond Massmart’s control, our management team worked tirelessly to respond to issues within their control. In our efforts to grow our core business, we have launched a number of initiatives to reduce operational costs, leverage Group efficiencies and pursue new revenue streams.
Efforts to sustain cost discipline continued and resulted in expense increases being limited to 5.0%, whilst comparable expenses increased by only 2.3%.
We continued with our strategy to pursue new revenue streams and a competitive range of Financial Services is now available across our business. Massmart recorded a 61% growth across the Value-Added Service (VAS) product portfolio including money transfers, Lotto sales, RCS credit product sales and extended warranties. Massmart will continue to pursue this offering with a view of adding further services.
Our omnichannel focus, designed to improve customer choice and experience, saw aggregate online sales increase by 56%. Massmart’s four ecommerce points of presence (Makro, Game, DionWired and Builders Warehouse) registered impressive growth of 74% in online traffic, a positive indication that we are meeting our customers’ needs. We will continue to invest in driving online sales.
In our efforts to achieve Group supply chain efficiencies and increase product velocity, the Massdiscounters and Masswarehouse Distribution Centres (DCs) were transitioned into Massmart Logistics during the period and will be used as a Group asset to support future growth.
In February 2018, we announced the restructuring of some of the business functions within Massdiscounters and Masscash and the relocation of both head offices from Durban to Johannesburg. The restructures and office moves were completed in late 2018 and caused business disruption and uncertainty amongst staff and management. We however believe that access to the Johannesburg talent pool will enhance the business in the future.
Overall we are focusing on ensuring a customer-centric culture across all of our businesses, growing market share and enhancing competitiveness.
We are making deliberate efforts to improve customer experience by focusing on our customer service offering, store layouts and ensuring that we respond to customer concerns effectively. We are leveraging off Walmart’s best practice to enhance the culture of customer service that makes us unique.
or Massmart to succeed, we need the South African economy to succeed. Key to this will be rebuilding trust in our institutions, creating a culture of execution, ensuring we have world-class infrastructure, and developing South Africa’s human capital, particularly through education and by building competent and capable managers and leaders.
In line with this, a top priority for us will always be investing in our people, ensuring we have motivated and capable staff and equipping them with skills for the future. In 2018 we rolled out the TalentPrint system to employees and their managers. Employees were given an opportunity to update their individual talent profiles thereby improving the quality and accuracy of talent reporting.
Our human capital commitments extend beyond our existing staff and include creating opportunities for young unemployed people. Once again we gave training and work experience to over 1,000 young people through our learnership and cadetship programmes.
We also seek to make a positive impact where it matters, and our CSI programme focuses primarily on school nutrition, Early Childhood Development and school sports infrastructure and maintenance.
This year, we improved our BBBEE score and achieved a Level 4 BBBEE contributor status, the highest score in the retail sector. This reflects our commitment to implementing meaningful and sustainable transformation.
Overall we also want to create a sustainable business, and I believe we are leading the charge in this regard through some of our environmental initiatives. Our solar panels generated 3.6 million kWh of renewable energy in 2018, the highest in the South African retail sector. Through our efforts to reduce our water usage, 22 million litres of water was conserved through onsite water harvesting. We were also rated by FTSE in the top five companies globally for Environmental, Social and Governance (ESG) performance in the Broadline Retail sub-sector.
In the face of recent corporate governance failures in the South African business landscape, we have continued to strengthen our efforts to ensure that Massmart’s business practices are guided by and comply with requirements of applicable regulatory frameworks, including the Companies Act of 2008, the JSE Listings Requirements and the King IV Code on Corporate Governance for South Africa, 2016 (King IV).
The Board ultimately endorses and accepts collective responsibility for achieving the values underpinning good governance advocated by King IV, namely: integrity; competence; fairness; responsibility; transparency; and accountability. It further embraces the concept of integrated thinking encapsulated in King IV, which underpins corporate citizenship, stakeholder inclusivity, sustainable development and integrated reporting. The Board and its Committees regularly reviews Massmart’s governance structures and processes to ensure that the Board exercises effective and ethical leadership, conducts its affairs as a responsible corporate citizen and makes appropriate decisions to ensure sustainability. In the period we deliberated on key issues such as strategy; structure; operational and financial performance; corporate citizenship; diversity; stakeholder engagement; ethics and compliance; risk; governance; and any other key activities of the Group.
Massmart is privileged to have a talented Board of Directors that have the necessary depth and diversity in skills, experience and perspective to hold the Executive team to account on the development and execution of its strategy.
I am pleased to report that, for the year ended December 2018, the Board is satisfied that it has fulfilled its responsibilities in accordance with its Charter, King IV and other applicable regulatory and legislative requirements.
Board and Executive changes
On 25 May 2018 we announced Olufunke (Funke) Ighodaro’s appointment as an Independent non-Executive Director and a member of the Massmart Audit and Risk Committees. On 23 August 2018 shareholders were informed that Chris Seabrooke had agreed to continue to serve on the Board as Lead Independent non-Executive Director and Deputy Chairman but would cease to be a member of Board Committees and step down as Chairman of the Audit, Risk and Remuneration Committees. Funke succeeded Chris as the Chairman of the Audit and Risk Committees, while Phumzile Langeni was nominated and assumed the role of Chairman of the Remuneration Committee.
On 28 February 2019 we announced the appointment of Lindiwe Mthimunye to the Board as an Independent non-Executive Director. Lindiwe was further nominated to serve on the Audit and Risk Committees. We also announced the appointment of JP Suarez as a non-Executive Director in place of Roger Burnley, both Walmart appointees. On the same day we informed shareholders that Chris Seabrooke’s retirement will become effective on 23 May 2019, from which date Chris will step down as the Deputy Chairman and Lead Independent non-Executive Director of the Board. The Board, Executive Committee and management extend their sincere appreciation and thank Chris and Roger for their significant and invaluable contribution to the Massmart business.
Johannes van Lierop, Massmart’s Chief Financial Officer, has indicated that for personal reasons he is not available to extend his tenure in South Africa after the formal conclusion of his South African work visa in February 2020. He has therefore given the Board early notice of this development and a formal Executive search process to identify and appoint a successor has commenced. This process will likely take between three to six months. Further announcements will be made when there are any material developments in this regard.
On behalf of the Board I would like to express our appreciation to Guy Hayward, the Executive team and all of the Massmart employees for their continued hard work and commitment. I would also like to thank our business partners, shareholders and other stakeholders for their ongoing engagement and support.
4 April 2019