What have your observations been since joining Massmart?
Massmart experienced a difficult 2019, with slowing sales growth, gross margin pressure and higher than expected expense growth. Our performance was not consistent with what we expect of ourselves as a management team, nor was it consistent with the expectations of our shareholders. The loss we reported this year is the first loss in the history of Massmart.
While Massmart has a solid underlying business with great brands, strong positions in many categories and substantial procurement scale, our review of the business as a leadership team identified strategic and operational gaps in core elements across the value chain, which have impacted performance. These included:
- Blurred go-to-market focus. Observing our brands, we believe that the way we serve customers has become blurred – by overlap and cannibalisation between our formats and, in some cases, overlapping customer value propositions. This has contributed to lower store profitability levels across our brands and formats
- Structural complexity and immature support function capabilities: We identified high levels of duplication of effort in support functions with low levels of standardisation, resulting in higher overhead costs with limited use of centres of excellence to leverage best ways of working
- Siloed ways of working: We have had a history of driving our businesses as independent, stand-alone divisions, with limited collaboration across the Group. This has resulted in failed opportunities to learn from collective experience and optimise business opportunities.
Expectations of high sales growth to compensate for inefficiencies in our cost structure are not realistic, particularly in the current challenging economy and very constrained consumer environment. We must do more in order for us to thrive and succeed as a business. The leadership team fully realises the need to act deliberately and with urgency to shift the trajectory of Massmart’s performance.
What initiatives have you put in place to shift this trajectory?
In order to quickly mobilise our associates in the business to drive our change programme, we launched three key initiatives from 1 September 2019. These included:
This initiative is geared towards breaking down divisional and brand silos and working together to optimally leverage our procurement scale, ensuring we are able to get the best deals for our customers. A great demonstration of its effectiveness was the impact of the collaboration between our divisions when they worked together on Black Friday promotions. For the first time in the history of the Group, we were able to leverage our scale to deliver promotions across the divisions. For example, Game, Makro and Builders Warehouse power tool buyers were able to save our customers almost R8 million by leveraging their collective buying power. This is not an isolated occurrence. This collaboration is continuing throughout the Group, with various departments leveraging Group scale to reduce costs (e.g. integration of core services), to achieve improved efficiency in order to strengthen margins and our ability to compete.
Powered by Walmart Over the past few years, we have not fully realised the benefits associated with leveraging the best practices and opportunities that are available from Walmart. This is not just with regard to obvious areas of opportunity such as product sourcing, but also with regard to leveraging business processes and ways of working. Our relationship with Walmart will now fundamentally change – Massmart will be Powered by Walmart and we will pursue leverage at every opportunity, by drawing on the global resources of the world’s largest global retail group.
Early in the process of my engagement with the leadership team at Massmart during the second half of 2019, we began working with Walmart to further enhance this relationship. For the first time the entire Massmart Executive Committee travelled to Walmart’s headquarters for a full week of discussions on how we could maximise leverage opportunities. We are now drawing on Walmart’s best practices and expertise to gain an edge in the competitive retail space – from its procurement processes and cost-saving methodologies to systems and logistics capabilities.
Every Rand matters
We have shared the Every Rand matters initiative with our associates across the Group – for every Rand spent at head office, our stores must generate R50 in sales to recover the cost. This initiative is designed to drive a cultural shift in the business. We are leveraging Walmart’s expertise and experience in driving indirect expense management and resetting costs in the business, while developing an everyday low-cost mindset. No retailer is better at cost control than Walmart and we need to learn from their approach.
Our collaborative efforts within Massmart, our ability to leverage the capabilities of Walmart and our cultural reset towards an everyday low-cost mindset resulted in our costs growing at a significantly lower rate during the second half of the year compared to the first half. This trend continued during the first few weeks of 2020.
We strongly believe in the importance of being an everyday low-cost operator as this enables us to achieve our commitment to save our customers money so they can live better. When we control costs effectively, we are able to pass these savings on to our customers in the form of lower prices on the basics that they need. Our customers in turn reward us with their business, resulting in improved comparative store sales.
Speaking of your customers, how is Massmart fulfiling its commitment to save the customer money so they can live better?
In the current economic environment, our customers are more financially constrained than ever before. It is during trying times like these that our customers need us the most. By saving our customers money, they are able to stretch their budgets further to afford the basics that they need the most and in doing so they can live better.
As a leadership team, we are focused on reducing our business expenses, while also working hard to negotiate the very best possible everyday low-cost prices with our suppliers. This frees up funds, which we in turn invest in everyday low prices for our customers. With better prices, the demand for our products increases and we are able to grow sales and reinvest in our business. My perspective is that if we can get this virtuous cycle right, it will form the basis of our shift towards price leadership.
Can you elaborate on your plans of turning around the business?
In order for Massmart to succeed and thrive as a business, we have defined a turnaround plan focused on key building blocks that will help us to serve our customers, while at the same time improving our business performance. The pillars of this plan include:
- Restructuring the Group operating model: shifting our operating model from the current federated approach with independent/autonomous divisions to an integrated, customer facing approach in which we have two business units: Retail and Wholesale, supported by centres of excellence that provide services across the Group.
- Portfolio optimisation: putting in place a disciplined portfolio strategy, driven by a clear point of view regarding where we will play and how we will win. At the same time, we will engage in careful monitoring of store performance with appropriate follow-up action. As a key part of our portfolio strategy, we also believe that we must address the performance of our Game stores as well as improve the manner in which we go to market in the wholesale space:
- Game customer value proposition (CVP): a key part of our portfolio work includes the revitalisation and growth of Game’s relevance to customers. We are focused on getting back to the basics of good retailing at Game, while we also engage in a series of merchandising tests, to ensure that we are offering the right assortment at the right prices to our customers. Significantly, these tests have resulted in our decision to remove Fresh and Frozen Food categories from our Game stores and to relaunch the basic apparel category. At the same time, we are designing our customer value proposition to create an exciting and relevant customer experience.
- Wholesale route to market: an analysis of our portfolio made us realise that the way we were serving our Wholesale customers was not optimal across our divisions and brands. We believe that there is an opportunity to create a consolidated, low-cost wholesale route to market, with high relevance for suppliers and customers through merging our Masswarehouse and Masscash Cash & Carry operations. To unlock this value, we are unifying our wholesale leadership and buying team, and leveraging one ERP with one point of sale system. Concurrently, we will add Cash & Carry volumes to our existing inbound network and expand our General Merchandise product offering from Makro for our Cash & Carry customers.
- Supply chain optimisation: integrating the supply chain for the total Group to promote cost-effective on-shelf availability at a lower cost to serve, as well as improve inventory management.
- Cost reset: identification of new approaches and new ways of working to move the existing cost structure down and moving towards the goal of ensuring that expense growth does not outpace sales growth. This includes leveraging Group scale to deliver spend reduction across indirect procurement categories (including Goods Not For Resale) and cost of goods sold, freeing cash to reinvest in price and customer experience and to provide fuel for future growth.
We will closely monitor our progress in each of these pillars and share progress with our stakeholders.
As we execute the pillars of our turnaround plan, we will also be developing our plans around various growth initiatives:
- Building capability in our online business
- Determining the best way to grow our Food offering
- Identifying the best path to creating sustainable scale in African markets.
Our Execution Office, which we are calling Catalyst, will drive these initiatives with our leadership team. The Executive Committee will be directly responsible for driving results and will be accountable for these initiatives.
How confident are you in Massmart’s ability to achieve success, and what shortcomings do you foresee in implementing the turnaround plan?
While Massmart’s circumstances are challenging, history indicates that we have the potential to succeed and I am confident that we can turn this business around. Our own bureaucracy and shortcomings in execution have been limiting factors in the past. We are overcoming these shortcomings by instilling a culture of collaboration and a desire and willingness to achieve success, tightly linked to the right metrics, and by holding ourselves accountable. Our associates have a wealth of knowledge in the business and that has impressed me. We have realigned ourselves to apply our best talent to our biggest opportunities.
What is Massmart doing to assist associates affected by the potential store closures?
It is sometimes necessary for businesses to make tough decisions. We have committed to approach this sensitive situation in a compassionate and understanding way, and have assured all those affected that any store closure decision will only be taken after a meaningful and inclusive consultation process. Our approach is to remain transparent and honest with our associates and to engage with our associates as often as required through internal channels as well as through regular town hall meetings. We understand that this can be a distressing experience and we have provided our affected associates with access to face-to-face counselling services and a 24-hour counselling support line.
How are you able to justify retaining Game given its sustained weak performance?
Game is a powerful brand and is recognised by our customers as a destination store for many categories, as indicated by the multiple choice awards that Game has received, including Star Readers’, Daily Sun, the Sunday Times and Sowetan 2019 Shopper Survey. A recently conducted Brand Poll study also found Game to be the first choice destination for small appliances, large appliances, patio and garden, equipment, televisions and electronics, health and fitness and Black Friday deals. We have also made signiﬁcant strides to improve the Game offering and have received an overwhelmingly positive response from our customers to the online shopping platform launched in November 2017. The potential of Game is clear – but we need to operate our stores better and get back to basics, including improving the product assortment, our in-stock availability and creating a better in-store experience.
Together with the new management team, we are revitalising Game’s CVP to get Game back to being the destination store that it once was. While we continue to adjust stores across the chain, we will also be launching our revised CVP store in the Mall of Africa during the first half of 2020.
Why has Masscash underperformed, and what makes you believe profits can be restored?
Masscash is a Wholesale and Retail business selling to small independent retailers whose consumers have been heavily impacted by the slowing economy. The result is that our Cash & Carry operations have been under significant sales and margin pressure. It is also the division that is most impacted by price deflation in commodities (like maize, wheat, oil, sugar and rice). I strongly believe that the business will benefit from better leverage of our Group scale, particularly through access to shared distribution centres that will reduce operating costs. We also need to improve certain operating disciplines. The new operating model will also help us to address these issues as we introduce strong operating principles and practices to the overall business.
Is growing Massmart’s sub-Saharan African footprint still a priority?
Our aim is to build the strongest and healthiest retail group, with the best long-term prospects in Africa. We are deliberate about where and how to expand our portfolio in the rest of Africa. We will not go into a market unless we can do well.
What does being a responsible business mean to Massmart?
We are committed to being a responsible corporate citizen; being socially and environmentally responsible is fundamental to achieving our purpose and are proud that we:
- Have the highest BBBEE score among South African retailers, and are the only listed Retailer to offer our customers 100% BBBEE procurement recognition
- Manage South Africa’s longest running Supplier Development Programme (SDP), through which we have invested more than R200 million since inception
- Are the only South African Retailer that undertakes genetic identity testing of our seafood products
- Produce more renewable energy than any other South African retailer.
Our SDP has not only benefited the manufacturers in the programme (R1 billion procurement from small manufacturers on the programme, in addition to the R3 billion procured per annum from small suppliers not on the programme), but has added value to the Group as well. We have grown our existing local supplier base, maintained consistent availability of products that previously experienced shortages, extended selected ranges and provided the flexibility to create some innovative consumer-trend inspired Private Label products. Our relationship with Walmart’s Global Sourcing team has created further opportunities for nine of the 23 local suppliers and small manufacturers from our SDP to export suitable products to Walmart markets.