When I reported to you in 2019 not only had the year under review been one of the most difficult in Massmart’s history, during which we recorded our first loss since we listed on the JSE twenty years ago, but we faced the likelihood that the performance of the South African economy would remain lacklustre. We also expected that this would be further exacerbated by the Covid-19 global outbreak. We knew that if Massmart was to continue creating value for our stakeholders we needed to operate as efficiently and cost-effectively as possible.
At the time we had no idea that the country would go into lockdown, and that the lockdown restrictions would result in our Builders stores being closed for a month, our other operations being limited to selling only essential items during lockdown level 5 and liquor trading completely banned for 40% of the year and restricted for an additional 27% of the year, leaving only 33% of the year for normal liquor trading. Tobacco sales were also banned during both lockdown levels 5 and 4. During the year unemployment soared and GDP is expected to shrink by 8%.
This scenario could well have resulted in Massmart incurring even greater trading losses than in 2019 but this was not to be the case. Instead, the Board approved Turnaround plan we announced in January 2020, with its focus on restoring low-cost retail discipline to stabilise the business, divesting noncore assets, reviewing store geographies to sharpen management focus and investing in high return assets and online, is working and we have achieved powerful forward momentum. The strongest evidence of this is to be found in a comparison of the second half trading performance of 2019 and 2020 with PBIT up 82%, free cash flow up 6%. Our balance sheet is stronger and Cash & Carry is more profitable than it has been for a number of years (see the Chief Financial Officer’s review).
The Covid-19 pandemic
During 2020 we held two additional Board meetings to address the impact of the Covid-19 pandemic. By keeping the Board informed, management ensured the Board had the information it needed to be able to provide the guidance and counsel required of us.
I would like to recognise the excellent work Massmart did and is doing to protect the business, its associates and its customers from Covid-19. On behalf of the Board I would like to extend my condolences to the families, friends and colleagues who lost those dear to them to Covid-19. I am proud that despite the massive impact on our cash resources of lockdown level 5 we took the brave step of paying all our associates and suppliers in full and we also provided our associates with a bonus to recognise the risk they took to provide our customers with essential services during lockdown. As a further recognition of our associates Massmart awarded all our associates with an Appreciation day’s leave to be taken in 2021.
The pandemic has taken a huge toll on South Africa’s people and its economy, I would urge our authorities to move with speed and vigour to ensure that South Africa receives the share of vaccines it needs in order to build herd immunity. Without a credible, effective and efficient vaccination programme with pace and scale our ability to unlock economic recovery, create jobs and attract and retain the massive inflows of foreign direct investment we need will remain very limited.
The macroeconomic landscape
Our economy is going through a difficult time. Implementing the economic reconstruction and recovery plan announced by President Cyril Ramaphosa is critical if we are to turn around the South African economy. However, for the Turnaround to happen we will require certain crucial decisions and interventions that would expedite the structural reforms necessary to unlock the country’s full economic potential.
These reforms relate to resolving the challenges in state-owned entities in general, and in our energy sector in particular. A country cannot function without a stable and reliable power supply, which places fixing Eskom at the core of these challenges. The issue of water security in a country that is listed among the 30 driest countries in the world is more challenging than electricity, and water is a significant and growing social and business risk. While there are alternative energy sources available there are no alternatives for water. Some of our water boards are in crisis and need to be fixed urgently so that society and business do not suffer as a result of water shortages caused by inefficient water boards.
Our tourism industry is a major employer and a major contributor to the economy. We need to make South Africa more attractive globally as a tourist destination. Making it easier to obtain tourist visas and ensuring we have a globally effective and efficient airline industry that can bring tourists to South Africa from all around the world would certainly help.
Without the right skills we cannot grow the economy in a meaningful way, especially now that we are living in a knowledge-based economy in which both business and the public sector is increasingly more dependent on knowledge, information and high skill levels. We need to urgently address the challenges in our higher and basic education systems, and in particular the lack of science, mathematics, technology and engineering skills, so we can build better for the future and avoid our economy suffering in the medium to long term.
During the Covid-19 pandemic our lack of industrial and manufacturing capacity and self-reliance was highlighted. We need to invest creatively in building capacity in South Africa’s industrial and manufacturing sectors to promote self-reliance and position South Africa globally as a net exporter rather than a net importer.
The need for partnerships and collaboration
Government and business need to be partners working together to make South Africa a successful, globally competitive country. To achieve this it’s crucial that there is a much more cooperative and collaborative relationship between government and business. This requires honest communication on crucial matters that affect both parties. In the early days of the Covid-19 pandemic government and business collaborated and partnered successfully to protect the country’s health system from being overwhelmed and to assist those in need. We urgently need to re-establish this partnership for the good of our country.
On behalf of the Board I must congratulate the Massmart team for its strong execution of the Turnaround plan and for restoring the low-cost retail discipline necessary to stabilise the business, which positioned the Group well to be resilient in a challenging environment.
They have mastered the ability to execute rapidly and overcome what is arguably the biggest risk in any turnaround initiative, the ability to deliver against commitments.
Over 30 turnaround projects have been delivered, which have halved complexity and doubled Group efficiency. These include rationalising from four to two business units; exiting DionWired and fresh food; launching clothing; selling underperforming Masscash stores; outsourcing SAP applications development/ support to Walmart’s India Development Centre; outsourcing financial transaction processing to Genpact; centralising Real Estate, Human Resources, Payroll; IT, etc. and it is already executing against initiatives set to delivery 60% of 2021 savings.
With the Group’s renewed strategic focus on areas of undisputed strength we are poised for a big performance.
We also benefited from the growth in online sales during the Covid-19 pandemic.
Our ESG performance
At Massmart we believe that being socially and environmentally responsible, committed to ethical practices and good governance is key to how we wish to do business and the creation of long-term stakeholder value.
I am pleased to note that Massmart continued to meet its commitment to contributing to the achievement of the United Nations Sustainable Development Goals (UN SDGs) through its responsible approach to business.
Massmart’s efforts to reduce its impact on the environment include water-use efficiency, climate change mitigation and adaptation, reducing waste generation and sustainable sourcing and product screening.
By using less electricity as well as increasing our use of renewable energy, we have not only reduced our greenhouse gas emissions (GHGs) but we have also substantially reduced our utility costs (see page 88). Currently, the annual generating capacity of our renewable energy installations is among the highest in the South African retail industry. The various initiatives steps we have taken to reduce our use of fossil fuels have resulted in a 14.5% reduction in our South African store energy intensity. We also offer our customers products that can reduce their environmental footprint and save them money by reducing their electricity consumption.
You can read about the steps we have taken to reduce our consumption of municipal water and that of our customers in the Responsible Business section of this report.
Massmart has an important role to play not only in minimising waste from our own operations and products, but also by encouraging our customers and suppliers to reduce their waste production and to recycle as much as possible. Our aim is to continually reduce the waste we send to landfill, which not only reduces our impact on the environment but also reduces the costs we incur for waste disposal.
Advancing Broad-Based Black Economic Empowerment (BBBEE), which is a key driver of economic and social inclusion and reducing inequalities, is a top priority for Massmart. We maintained our Level 4 contributor status for the 2020 financial year, with the highest score Massmart has achieved to date, and the highest score achieved by a JSE-listed retailer. We achieved full points for our enterprise and supplier development and our corporate social investment. Areas of improvement were employment equity, preferential procurement and our investment in skills development.
Massmart’s commitment to its corporate social investment programme, which focuses on reducing food insecurity and foundation phase education efforts in underserved communities, received additional support this year. During the initial Covid-19 lockdown level 5, millions of people were unable to work and buy food for their families. The financial contribution our Board members and the Massmart Executive team when they sacrificed their fees and salaries, together with a donation from the Walmart Foundation made it possible for Massmart to make a substantial donation of food to people in need during the Covid-19 pandemic.
To reduce the health risk they faced from Covid-19 we provided personal protection equipment for frontline medical workers in public healthcare facilities and support equipment for use in Covid-19 testing sites and pre-triage treatment facilities at key state-run hospitals. We also assisted Uganda’s Covid-19 Task Force with establishing screening stations.
Ethical and good governance
Massmart’s commitment to ethical and good governance includes our Board’s primary governance role and responsibilities for steering and setting the Group’s strategic direction, approving policy and business plans, overseeing and monitoring and ensuring accountability, and the embedding of responsible business practices. These practices include our Responsible Sourcing Compliance Program, our Food Safety Program, and our Consumer Protection and Product Safety Compliance Programme.
An important element of corporate governance is ensuring that the organisation’s remuneration promotes the achievement of its strategic objectives and positive outcomes in the short, medium and long term. The approach Massmart has taken to the short-term incentives of its Executive team is designed to ensure our entire leadership team is focused on the turnaround of Game, a key element of our Turnaround plan.
Board and Executive changes
During the year under review Non-Executive Director Enrique Ostalé resigned from the Board and the Remuneration and Nomination Committees on 25 February 2020. Charles Redfield was nominated for appointment to the Board as a Non-Executive Director on that date and Non-Executive Director JP Suarez was appointed to the Remuneration and Nomination Committees. In March 2020 Phumzile Langeni resigned from the Audit and Risk Committees to focus on her role as Lead Independent Director and Chair of the Remuneration Committee.
Sandile Lukhele joined the Executive Committee on 1 October 2020 as Senior Vice President, Massmart General Counsel and Company Secretary.
During its annual assessment of whether directors who have served on the Board for over nine years have maintained their independence the Nomination Committee concluded that while Ms Langeni and Ms Gwagwa have both served on the Board for over nine years they have maintained their independence. We will, however, continue to annually assess the independence of Board members. During 2021 we will be actioning the plans put in place to enhance the performance of the Board and its Committees following an independent external evaluation.
Poised for performance
I have no doubt that the Group is poised for strong performance with a renewed strategic focus on areas of undisputed strength, underpinned by a sustainably low cost base and higher rebased margins, assisted by the easing of the Covid-19 trading restrictions and evidence of green shoots in the economy.
Our strategic position is clear. Through our disposal of Cambridge Food, Rhino, The Fruitspot and the Massfresh meat processing facility and the review of our store portfolio outside the SADC countries we intend achieving a coherent portfolio focus that will release intellectual, manufactured and financial capital resources that will be invested in our growth in e-commerce, key categories and geographies.
We are prioritising the merchandise categories of bulk food, liquor, general merchandise and DIY and the customer segments in which we are market leaders. As a result of our 2020 online experience we are accelerating our online initiative, extending our B2B online market leadership and unifying our trading banner scale and assortment onto a mobile first online solution. Our new Vodapay Super App partnership with Vodacom is an exciting step forward accelerating our online presence.
On behalf of the Board I would like to extend our appreciation to Enrique Ostalé for his contribution to our deliberations during his membership of the Massmart Board and welcome Charles Redfield to the Board.
On the Board’s behalf I wish to thank CEO Mitch Slape, CFO Mohammed Abdool-Samed and the rest of the Executive team for their contribution to the Group’s excellent performance in 2020. My thanks and appreciation also go to all our associates for their outstanding commitment to putting our customers at the centre of everything.
8 April 2021