Explanation of accounting changes
This year‘s accounting for the adoption of IFRS 9 and IFRS 15, which in particular includes Shield’s sales on a net basis in the current 2018 year, complicates performance comparisons between the results for the current and prior years. To provide a more meaningful assessment of the current year‘s performance, and unless otherwise stated, my commentary has been provided on a like-on-like basis, i.e. reflecting the impact of IFRS 9 and IFRS 15 in both the current and prior years. In addition, the commentary below reflects Massmart’s performance for the current and prior years’ 52-week periods.
This year in review
The 2018 financial year was exceptionally difficult for the South African economy, in particular, and also for several of the sub-Saharan countries where we have stores. The economic recession recorded in the first half of 2018 caused severe trading and expense pressures in most retail businesses, including our own. Compounding the sales pressure for much of the year was unusually low Food price-inflation, caused by commodities deflation.
Total sales from our South African stores grew by 2.9% and comparable sales by 1.5%. Group sales in November and December 2018 were unexpectedly soft, resulting in comparable sales declining by 0.9% over this crucial two-month period. This marked slowdown was seen subsequently in the StatsSA national sales figures for December 2018.
Total Rand sales from our ex-SA stores grew by 3.7%, while in constant currencies these grew by 3.9% and comparable stores grew by 0.5%. Ex-SA Rand sales growth improved in the second half of the financial year due to positive currency movements.
In the Group’s major categories, Food sales grew by 0.7% (with product deflation of 1.1%), Liquor sales by 11.8% (with product inflation of 2.2%), Durable Goods sales by 0.7% (with product deflation of 1.7%) and Home Improvement sales by 5.9% (with product inflation of 0.9%).
The ongoing deflation in food benefits constrained customers, but causes pressure on profitability from deflated sales growth being below expense growth. Similarly, Durable Goods deflation is benefiting customers, who nevertheless remain cautious and time many of their purchases around our promotional activities.
Black Friday has become a firm fixture on the South African retail calendar, our various businesses developed different tactical plans to satisfy our customers’ expectations and also to cope with the extreme volumes sold over this period. Customers have demonstrably changed their shopping behaviour with reduced purchases in the month or two prior to Black Friday and then they selectively target the promotional offerings. The Group’s total sales from the Black Friday period (Friday to Sunday) of R1.8 billion were 16% higher than the same period in the prior year.
The Group’s gross margins declined slightly from 19.63% to 19.45%, caused primarily by margin pressure in Game and negative stock adjustments in Massfresh, which were partially offset by the higher sales participation of higher-margin retail customers in Massbuild. More detail is provided in the Divisional operational review.
In February 2018, we announced the restructuring of some of the business functions within Massdiscounters and Masscash and the relocation of those head offices from Durban to Johannesburg. Expected annual savings will be approximately R52.0 million. The restructures and office moves were completed in late 2018 and caused business disruption and uncertainty amongst staff and management.
Growth in total expenses, excluding restructuring costs, was a creditable 5.0% while comparable expense increases were limited to 2.3%. This good performance was however insufficient to neutralise the pressure from soft sales and from slightly lower gross margins. Occupancy costs saw the highest increase of 10.1% which mainly came from new stores that added 2.2% to trading space and the rental annualisation of the Makro Riversands store which opened in late 2017.
Disappointingly, the combination of low sales growth and higher expense growth caused Group trading profit excluding foreign exchange movements, interest, impairments and restructure costs to decline by 16.8% to R2.1 billion. Headline earnings excluding restructure costs decreased by 22.9% to R1.0 billion, while Headline earnings decreased by 31.7% to R901.2 million.
During the year 19 stores were opened and six were closed, resulting in a net trading space increase of 2.2% to 1,648,718m2. Our African growth plans remain on track and we added 13,409m2 of ex-SA trading space in the year, representing 5.8% new space.
* Like-on-like 52-week basis
^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to note 41.
Later in this letter, I describe the three strategic priorities we are pursuing – improving and growing the core South African business over the medium term; sub-Saharan African expansion through opening new Builders Warehouse, Game and Masscash stores; and expanding, improving and refining our online/ecommerce offering in Game, DionWired, Makro, and Builders Warehouse.
We are driving towards a Group services business model that encompasses logistics, supply chain and part of our IT capabilities. This has been one of our strategic priorities and the remaining long-term strategic goals are outlined below:
- Improving the proﬁtability of Game and Masscash;
- Delivering structurally lower operating costs by improving Group resource utilisation;
- Achieving supply chain efficiency through optimisation of our regional Distribution Centres (DCs) and vehicles by increasing the volume of product moved through the supply chain network thereby reducing costs and stock holding;
- Opening about 43 new stores between 2019 and 2021, representing a 2.5% compounded annual growth rate (CAGR) of new space. 25.9% of this new space will be outside South Africa, concentrated specifically in Kenya and Zambia;
- Investing capital in omnichannel capabilities, which now represent 1.1% sales participation of those categories that are online;
- Improving our Value-Added Services (VAS), customer offering across the Group by adding to the portfolio of services offered; and
- Improving our Private Label execution to offer customers good quality products at affordable value.
- The Massdiscounters and Makro DCs were transitioned into the Massmart Logistics business unit and will be utilised as a Group asset, resulting in improved DC cost-recoveries and transport efficiencies
- The continued focus on new revenue streams saw a 61% growth in our VAS business which was achieved through growth across money transfers, Lotto sales, cash-backs, RCS credit product sales and extended warranties
- Our omnichannel focus, improving our customers’ choice and experience, resulted in the Group’s total online sales growing by 56%. This was achieved through our four ecommerce points of presence – Makro, Game, DionWired and Builders Warehouse – all of which now use the SAP Hybris platform. In February 2019 Makro switched from its legacy online platform to Hybris and we are managing the usual challenges with this type of transition. Combined, online traffic across Makro, Game, DionWired and Builders Warehouse grew by 74%
- We continue to hold strong market shares across a number of our Durable Goods categories, including: large and small domestic appliances; Hi-tech; and most DIY and hardware categories
- We improved our Group Private Label offering to our customers, resulting in Private Label sales representing 9.0% of Group sales
Divisional operational review
Massdiscounters comprises the 146-store General Merchandise and Food discounter Game, which trades in South Africa and 11 other African countries (22 stores); and the 25-store Hi-tech retailer DionWired in South Africa.
Massdiscounters total sales decreased by 1.2% and comparable sales were down 1.5%, both of these were impacted by product deflation of 2.9% for the year. In Game’s South African stores total sales declined by 0.1% and comparable sales increased by 0.1%, which masks an improved sales performance in the second half of the financial year. Game Africa’s total sales in constant currencies increased by 1.5%, but declined by 0.9% in Rands, with trading conditions particularly difficult in Nigeria and Mozambique. General Merchandise sales grew by 0.3% over the prior year and Game maintained strong market shares in the domestic large appliances and Hi-tech categories. DionWired sales were below the prior year as low consumer confidence affected sales of high price-ticket electronic items. Declining customer traffic into major shopping malls where some of our larger DionWired stores are based, also impacted sales.
A new store layout for Game has been rolled out into six stores in South Africa and six in ex-SA countries and has attracted positive customer comments and we are seeing improved store sales densities.
Game and now DionWired use the SAP Hybris online shopping platform. The SAP ERP system implementation go-live date is scheduled for the second half of 2019.
Our Fresh roll-out continues, with 68 Game stores in South Africa and 20 in other African countries now offering this category, resulting in Food & Liquor sales participation of 22.6%.
Three DionWired stores and five Game stores (including two in Ghana and one in Kenya) were opened during the year, while one Game store and two DionWired stores were closed (all in South Africa). Massdiscounters’ trading space increased by 2.2% to 560,828m2.
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 and Fresh meat operations including The Fruitspot.
Total sales increased by 5.4% and comparable sales grew by 3.7%. Product deflation was 0.2%, caused by deflation in Durable Goods and Food commodities. Total sales growth in Food & Liquor was 3.3% – a good performance given the consumer environment. General Merchandise sales growth was a pleasing 4.5% despite deflation and pressure on discretionary spending.
From good margin management and expense control, Makro managed to grow trading profit slightly above last year. In Massfresh however an unexpectedly weak control environment resulted in negative adjustments to inventory and cost of sales in the second half of the financial year. These negative adjustments were recorded in gross margin and caused the Division’s trading profit to be 12% below last year.
Online sales grew by 22.4% and margins improved through better logistics, fulfilment and product mix. Makro’s new SAP Hybris platform was launched in early February 2019, replacing the original third party-hosted platform. The migration has experienced the usual difficulties associated with this type of IT process and for two months caused customer frustration as the refunds functionality was initially clumsy. Commercial customers contribute 32% to Makro’s online sales.
We continue to improve the customer experience in Makro by, for example, refining our rewards programme, mCard, and having hand-held payment devices to faster process queuing customers.
There were no new stores opened in 2018, which resulted in trading space remaining at 231,021m2. In late March 2019 we opened a new Makro store in Cornubia, north of Durban, which has recorded strong sales and positive customer support.
Massbuild comprises 106 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 eight Builders Warehouse stores across Botswana, Mozambique and Zambia.
Massbuild grew total sales for the year by 5.9% with comparable sales increasing by 3.4% and product inflation of 2.7%. In the latter part of the financial year Massbuild saw a softening trend in contractor sales which has continued into 2019. Retail sales have however remained positive. Total sales growth in Massbuild’s ex-SA stores was 14.1% in Rands but this figure was bolstered by new stores opened in the current and prior year, and so comparable sales growth was slightly negative.
We continually seek new sales channels and, in conjunction with a major financial institution, have recently successfully piloted the supply of Building Materials and Hardware to customers who are replacing an insured loss.
The product range on the Builders Warehouse online platform has been expanded to 35,000 items and sales growth remains high with strong customer support. Click-and-collect is available in all South African metropolitan stores and will soon be launched in our stores in Zambia and Botswana.
In South Africa, one Builders Warehouse store, four Builders Superstores, and three Builders Express stores were opened, while two Builders Trade Depot stores and one Builders Express store were closed. One Builders Express store opened in Maputo, Mozambique, resulting in a net trading space increase of 2.6% to 468,155m².
Masscash comprises 54 Wholesale Cash & Carry stores, and 63 Retail stores trading in South Africa; 13 Cash & Carry stores in Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zambia; and Shield, a voluntary buying association.
Masscash total sales increased by 2.1% while comparable sales decreased by 0.2%. During the year product inflation increased slightly to 0.3% as commodities deflation eased. Cambridge and Rhino performed well in this difficult consumer environment, growing total sales at 1.8%.
During the year our focus on improving in-stock service levels and KVI pricing in the Wholesale stores improved sales and customer retention. In the Retail business, we have seen an improvement in sales and store profitability when we convert and rebrand a Rhino to a Cambridge store, and will therefore be doing more of these conversions where practical.
We are very supportive of the South African government’s intention to address general tax compliance and enforcement as this will improve our longer-term competitive positioning in the South African cash & carry industry which is afflicted by VAT evasion and trading in illicit or grey goods.
Two Retail stores were opened in South Africa, resulting in a net trading space increase of 3.1% to 388,714m2 from December 2017.
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.
We continue to drive towards Group services that encompass logistics, supply chain and part of our Information Technology (IT) capabilities. The Group Supply Chain Executive, Richard Inskip, has been mandated to achieve supply chain efficiency through optimisation of regional DCs and vehicles by increasing the volume of product moved through the supply chain network, thereby reducing costs and stock holding. In 2018 our supply chain community performed exceptionally and delivered an improved financial performance. The Massdiscounters and Makro DCs were transitioned into the Massmart Logistics business unit and will be utilised as a Group asset, resulting in improved DC cost recoveries and transport efficiencies.
Richard is also the Chief Information Officer (CIO) and has been tasked to leverage scale by establishing Group IT services to reduce IT operating expenses in the longer-run and sharing scarce skills. This includes building IT skills and capacity in key focus areas, migrating to integrated standardised SAP systems across the Division and improving IT governance and security.
Grow into sub-Saharan Africa
We believe that over the long term several sub-Saharan African countries are expected to record strong real economic growth (i.e. above 4% per annum). This growth will be accompanied by a burgeoning middle-class and increased participation and penetration of modern retail – we feel that both trends will support strong retail sales growth over the longer term.
At R167.8 million, our average sales per ex-SA store is up to three times higher than those of many other South African competitors. This allows us to build relatively fewer stores but still attract large market shares and, importantly, also allows us to keep low operating costs (as a % of sales) in those stores, enabling us to be very price-competitive. In the next three years we anticipate adding 13 new ex-SA stores, representing a 7.8% CAGR of new space, concentrated specifically in Kenya and Zambia. Ex-SA sales currently represent 19% of Massdiscounters total sales, 8% of Massbuild and 11% of Masscash Wholesale.
We remain focused on 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 international trends see that customers’ purchases of certain General Merchandise categories 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 56% in 2018. This was achieved through our four ecommerce points of presence (Makro, Game, DionWired and Builders Warehouse). The Group continues to invest considerable capital in driving online sales and all four of these platforms are now currently using SAP Hybris.
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 continued focus on new revenue streams saw a 61% growth in our VAS business.
The Board and Executive Committee
Elsewhere in this report we have formally noted the recent Board changes. In brief, in May 2019 after 19 years of service to the Board where he made a huge and invaluable contribution to many material aspects of Massmart’s development and evolution, Chris Seabrooke is retiring. In his place Funke Ighodaro, who joined us in early 2018, will be chairing the Audit and Risk Committees. Walmart-appointee Roger Burnley was replaced in February 2019 by JP Suarez who returns to the Board after having initially served from 2011 to 2015. The Board, Executive Committee, management and I extend our sincere appreciation to Chris and Roger for their contributions to Massmart. In February 2019 we also welcomed Lindiwe Mthimunye to the Board.
Johannes (Hans) 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.
Our people and transformation
The contribution of our 48,500 colleagues across sub-Saharan Africa remains remarkable and is always appreciated, especially in the current environment where many of them and their own families may be feeling the adverse consequences of the weak economy and high unemployment. We acknowledge and thank our colleagues in all our stores, offices, DCs and call centres for their contribution, service and support.
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.
For the 13 weeks to 31 March 2019, total sales amounted to R21.8 billion, representing an increase of 5.8% over the prior year. Comparable store sales increased by 4.0% with product inflation estimated at 1.7%. Recent sales trends are difficult to interpret meaningfully as we annualise the prior year’s Easter period which commenced on 30 March 2018.
Despite this slightly improved sales performance, we remain cautious about the outlook for the South African consumer economy for the first half of the 2019 financial year. The financial information on which this outlook statement is based has not been reviewed and reported on by the Company’s external auditors.
Given the Group’s 2018 financial performance; our increased IT capital expenditure programme over the next few years; the likely muted South African economic growth over the same period; and the possibility of negative movements in future key South African macro-economic variables, the Group has begun to selectively curtail new store growth and to focus on reducing working capital levels in order to reduce our cash and capital demands. Another aspect of this focus was to recently offer shareholders the choice of a cash or scrip dividend.
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
4 April 2019