The challenging operating environment has certainly contributed to our performance, with hard-pressed consumers, impacted by slow wage growth and rising fuel costs, opting to spend on non-Durable Goods rather than Durable Goods. This, together with the impact of load-shedding and service protest action, severely impacted our sales performance, which totalled R93.7 billion in 2019 compared to R90.9 billion in 2018. This amounts to a growth in sales of just 3.0%, which was exceeded by our expense growth of 10.2% during the same period.
With the outlook for the South African economy remaining lacklustre, further exacerbated by the coronavirus, COVID-19, global outbreak, Massmart has to operate as efficiently and cost-effectively as possible if we are to continue creating value for our stakeholders in the current economic environment.
Our Road to Recovery
In September 2019 Mitchell (Mitch) Slape, a seasoned retailer with extensive Walmart leadership experience, took over as the CEO of Massmart. He moved quickly to leverage his well-established Walmart network to implement initiatives to improve Massmart’s operating performance.
These initiatives included breaking down divisional and brand silos to create efficiencies, leveraging the opportunities made possible through our relationship with Walmart, the world’s most successful retailer, and adopting an everyday low-cost mindset among all Massmart associates, with a particular focus on head office, to significantly cut rising operating costs.
In January 2020, Mitch announced his plans for turning the business around, which were well received. These plans put the customer at the centre of our operating model and will see us moving away from four divisions to two business units: Retail and Wholesale. The turnaround plan also focuses on portfolio optimisation, which will involve evaluating Game’s customer value proposition and the consolidation of our low-cost wholesale route to market by merging our Masswarehouse and Masscash Cash & Carry operations.
The plan also includes the optimisation of our Group-wide supply chain and ensuring that expense growth does not continue to outpace sales growth.
Our turnaround plan, which will ensure we can serve our customers better, has the full support of the Board and we are confident that it will bear fruit, with some quick wins already having been realised in terms of cost control.
Our disappointing performance necessitated a review of all stores within our portfolio. Underperforming stores have been identified and their potential turnaround evaluated.
As a responsible retailer, we take any potential job losses very seriously and in any restructuring process think long and hard about what we can do to minimise job cuts. We engage with social partners to look at various options and redeploy associates to other parts of the business where we can.
Following the review process, a decision was taken to close 34 underperforming DionWired and Masscash stores. This affects approximately 1,440 jobs, which is equivalent to 3% of our workforce. After an extensive consultation process with affected associates, organised labour and other relevant stakeholders, the Group announced the closure of 23 DionWired stores on 19 March 2020. Click here for more information.
Despite the ongoing negative outlook for the South African economy, Massmart remains committed to building the strongest and healthiest, diversified retail group with the best long-term prospects on the continent. The Board is confident that with a clear turnaround plan in place, driven by an experienced leadership team, Massmart’s prospects will improve.
In order for Massmart and South Africa to thrive, the South African economy needs a jumpstart. For this to happen, Government needs to create an enabling environment for growth. While we do see some positive signs, we urgently need a common and shared view between Government, Labour and Business, of how to grow the economy, create jobs and provide a better life for all South Africans. While differences should be encouraged in a democracy, this is one area where we need to find common ground regardless of political party or faction.
Commitments made by the President during the State of the Nation address in February 2020, to enable more private sector participation in meeting South Africa’s energy needs, are welcomed as access to reliable energy is a prerequisite for growth and development. The announcement by Finance Minister Tito Mboweni, that Government will be cutting the public-sector wage bill by R160 billion over the next three years, is a step in the right direction.
With the global outbreak of the coronavirus, COVID-19, the Group’s priority is the health and safety of its associates and customers. The measures the Group has implemented to stem the spread of the disease and to look after the health and wellbeing of our customers and associates include: developing various in-store safety measures to enhance cleaning and hygiene protocols as well as to enable safe social distancing, providing pregnant associates across the Group with paid COVID-19 special leave, liaising closely with suppliers to secure high demand products for our customers, and restricting all international and domestic travel for non-essential purposes.
The Group is also partnering with Food Forward to provide COVID-19 related food aid to vulnerable groups across the country, including the elderly, orphans and the chronically ill.
The Group is confident that through the actions that have been taken, including engagement with various stakeholders such as lenders and shareholders, as well as the cost saving initiatives which have been implemented since the second half of 2019, combined with the Group’s liquidity position, will place Massmart in a strong position to weather this difficult period.
In terms of Africa, we will continue to look to leverage profitable scale on the continent. The long-awaited African Continental Free Trade Area (AfCFTA), scheduled to begin on 1 July 2020, provides us with a significant opportunity on a continent where intra-African trade only accounts for approximately 18% of total trade. This is the largest free trade zone since the launch of the World Trade Organisation in 1995. AfCFTA contains provisions for countries to reduce tariffs by 90% and also reduce impediments to trade.
Managing our impact
The ESG agenda is increasingly receiving the attention it deserves. Shareholders are beginning to demand action on climate change and are starting to ask important questions about whether Executive incentives have any relationship or bearing on how the companies they lead manage their environmental impact.
I believe that Massmart leads from the front when it comes to ESG and our inclusion in the FTSE/JSE Responsible Investment Top 30 Index is testament to this.
Massmart is the most transformed Retailer in South Africa with a BBBEE rating of 82.06 (80.81 in 2018). Our improved score is attributable to a two-point increase in preferential procurement recognition. During the period we procured R10 billion worth of products from black- and 30% black women-owned businesses.
Thanks to our Supplier Development Programme (SDP), we exceeded the BBBEE investment targets for enterprise development and corporate social investment (CSI). The SDP was established to procure products from small local manufacturers and in 2019 it passed the R1 billion mark in terms of products procured since inception.
The main aim of the SDP is to develop and significantly increase the production scale of small local manufacturers. The work of Massmart’s SDP team typically involves assisting suppliers to meet regulatory standards, improve price competitiveness, build manufacturing capacity and develop retail and business management expertise. The programme currently has a portfolio of 23 small businesses manufacturing a variety of products ranging from chef wear, cooking gel and instant noodles to charcoal, cooler-boxes, doors and paint. Six of these manufacturers currently export their products. Through our relationship with Walmart, a Global sourcing buyers team visited nine suppliers to identify opportunities to export suitable products to Walmart markets. This is something that I would like to see continue and grow. For South Africa to be successful, we need to be internationally competitive, and that starts at the level of our own suppliers on the SDP.
In terms of environmental impact, Massmart is continually striving to do more. In 2019, Massmart commissioned two new solar photovoltaic installations increasing our renewable energy generation capacity to five million kWh annually. As a Group, we are well-positioned to further exploit solar energy to reduce our carbon footprint and operating costs. We are encouraged that the Government plans to lower barriers that have previously slowed the introduction of renewable energy alternatives to the grid and we are intent on continuing to rapidly incorporate solar energy to reduce our carbon footprint and costs. In this regard, we believe that the move to allow municipalities to purchase renewable energy is a welcome development, which, we hope, will enable us to sell solar energy from our stores back into the grid in the future.
In a water scarce country like South Africa, water conservation is critical and Massmart is working hard to conserve water across its operations. In the coming year we aim to install remote water monitoring capabilities at all standalone facilities so that we can establish long-term water use targets for stores and facilities. We continue to make use of rainwater and refrigerant condensate to supplement our water needs for non-potable water applications. During 2019, our rainwater and refrigerant condensate harvesting projects at Makro and Builders stores captured an estimated 23 million litres of water.
We are cognisant of the role that retailers like Massmart play in job creation. Retail is South Africa’s third largest employer, but this sector faces threats in terms of its ability to create employment beyond those posed by the current economic climate. The new normal is omnichannel and this requires a different workforce to the store-based model. We are working hard to understand the skills required for the jobs of the future and to ensure that our associates have the skills relevant in an increasingly digital world. We believe that this is an area that requires strong collaboration with Government as we seek to position our country for the fourth industrial revolution.
We strive to have only a positive impact on the lives of our associates and, as such, the safety of Massmart’s associates is of utmost importance to us. Despite all our efforts we are saddened to report one associate work-related fatality during the period. Given the Group’s focus on workplace safety, we also work closely with contractors to ensure compliance to safe work practices. We were deeply saddened by third-party contractor fatalities, of which there were six during the reporting period. This has caused the Group to intensify its focus on safety standards, not only for our associates, but also for our third-party contractors. The Board extends its sincere condolences to the families for their loss.
Our commitment to good governance
In my role as Chairman of the Board, I seek to create a climate of trust, respect and candour, as I believe that these are the qualities required of a Board deliberating the most pressing issues that face the Group. In this regard, the Board undergoes ethics and compliance training annually, so that each Board member knows what is expected of him or her and to ensure that we are living the values of the Group. As a Board we recognise that it is our role to lead with integrity. We seek to instil a culture from the top that builds trust and accountability throughout the organisation.
We are also focused on ensuring that we are equipped to lead effectively. During the year under review we undertook an external evaluation of the Board’s effectiveness with the aim of assisting the Board and its Committees in identifying opportunities for improvement. The review considered the balance of skills, expertise and competencies of the Board.
The role of the Board is also to debate strategic decisions and matters of importance, including making sure we have fit-for-purpose structures and processes to manage risk effectively.
Board and Executive changes
The changes made to the Board and Executive Committee during the period under review introduced a balance of diversity in age, gender and race to the Group. The new leadership, together with their management teams, will support the overall turnaround plan with the focus and leadership skills they bring. In summary, the following Director changes were made this year, further information can be found here.
In February 2019, CFO Johannes (Hans) van Lierop indicated that he was not available to extend his tenure with Massmart for personal reasons after the formal conclusion of his South African work visa in February 2020. Mohammed Abdool-Samad succeeded Hans as CFO and Executive Director, effective 1 August 2019.
On 6 May 2019, CEO Guy Hayward informed the Board of his decision to step down before the end of 2019. On 23 May 2019, it was announced that Mitch Slape would assume the role of CEO and Executive Director; his appointment was effective 1 September 2019.
Lindiwe Mthimunye was appointed as an Independent Non-Executive Director and member of the Audit and Risk Committees on 28 February 2019 and JP Suarez, a Walmart-appointed Non-Executive Director replaced Roger Burnley.
Chris Seabrooke retired as the Deputy Chairman and Lead Independent Non-Executive Director of the Board on 23 May 2019.
On 27 May 2019, Phumzile Langeni assumed the role of Deputy Chairman and Lead Independent Non-Executive Director effective 23 May 2019.
On 5 September 2019, Mohammed Abdool-Samad was appointed as a member of the Risk Committee effective 1 August 2019 and Mitch Slape became a member of the Risk and Social and Ethics Committees on 1 September 2019.
The Group’s General Counsel and Company Secretary, Joseph Ralebepa, resigned as of 31 December 2019 and the appointment of Nicole Morgan as the Interim Company Secretary came into effect as of 1 January 2020.
On 25 February 2020, Enrique Ostalé resigned from the Board, Remuneration and Nominations Committees. JP Suarez was appointed to the Remuneration and Nominations Committees on the same day. Charles Redfield was also nominated for appointment as a Non-Executive Director of the Board.
On 6 March 2020, Phumzile Langeni’s resignation from the Risk and Audit Committees to focus on her other Massmart Board and Committee duties was announced, with effect from 21 May 2020.
I believe that these appointments have further strengthened the Board, which has the right balance of skills and experience to discharge its duties.
On behalf of the Board, I would like to extend our appreciation to Guy Hayward and Hans van Lierop for their contribution to Massmart over the years. We welcome the incoming CEO Mitch Slape and CFO Mohammed Abdool-Samad and thank them for the work they have done so far. We would also like to thank the rest of the Executive team and Massmart’s associates across the Group for their ongoing commitment.
I extend my appreciation to the Board for their valuable guidance and oversight during the year. Finally, I would like to thank our business partners, shareholders and other stakeholders for their continued engagement and support.
2 April 2020