Proven format pays off

For the first time in 37 consecutive financial half-years, Massmart was unable to announce real sales growth exceeding 8%. Instead the retailer achieved modest real growth of 3,1%, in a year when there were no acquisitions.

Sales grew from R18bn to R20bn, while profit before interest and tax was up to R1,2bn, from R1bn.

That said, the benefit of long-term strategic planning and prudent management is evident for the interim period to end-December. CEO Grant Pattison has evidently taken the baton from Mark Lamberti at full speed.

The newest leg of the business, Massbuild, acquired De la Rey, Federated Timbers and Servistar, a home-improvement chain, three years ago. It is now a star, growing sales by 16% to R2,9bn, up from R2,5bn, and R1,9bn in 2005. “We are gaining market share, which may mask some of the slowdown in that sector,” says Massmart chief financial officer Guy Hayward.

The company is already moving to counter the slowdown in consumer DIY spend, says BoE investment analyst Barbara Price-Hughes. “Management intends to tweak this business further for the bakkie brigade” — small operators who subcontract to larger projects.

The decision in mid-2005 to reduce operating expenses and simplify structures and processes has delivered. In both Masscash (CBW, Jumbo & Shield) and Masswarehouse (Makro), profit growth was double sales growth. At a time when the retail sector is contracting, two chains — Builders Warehouse and Makro — grew market share.

Says Nedcor Securities retail analyst Syd Vianello: “This is a management team that has correctly interpreted the changing business environment in SA. They have adapted the business over the years to continue making money.”

Massdiscounters (Game & Dion) grew comparable store sales by 4,1%, with estimated inflation of 2,7%.

Game stores in sub-Saharan Africa grew at twice the pace of SA stores, and Dion Wired — the consumer electronics store — will be expanded from three stores to 10 in the next year. “The energy that has been created by Dion Wired is tangible,” says Hayward. “We are actively looking for new formats.”

Core business Masswarehouse delivered respectable sales of R5,1bn (up 11%), against two successive half-years of very high growth.

“Makro has gained market share, particularly in brown goods — audio and plasma — and more recently in white goods,” says Vianello. “That is all about slick marketing. It's having the right product in the right place at the right price — and convincing the customer that your pricing is better.”

Vianello speculates that Makro has grown at the expense of Game, Hi-Fi Corp and even the traditional furniture retailers. “When times get tough, consumers look for perceived value, and they will pay cash for it. This business model is all about value.”

Masscash grew sales by 11% and profits before tax by a whopping 37% — “but that was probably a one-off, as we took out a number of head-office costs with the merger of Jumbo and Shield into CBW,” says Hayward.

“We believe we have built a model that we can trade through [these tough times],” says Hayward. “We may miss some peaks in the cycle, but are not over stored — unlike some competitors. It's about switching gear. We will not be refurbishing unless stores really need it.”

Massmart continues to search for a “fifth leg” to the business. According to Price-Hughes, it could be in an area of the market that would benefit from consolidation and the Massmart model: high volume, low-margin, low-cost distribution of consumer goods for cash. She says sectors such as liquor and furniture have been mooted, but for now, management is keeping quiet.

Source: Financial Mail

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