I am pleased to report that we have been able to make good progress with our Turnaround plan during the course of 2020. Despite the substantial impact of the Covid-19 pandemic lockdown restrictions on the sale of certain product categories, our increased focus on optimising our product and promotional mix, combined with a shift towards an everyday low price (EDLP) proposition, resulted in gross margin increasing by 147bps to 20.4% from December 2019. We were also able to continue our trend of improving our expense management that was reflected in our interim results. Our final result for 2020 was a 0.3% decrease in total operating expenses over the previous year.
Our trading profit for the year of R1,172.17 million represents an increase of 5.5% from the R1,111.2 million trading profit we reported in 2019.
The Power of One
For much of its history, Massmart has been operated in a federated model. When I reported to you last year, we had identified the need to break down divisional and brand silos and encourage collaboration to leverage our procurement scale and get the best deals for our customers. This required creating a Companywide mind-set and approach, in which our focus was on driving Massmart forward as a whole.
We explained that ‘Powered by Walmart’ meant we would be drawing on the best practices and expertise of Walmart, from its procurement processes and cost-saving methodologies to systems and logistics capabilities, with the aim of gaining an edge in the competitive retail space. We also wanted to develop an everyday low-cost mind-set, leveraging the expertise and experience of Walmart, recognised for being a leader in cost control, to achieve our goals.
The reorganisation of the business into two business units – Retail and Wholesale – has also created momentum in the business towards becoming more collaborative. Initiatives such as creating Centres of Excellence for support functions to serve our customer-facing business units and modifying our Executive remuneration so that the incentives of our Executives were tied to the success of our Turnaround plan initiatives, has also resulted in a renewed level of focus in the business.
An excellent example of the power of working together is how we are engaging with vendors as one team. Leveraging our Group purchasing power for events such as Black Friday has proved to be very powerful, realising real efficiencies for the Group and substantial savings for our customers, who now – more than ever – need us to fulfil our purpose of saving them money so they can live better.
I am pleased with the work that we have done in the optimisation of our supply chain. This remains a work in progress that will play an increasingly important role in the efficiency of the business going forward. In the current year, we have begun the process of consolidating our network and we are progressing nicely with the construction of our Cape Town regional distribution centre which is set to open in May 2021. We have thus far delivered a 31bps reduction in our supply chain cost-to-serve during 2020, and we maintain our targeted 100 bps reduction opportunity identified as part of the Turnaround plan.
Leveraging our Group purchasing power has proved to be very powerful resulting in real savings for the Group and our customers
Resetting and preparing for growth
Even though the Builders business in South Africa was closed for the entire month of April 2020 due to governmental restrictions, during which it lost approximately R1.0 billion in sales, it was able to benefit during the remainder of the year from our customers’ focus on home improvement projects. Our Builders’ team was able to help customers to safely shop in stores as well as enhance our online business, with e-commerce sales growing by 111.0% during the year. Overall for the Builders’ business, we finished 2020 with R13.9 billion in sales, which was down 2.1% on the previous year. The business delivered profits of R1,032.6 million PBIT.
Both the Game and Cambridge businesses were significantly impacted during lockdown level 5 as they were limited to sales of basic food items per the terms of lockdown regulations. At the same time, unemployment in lower LSM groups, which remains a concern going forward, has made trading conditions more difficult for consumer durables and discretionary purchases. Customers’ dependence on the cycle of governmental grants is also noticeable.
Our reset of the Game business remains a work in progress. While the impact of restrictions and implementation issues with a new system had a negative impact on sales, we did make substantial progress in improving the fundamentals of the business. Improved stock management and optimisation of product and promotional mix through the adoption of EDLP pricing strategy resulted in a 230bps GP margin uplift in 2020. Game was also able to reduce costs through diligent negotiations, successfully negotiating reductions in rental costs, better prices from suppliers and by realising efficiencies through improved overtime scheduling. In September 2020, we launched our ‘Game Reimagined’ test store in the Mall of Africa, which provides a new vision of where we want to take the business. We plan to roll out the concepts in this test store to most of the rest of the chain in the coming year. Game continued to drive market leadership in key ownership categories and was able to generate strong online sales growth of 77.5% year-on-year.
Both Cambridge and Rhino suffered from reduced sales during the course of 2020 due to reduced footfall and the impact of restrictions on liquor, which account for approximately 10% of chain sales. The progress made on gross profit margins and cost control was encouraging. As was announced during the annual results presentation on March 8, the business has made the strategic decision to divest the Cambridge and Rhino businesses, as well as the Massfresh business, as they have relatively small market shares and are not considered core to the Massmart portfolio.
Finally, as we advised when we released our interim results, we closed 23 DionWired stores during the first half of 2020.
Massmart Wholesale had a solid performance in 2020 despite losing an estimated R3.4 billion in sales as a result of Covid-19 trading restrictions. The impact of restrictions in liquor were particularly pronounced as there were only 17 weeks of liquor trading without some form of restriction during 2020. Under normal conditions, the sale of liquor makes up approximately 25% of Massmart Wholesale’s sales.
Through driving sound merchandising fundamentals and leveraging Group synergies as a combined Wholesale entity, our Makro and Cash & Carry businesses were able to deliver enhanced gross profit margins with improved price gaps during the course of the year. Expenses were well-managed across the business (-1.9% for Makro and -0.1% for Cash & Carry). Encouragingly, the combination of these factors resulted in the Cash & Carry business delivering positive PBIT for the first time in the last five years. Emerging from lockdown, Makro experienced an increase in retail customers and a reduction in wholesale and commercial customers, attributable to the impact of the various lockdowns on the hospitality industry. At the same time, Makro online sales grew by 40.2%, and the business was able to leverage its partnership with One Cart to enhance its last mile delivery capability.
The impact of Covid-19 on our Turnaround plan
The Covid-19 pandemic certainly impacted the Company in a variety of ways and has created new norms in the way we work throughout the business. From the outset of the pandemic, we remained highly focused on ensuring the safety of our associates and customers in our stores. From best-in-class safety practices and training to grouping associates in shifts to contain potential exposure between different working groups, we introduced a number of in-store protocols to keep everyone safe. For those who were able to work remotely, we invested in the resources to enable them to effectively and seamlessly perform their work.
The Turnaround plan that we introduced in 2019 had already given structure to the way we were managing our business. We knew what we needed to accomplish, and were highly focused on removing cost from the business. Toward this end, our plan was structured and highly disciplined and included a variety of elements, including the negotiation of better rentals for our stores and finding ways to use less energy (see page 88 of the Responsible business section) to reduce costs. Thanks to our early efforts to get these initiatives underway, we were well-positioned to continue that work and accelerate it as the pandemic started. Managing through the impact of the Covid-19 lockdown was closely linked delivering against our Turnaround plan.
Cash flow management was key to achieving our Turnaround plan, but during the Covid-19 lockdown level 5 in South Africa, when the entire Builders business could not operate, we really honed our cash management skills. The need to pay our associates and vendors and meet our other commitments gave cash flow management a whole new meaning. We could see our debt levels increasing and had carefully calculated how long we could continue to survive without being able to operate. This experience had a very powerful impact on our leadership team because it created a day-to-day discipline around understanding how much cash was coming into the business and how to maximise our financial position. It was an important lesson on how vital cash is in the business and the lessons learned will help us to be even better at cash and balance sheet management in the future.
Despite incurring a net loss during the year under review, the intense focus on liquidity and the proactive management of our cash flow resulted in our net debt only increasing by 6.3% or R152.6 million year-on-year.
A work in progress
We also significantly ramped up our e-commerce offering as part of our efforts to keep our customers safe during Covid-19. As a result these efforts, our online sales grew by 58.6% year-on-year our Gross Merchandising Value (GMV) topped R1 billion for the first time in our history. Massmart’s e-commerce sites had the second highest share of retail website traffic in South Africa during 2020. While we are pleased with the progress we have made, a number of learnings came out of this growth. The sudden increase in volumes during the lockdown challenged our ability to deliver against our service commitments at times and helped us to understand that we needed to take a step back and make improving our service levels a priority.
One of the things we did to improve service levels was to partner with companies who could help us meet customer demand. Partners such as One Cart, Uber Eats and our internal delivery company, WumDrop, have helped us improve our levels of customer service. However, there remains a great deal of opportunity for us to improve our ability to get products to our customers, when they want them, with every aspect of the transaction executed perfectly.
We still have much work to do in using digitalisation to enhance our e-commerce customer relationships, financial services relationships and our customer service. These are all currently a work in progress.
A responsible business
I am proud of our approach to our people during the Covid-19 pandemic. Early on, we prioritised paying our people and not cutting salaries. This was a big decision when it came to businesses such as Builders, which were unable to operate during certain periods of the year due to lockdown restrictions. In fact, rather than cutting salaries, we were proud to be able to provide bonuses to those associates working in our stores during lockdown to acknowledge the substantial contribution that they were making in serving our customers.
When cash management was so critical, our Executive Committee elected not to take salary increases in 2020. When our officer group also opted not to take their salary increases, we made the decision to defer salary increases for all our management-level associates to the beginning of 2021. At the same time, however, all associates below management-level received the mid-year increases for 2020. All deferred increases for management were paid from January 2021 onwards.
Our Chair has reported on how well the Board and Exco responded to government’s appeal for business leaders to donate a portion of their salaries for three months to assist with the impact of the Covid-19 pandemic.
The Massmart Group’s corporate social investment programme’s efforts to contribute to food security and the achievement of the United Nations Sustainable Development Goal (UN SDG) 2, the focus of which is to end hunger by 2030, are traditionally addressed through our partnerships with FoodForward South Africa and Gift of the Givers. During the Covid-19 pandemic we were able to increase our efforts in this regard to provide approximately 500 tonnes of food to those in need (see page 96).
The way forward
The progress we have made with our Turnaround plan is helping us to optimise the business and will position us well for future growth. Our aim is to become a stronger business by leveraging our core strengths as a general merchandise and DIY market leader and a wholesale Food & Liquor powerhouse all while employing best-in-class e-commerce solutions. In accomplishing this, we are leveraging the capabilities and know-how of Walmart throughout the organisation in our quest to be ‘Powered by Walmart’. At our most recent annual results presentation, we shared two immediate decisions will further drive our focus on our core business. These include: 1) The sale of our Massfresh and Cambridge/Rhino Food businesses, which are not core to our areas of business strength; and 2) A detailed portfolio review of our stores outside the Southern African Development Community (SADC) region where performance has been mixed and management of these businesses is complex.
The first quarter of 2021 will see the final implementation of the Group operating model with the two customer-focused business units supported by Centres of Excellence and the finance support transition to Genpact.
In 2021 we will continue with the roll out of the Game store ‘Re-Imagined’ programme, an effort to put our best foot forward in the customer value proposition for Game. The roll out of the successful introduction of apparel to Game will be accelerated and completed as part of this effort. We believe that 2021 will see Game achieve much improved results that could see it break even by year-end.
Our Wholesale integration will be further enhanced by the unifying of IT systems and the enhancement of our e-commerce offering. We will also be piloting a standalone ‘Powered by Makro’ liquor store format.
The ongoing optimisation of our supply chain will include the go live of two state of the art distribution centres. Leveraging Walmart supply chain expertise we plan to achieve a ‘one best way’ approach and centralise supply chain volumes through our distribution centre network to more than 40%.
Finally, we will continue to expense growth below sales growth by executing on our R1.9 billion expense reduction ambition.
Group Chief Executive Officer
8 April 2021