It was a year like no other. In addition to facing the challenge and disruption of successive waves of Covid-19 infections and the resulting lockdown restrictions on businesses, the South African market also suffered from the impacts of significant civil unrest during the month of July. Global supply chain impacts, exacerbated in South Africa by the loss of stock and production capacity by many of our vendors due to the unrest, created in-stock challenges through the balance of the year in product categories such as electronics and appliances. Additionally, the impact of load shedding and growing inflationary pressures on raw materials and product costing were also significant headwinds.
In spite of the many challenges that 2021 presented, I am extremely proud of the way that Massmart associates stepped up and responded.
Our Covid-19 protocols and safety measures continue to be among the very best in the industry and are continually reviewed and monitored by our outstanding Compliance and Operations teams.
The Massmart business was affected by decreased sales from the hotel, restaurant and catering (HORECA) industry, as well as from prohibitions on the sale of alcohol for approximately 110 days of the year. Lost sales due to trading restrictions on alcohol, which account for about 15% of total Group sales, are estimated to be R1.8 billion for the year under review.
During the civil unrest in July in the KZN and Gauteng provinces of South Africa, 43 of our stores and two DCs were directly impacted, some of which were severely damaged by arson. Nine of these stores remain closed, as do the impacted DCs. We were able to quickly reconfigure our logistics network and move products to other facilities, and are now in the process of commissioning a new state-of-the-art DC facility in Northfields in Durban, which will replace the two facilities that were looted, one of which was destroyed during the unrest. Bringing this facility on line will improve product flow, both imported and locally sourced, to all our formats. Notwithstanding this rapid adaptation, our supply chain was also disrupted by stock losses at our DCs, disruption at the Durban Port and impacts on suppliers’ logistics networks. This undermined our stock availability, particularly in Game.
Our reaction to the civil unrest was world-class in my opinion. Our immediate priority was to ensure the safety and security of our associates and customers. This resulted in the temporary closure of vulnerable stores and facilities during the civil unrest. Total Group damages incurred from these events was R1.5 billion, R1.2 billion of which relates to inventory write-offs, and insurance proceeds recouped thus far amounted to R1.0 billion.
In the days following the civil unrest, Massmart provided care packages, containing basic essentials that were difficult to source, to all 8,373 Massmart associates in KZN. We also initiated early opening hours at stores that were not impacted, so that our associates could shop exclusively before opening to the public. Together with Walmart and the Walmart Foundation, we contributed R13 million worth of food and equipment to mitigate food insecurity in vulnerable communities immediately following the civil unrest. This support included supplying more than 200 tonnes of food to FoodForward South Africa and the Gift of the Givers Foundation. Based on our research, this constitutes the single largest response by any retailer in South Africa.
What’s important is that we did not become distracted by lamenting the impact of the unrest. I was pleased with the way that our Operators and Merchants focused on re-establishing the business under the rallying cry, ‘We will come back stronger’. A good example was the response of the Makro team, which secured warehouse space and established a ‘pop-up store’ to serve wholesale and retail customers within approximately 73 days of the unrest. We emerged from the unrest with stronger Government, civil society and community relationships, and with greater confidence in our ability to respond to crises.
In November, a maximum of 29% of our unionised associates participated in an 18-day strike. This followed strike action that occurred in May 2021. Both of these actions were primarily a response to the change associated with the re-positioning of our business. This was an eventuality for which we had planned. We were well prepared and able to effectively implement strike contingency plans that contained the impact on trading, including during the busy November period. We have redoubled our engagement with SACCAWU toward better understanding their concerns and avoiding future strike action.
Notwithstanding the strike, we made excellent progress on our journey to become an employer of choice. This effort was rewarded when we were accredited by the Top Employers Institute as a Top Employer for 2022. This certification is in recognition of the organisation’s dedication to a better world of work demonstrated through excellent people policies and practices. At the conclusion of a rigorous assessment and audit process, Massmart was placed in the Top 25% of approximately 1,800 employers who participated globally. Massmart scored particularly well in the category that evaluates values, ethics, sustainability and diversity and inclusion initiatives. We achieve this through continuous engagement with our associates and an ongoing focus on strengthening our relationship while aligning to best market practice.
Progress on our Turnaround strategy
In the face of the aforementioned significant headwinds, I am happy to report that Massmart’s Turnaround plan continues at pace and with focus. The structure and clarity of the Turnaround plan has helped guide the organisation and provide clear direction to our associates. I am particularly pleased by the extent to which the Management team has grown in confidence, displaying a remarkable ‘can do’ attitude that is evidenced by reliable delivery of our Turnaround objectives. The organisation’s ability to drive change that will better position Massmart for the future is impressive.
Group operating model: We have bedded down our new Group operating model with the two customer-focused business units, supported by more efficient centralised support functions, which have eliminated unnecessary duplication and optimised Group-wide access to scarce expertise. We have also successfully completed the transfer of our back-office finance support and transaction processing services to Genpact, a Walmart strategic partner.
Portfolio optimisation: We remain focused on exiting non-core businesses and geographies through the divestiture of the stores in Game East and West Africa as well as the Cambridge, Rhino and Massfresh businesses. We are satisfied with the progress made to date and look forward to completing those transactions in due course.
Reinvigorating Game: While we are not happy with Game’s 2021 performance, we are optimistic about the promising impact of initiatives implemented, including the impact of a more efficient associate resourcing model and the relay of our 114 Game South Africa stores. This optimistic perspective is further supported by the initiative to divest of Game East and West African stores, together with the 15 non-core South African stores announced in December 2021. We will continue to closely evaluate the Game turnaround and fully expect to see improved performance in 2022.
Wholesale integration: We have progressed the IT unification pilot project, and are still on track for full implementation in 2023. We have also introduced our first Cash & Carry ‘Powered by Makro’ Liquor store format in Witbank. This store has yielded encouraging results. Importantly, we have also completed the CEO leadership transition to Llewellyn Walters following the decision of Doug Jones to pursue opportunities outside of the country.
Supply Chain optimisation: We’ve established our integrated Group Supply Chain team, headed by 25-year Walmart logistics veteran Martin Halle. During this period, we have closed six DCs and one LID and opened three DCs and one LID. This is a significant step forward in the consolidation and regionalisation strategy for our Supply Chain network. Currently, 32% of our volumes now flows through our centralised Supply Chain DC network.
Cost reset: Our cost-saving initiatives continue to be ahead of our three-year target of R1.8 billion. By the end of this financial period, cost-saving initiatives delivered R1.6 billion in savings, which represents 89% of our total Smart Spend target. Through this journey, we have embedded sustainable cost management practices in the business.
Our commitment to being a regenerative Company
We are on a journey to becoming a regenerative Company, one that contributes to leaving the environment and communities in which we operate in a better position than we found them. To achieve this, we have aligned ourselves with Walmart’s global sustainability goals, which include:
We recognise that to meet our objectives we need to accelerate our efforts with a focus on reducing emissions and waste. Some highlights from the year include 130 million kWh saved through stricter energy efficiency measures at stores, a 90% increase in onsite solar generating capacity approved for installation, and a 642 tonne reduction in virgin plastic use annually, through the introduction of more sustainable shopping bags. These initiatives, while good for the environment, have also contributed to improved costs in the business, resulting in R156.0 million in savings during 2021.
Our contribution to combatting Covid-19
The safety of our associates and customers is always a key priority for us. We continue to practice and enhance our Covid-19 safety protocols implemented since the onset of the pandemic. This includes ensuring regular hand sanitising, wearing a mask and daily disclosure and monitoring of associates’ health.
Where appropriate, such as in our Head Offices, Massmart has largely moved to a hybrid work model that aims to optimise productivity without losing the necessary networking and organisation identity benefits from regular contact with workplace associates. We have a strong preference for mandatory vaccination protocols, which we are implementing in our Head Offices, while we continue with our store-based vaccine education and enablement programme. This includes providing associates with paid leave to have vaccines and the use of mobile vaccination clinics at stores located in high density urban areas.
As part of our wider efforts, Massmart has assisted pensioners in rural areas to register on the Electronic Vaccination Data System (EVDS) to receive their vaccinations. Following this, Massmart, in collaboration with the Department of Health, rolled out Covid-19 vaccination sites at selected stores where pensioners continued to be assisted to register on the EVDS and get their vaccination on the days they collected their SASSA grants.
During the past 24 months, we have simplified and focused our business. We are now poised for accelerated growth.
A significant outcome of the Turnaround plan to date has been re-organising and introducing new ways of working towards unlocking the strength of the Group and deriving the resultant benefit to the business. This has mostly involved leveraging Massmart scale, and Walmart networks and expertise, to lower the cost base and implement better ways of working to create a significantly more competitive platform for future growth.
Our approach is to accelerate omni-focused growth that is responsive to shifting consumer behaviour centred on the Southern African Development Community (SADC) and focusing on the categories in which we are market leaders, namely Home Improvement, General Merchandise and Wholesale Food and Liquor. This approach is underpinned by the following principles:
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Our omnichannel focus has led to prioritised investment in e-commerce where we are fortunate to be able to draw from Walmart’s capabilities and expertise, including the ability to leverage the talent of experienced e-commerce professionals in leadership roles in our e-commerce business and in technology support.
As a result, we have approved a multi-year e-commerce investment plan that leverages our store network and DC assets, underpinned by a mobile first approach. I am pleased by the progress we have made in a relatively short period of time that includes the following strategic and tactical highlights:
With this solid foundation, we are now focused on improving the customer proposition and end-to-end journey, while leveraging all the new and enhanced digital assets to drive accelerated growth.
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I would like to conclude with a big thank you to all of our great Massmart associates, whose tireless work in serving our customers is really at the heart of Massmart. I appreciate all that they do as we work together to position Massmart for the future!
Group Chief Executive Officer
8 April 2022