CONTENTS STAKEHOLDERS GUIDE

Transcription

1 CONTENTS MASSMART AT A GLANCE Financial Highlights Our Business Model 2 Our Vision and Mission 4 Corporate Accountability Highlights 5 Our Shares and Shareholder Information 6 Group Profile 8 Store Regional Map 2 Our Investment Proposition 4 Executive Directors 5 Non-executive Directors 6 Executive Committee 8 REPORTS TO SHAREHOLDERS 20 Chairman s Letter to Shareholders 23 Chief Executive Officer s Review 26 Chief Financial Officer s Review 30 TEN-YEAR REVIEW 44 Definitions and Formulas 47 Massmart Annual Sales and Corporate Activity Through the Years 48 Ten-year Review 50 OPERATIONAL REVIEW 62 The Economy over the Year to June Massdiscounters Divisional Review 66 Masswarehouse Divisional Review 74 Massbuild Divisional Review 82 Masscash Divisional Review 90 Channel and Shared Services Review 98 CORPORATE ACCOUNTABILITY 00 Introduction 03 Sustainable Development Beliefs 04 Broad-based Black Economic Empowerment 06 Human Capital 08 Climate Change and Environment 0 Corporate Social Investment 2 CORPORATE GOVERNANCE 4 Corporate Governance 7 Audit Committee 23 Remuneration of Directors and Executives 26 Risk 30 Compliance, Transparency and Accountability 36 Investor Relations 39 King III Question and Answer 4 GROUP FINANCIAL STATEMENTS 50 Approval of the Annual Financial Statements 53 Directors Report 54 Income Statement 57 Statement of Comprehensive Income 58 Statement of Financial Position 59 Statement of Cash Flows 60 Statement of Changes in Equity 6 Notes to the Annual Financial Statements 62 COMPANY FINANCIAL STATEMENTS 226 Income Statement 229 Statement of Comprehensive Income 229 Statement of Financial Position 230 Statement of Cash Flows 23 Statement of Changes in Equity 232 Notes to the Annual Financial Statements 233 SHAREHOLDER INFORMATION 238 Notice of Annual General Meeting 24 Notice of Amendments to the Massmart Holdings Limited Employe Share Scheme 247 Form of Proxy 25 STAKEHOLDERS GUIDE Massmart recognises that its business must serve all stakeholders. This guide will direct you to the parts of this annual report that specifically address the interests of different stakeholder groups.. SHAREHOLDERS Massmart has over 7,670 shareholders in South Africa and abroad ranging from major institutions to individuals. Chairman s Letter to Shareholders page 23 Chief Executive Officer s Review page 26 Chief Financial Officer s Review page 30 Ten-year Review page 44 Group Financial Statements page EMPLOYEES Massmart employs over 26,500 people across its operations. Many thousands more rely on our employees for their livelihoods. Corporate Accountability page 00 Operational Review page 62 Chief Executive Officer s Review page 26 Corporate Governance page 4 3. COMMUNITIES Massmart operates from 263 sites in South Africa and 25 sites in 3 other sub-saharan countries and is integrally involved with the communities around its operations. Corporate Accountability page 00 Corporate Governance page 4 Operational Review page 62 Chairman s Letter to Shareholders page CUSTOMERS Massmart appeals to a wide variety of customers ranging from LSM 2 to 0. Operational Review page 62 Chairman s Letter to Shareholders page 23 Group Financial Statements page 50 Corporate Accountability page SUPPLIERS Massmart sources goods and uses the services of approximately 8,54 active suppliers. Group Financial Statements page 50 Operational Review page 62 Chief Executive Officer s Review page 26 Chief Financial Officer s Review page 30 Corporate Accountability page 00 Corporate Governance page 4 Visit for more information on Massmart. Your feedback is important and allows us to make meaningful changes to our report. annualreport@massmart.co.za and give us your opinion.

2 Massmart at a Glance MASSMART GROUP Massmart has evolved a business model that empowers its Divisions to take trading decisions suited to their individual operating needs but within a strategic operating and financial framework set by the Group. This has several advantages. The framework guarantees consistent compliance with the best governance standards and national legislative requirements. It commits each Division to implementing Massmart s core strategy of being a high-volume, low-margin distributor of quality branded consumer goods for cash, and ensures expansion plans add net value to the Group rather than cannibalising existing operations. At the same time, Divisions can extract maximum value from being part of a larger Group with greater access to goods and services or negotiating better terms and rebates with suppliers and service providers. The Divisions are differentiated as retail or wholesale formats that address different customer and market profiles. The model operates through four entities: Massmart Holdings, the shareholder of the operating Divisions that consolidates the Group s financial, treasury, tax and company secretarial functions and is headed by the Group CFO; Channel, where Divisions can share best practice and develop mutually beneficial collaborative efforts; Shared Services, which handles those activities identified by Channel that are more cost effective to share across Divisions; and the four operating Divisions themselves. Decentralised decision-making is given effect through a Group Executive Committee reporting to the Group CEO. The Committee s members comprise the CEOs of Massmart s four operating Divisions and a Group Executive from each of Massmart Holdings, Channel and Shared Services. Massmart Holdings Executives are also represented on each of the four Divisional Boards as non-executive Directors. MASSMART HOLDINGS Massmart Holdings performs the Group management and advisory role and defines the strategic and broad operating principles that guide the Group s activities. Its functions include budget approval and capital allocation, store site location, executive appointments, development and retention, corporate affairs, human capital and internal audit. A business intelligence unit collates and analyses divisional data to inform Group strategy and decision-making. MASSMART CHANNEL Massmart Channel consists of formal trading and functional forums where ideas on collaboration across Divisions are shared. Trading forums cover Food and Liquor, General Merchandise, and Cellular. Functional forums include Technology, Information and Process (TIP), Operations and Human Resources. Trading forums are headed by Divisional CEOs and functional forums are headed by Group Executives. Directors and Executives from the Divisions attend forums in their specific areas of competence. Once consensus is reached on a collaborative proposal, the Executive Committee approves whether it should be rolled out across the Group. MASSMART SHARED SERVICES Massmart Shared Services implements collaborative agreements reached by Channel. The most important are Group supplier negotiations for all products sold across the Group. Shared Services also handles the Group s Payroll functions, the Shipping and associated treasury functions for direct imports, and managing private or exclusive brands shared across Massmart s trading Divisions. MASSMART DIVISIONS Massmart s Divisions comprise Massdiscounters, Masswarehouse, Massbuild and Masscash. Each has a dedicated management team focusing on a particular retail or wholesale format, merchandise proposition and customer base, and is empowered to take trading decisions within a strategic framework and governance structure defined by the Group. Massmart Annual Report 200 3

3 Massmart at a Glance CORPORATE ACCOUNTABILITY HIGHLIGHTS Value added (Rm) 0,30.6 Massdiscounters Masswarehouse Massbuild Masscash Other R3,434.5m R,446.9m R2,055.3m R3,226.4m (R32.5m) Customer satisfaction (%) 88.6 Massdiscounters 85.5% Masswarehouse 90.2% Massbuild 89.2% Masscash 88.2% Tested HIV/Aids prevalence (%) 6. Massdiscounters No testing conducted Masswarehouse 2.8% Massbuild 3.5% Masscash 6.7% Black professionals as a % of management professionals 77.5 Massdiscounters 88.5% Masswarehouse 69.2% Massbuild 57.5% Masscash 67.4% Other 68.3% Our B-BBEE score (%) 66. Massdiscounters 68.8% Masswarehouse 65.6% Massbuild 50.7% Masscash 59.% Our purchased electricity emissions intensity (C0 2 e(kg)/m²) Massdiscounters CO 2 e(kg)/m 2 Masswarehouse CO 2 e(kg)/m 2 Massbuild 2.3 CO 2 e(kg)/m 2 Masscash 42.8 CO 2 e(kg)/m 2 Corporate social investment (Rm) 20.6 Massdiscounters Masswarehouse Massbuild Masscash Other R7.0m R6.m R.6m R3.9m R2.0m Read more Additional detailed information about the indicators covered in this scorecard is available on page 00 Corporate Accountability Massmart Annual Report 200 5

4 Massmart at a Glance OUR SHARES AND SHAREHOLDER INFORMATION KEY INFORMATION Ordinary shares Authorised 500,000,000 Issued 20,495,504 Number of shareholders 7,674 Year-end End of June Ordinary general meeting of shareholders Held annually in Johannesburg towards the end of November Administrators of shareholders register Computershare Investor Services (Pty) Ltd 70 Marshall Street Johannesburg 200 Share code MSM Shareholder spread Shares % -,000 shares,76, ,00-0,000 shares 0,00-00,000 shares 00,00-,000,000 shares,000,00 shares and over 5,209,63 9,492,838 26,878,657 58,97, Shareholders split between public and non-public Shares % Non-public: Directors and Group Executives of the Company 3,709,706.8 Non-public: Share trust 68,03 0. Public shareholders 97,77, High, low and closing share price (cents per share) Distribution of shareholders Closing 4,387 8,800 6,49 8,000 2,200 High Low 6,408 9,997 9,724 9,029 2,580 4,85 4,85 5,90 5,650 7,275 Shares Unit Trusts/Mutual Fund 77,393,04 Pension Funds 58,89,368 Other Managed Funds 3,900,026 Foreign Government,902,359 0,477,480 8,356,46 5,342,888 2,66,028 Private Investors Custodians Insurance Companies Charity American Depositary Receipts Investment Trust Local Authority Hedge Fund Remainder 994, ,038 85,978 30,689,262,865 % Massmart Annual Report 200

5 Massmart at a Glance Foreign shareholding Massmart foreign holding JSE General Retailers average foreign holding % UK, Europe and other 43 US 29 South Africa 28 Massmart s share price and trading volumes on the Johannesburg Stock Exchange (rebased to R2.95) Massmart trading volumes (000 s) 280, , ,000 60,000 20,000 80,000 40,000 0 SHV s 3% shareholding in Massmart sold to local and international investors in January Dec-00 Jun-0 Dec-0 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-0 Massmart share price and JSE Gerneral Retailers Index Massmart share price JSE General Retail Index Biannual Massmart trading volumes Principal shareholders Number of shares Equity stake (%) Custodians and managers holding 5% or more The following custodians and managers held beneficially, directly or indirectly, more than 5% of the Company s shares: Aberdeen Asset Management Group 33,505, Public Investment Corporation 27,857, JP Morgan Asset Management 5,2, Lazard Asset Management LLC Group 3,907, Baillie Gifford & Co Ltd 0,900, Massmart Annual Report 200 7

6 Massmart at a Glance GROUP PROFILE MASSMART GROUP MASSDISCOUNTERS General merchandise discounter Divisions Stores and outlets 288 stores 9 stores stores Countries SA, Botswana, Ghana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe SA, Botswana, Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia SA Product categories Food/liquor/general merchandise/home improvement supplies General merchandise and FMCG Electrical appliances Financial highlights and contribution to Group Sales R47,45.0 million Sales R2,64.9 million Sales 26% Trading profit before tax* R2,267.5 million Trading profit before tax* R690.3 million Trading profit 30% Highlights f Operating profit before foreign exchange movements grew 0.% to R2,03.0 million f No consumer credit sales f 7.6% of sales from African stores f Strong performance by Game SA with profits up 20% f DionWired now a national brand with stores f New 70,000m² Gauteng regional distribution centre operational f Level 4 B-BBEE contributor Key sales drivers f Consumer confidence and disposable income f New stores f Interest rates f Social grants f Product inflation f Product inflation f Price perception f Interest rates f Consumer confidence and disposable income f New stores * Trading profit definitions can be found on page 47 8 Massmart Annual Report 200

7 Massmart at a Glance MASSWAREHOUSE MASSBUILD MASSCASH Warehouse club Home improvement retailer and building materials supplier Food wholesaler, retailer and buying association 3 warehouse clubs 24 stores 2 stores 3 stores 9 stores 6 stores 57 outlets SA, Zimbabwe (2 Zimbabwe stores not consolidated and excluded from 3 above) SA SA SA SA, Botswana, Lesotho, Mozambique, Namibia, Swaziland SA SA, Botswana, Lesotho, Namibia, Swaziland Food/liquor/general merchandise Home improvement supplies/ tools/building materials Home improvement supplies/ tools/building materials Building materials/ tools Food/liquor/ groceries Food/ groceries/ ethnic cosmetics Food/groceries Sales R,50.2 million Sales R6,366.9 million Sales R7,48.0 million Sales 24% Sales 3% Sales 37% Trading profit before tax* R758.6 million Trading profit before tax* R308.5 million Trading profit before tax* R50. million Trading profit 34% Trading profit 4% Trading profit 22% f General merchandise sales reached R4 billion for the first time f Improved B-BBEE rating to Level 4 contributor f Dropped stock levels and improved service levels f Four new stores to be opened in the next four financial years f Double digit sales growth achieved in a difficult market f Launched new store format f Acquired Kangela in Mozambique f Branding opportunities maximised f Retail offering expanded focused on three key regions and developing a single national brand f Wholesale division-wide full suite IT system rolled out f Acquired Kawena in Mozambique f Product inflation f Price perception f Interest rates f Consumer confidence and disposable income f New stores f Interest rates f Residential property prices and housing growth f Consumer confidence and disposable income f Price perception f New stores f Selected acquisitions of existing competitors sites f Food inflation, particularly commodities f Social grants f New stores f Retail cash and carry acquisitions Massmart Annual Report 200 9

8 Massmart at a Glance GROUP PROFILE MASSMART GROUP MASSDISCOUNTERS General merchandise discounter Divisions 200 trading space (m 2 ),79, , net new stores target net new trading space target (m 2 ) 202,425 0,87 Medium-term target trading PBT return on sales 5.5% Target 5.7% International 8.0% Target 7.4% International 4.2% Current benchmark 5.7% Current benchmark Wal-Mart ex-food Medium-term objectives f Maintain trading aggression f Organic store growth f Explore greenfield opportunities f Sustainability f Explore acquisitions f New Game outlets in South Africa and Africa f Develop DionWired f Build a supply chain capability f Private label f Leverage financial services capability Performance against objectives f Despite difficult trading, gained market share in both Massdiscounters and Builders Warehouse f Food retail acquisitions and new stores in Masscash f Group B-BBEE score of 66.% up from 55.7% f Seven new Game stores in South Africa f Five new DionWired stores f Johannesburg, Gauteng, RDC opened in June 200 f Very successful July 2009 launch of Game credit card with third party financial services provider RCS Revised medium-term objectives f Maintain trading aggression f Organic store growth f Explore greenfield opportunities f Sustainability f Explore acquisitions f African expansion f New Game stores in South Africa and Africa f Private label f Finalise switch-over to Gauteng RDC and realise supply chain efficiencies. Focus on a new KwaZulu-Natal RDC f Leverage further benefits from RCS relationship f New DionWired stores in South Africa Major potential risk areas noted in the risk register f Poor business model or strategic execution f Insufficient progress with transformation at executive level f Economic volatility f Acquisition risk f Talent retention and succession f Customer safety f Financial health and confidence of consumers in South Africa and Africa f Supply chain execution f African economic volatility and recovery 0 Massmart Annual Report 200

9 Massmart at a Glance MASSWAREHOUSE MASSBUILD MASSCASH Warehouse club Home improvement retailer and building materials supplier Food wholesaler, retailer and buying association 8, ,625 32, ,000 5,54 30, % Target 5.0% International 7.0% to 9.0% Target 0.0% International 3.0% Target 3.0% International 6.6% Current benchmark Metro AG C&C 4.8% Current benchmark Home Depot/B&Q 2.9% Current benchmark Makro South America f New stores in South Africa f Leverage customer relationship management capabilities f Invest in supply chain capability f Private label f Extract benefits from IT and structural investments f Optimise joint buying and merchandising benefits f New Builders Warehouse stores in major centres f New Builders Express stores in suburbs f New Trade Depot stores through acquisitions f Invest in supply chain capability f Private label f Refine and grow new Retail Food format f Roll out point-of-sales IT system to all stores f Manage Wholesale for cash and returns f Private label f Opening a new store in Vanderbijlpark in October 200 f SAP Forecasting & Replenishment applied to 70% of merchandise f Two new Builders Warehouse stores, one new Builders Express store and one new Builders Trade Depot store f Acquired Mozambique building materials business, Kangela, three ex-mica stores now branded Builders Express and one store in Builders Trade Depot f Improved profitability in Builders Warehouse and Builders Express, and gained market share f Conditional offer to acquire Namibian building merchant, Pupkewitz. Pending authorities approval f In-store and back-office IT system now implemented at 70 stores f Acquired and opened ten retail stores and eight wholesale stores f Annualised retail turnover R2.5 billion f Rebranding retail stores as Cambridge Food f Anticipate opening 4 to 5 stores in next four years f Leverage customer relationship management capabilities f Continue to invest in supply chain capability f Private label f African expansion, initially focused on Nigeria f Merger of Builders Warehouse and Builders Trade Depot management and administration f New stores in South Africa and Africa f Supply chain capability f Private label f Focus on building materials and subcontractors through Builders Warehouse and Builders Trade Depot f Aggressively grow new Retail Food format f Finalise roll out point-of-sales IT system in all stores f Manage Wholesale for cash and returns f Private label f Store destroyed by fire f Financial health and confidence of consumers f Supply chain execution f Customer safety f Sustained deflation in Food f Finding appropriate sites in right locations for Builders Warehouse stores f Bonded residential housing market f Supply chain f Store destroyed by fire f Customer safety f Government social welfare programme f Poor acquisition or poor integration f HIV/Aids f Customer safety f Sustained deflation in Food Massmart Annual Report 200

10 Massmart at a Glance EXECUTIVE DIRECTORS Grant Pattison (39) BSc (Eng) (Hons) (UCT) Chief Executive Officer, member of the Strategy and Investment Committee. Appointed 7 December Grant graduated from the University of Cape Town as an electrical engineer. After four years with the Anglo American group and two years consulting with The Monitor Group, Grant joined Massmart as Executive Assistant to the Executive Chairman in 998. He has since held various positions within the Group, including Managing Director of Massdiscounters and Group Commercial Executive. He joined the Executive Committee in 2000 and the Board in 2004, becoming Deputy Chief Executive Officer in 2005, Chief Executive Officer Designate in 2006 and Chief Executive Officer on July Guy Hayward (45) BCom, CTA (UCT), CA(SA) Chief Financial Officer, member of the Risk, and Strategy and Investment Committees. Appointed 5 May 200. Guy graduated from the University of Cape Town in 986 and, after serving articles with Deloitte Haskins & Sells, qualified as a Chartered Accountant in 989. During the 990s he held senior financial roles at Malbak and CNA Gallo in South Africa and at Goldman Sachs in London. He joined Massmart as Group Financial Executive in 2000 and was appointed Chief Financial Officer in 200. Guy is also a Governor of Hilton College. Massmart Annual Report 200 5

11 Massmart at a Glance NON-EXECUTIVE DIRECTORS Mark J Lamberti (60) BCom, MBA (Wits), PPL (Harvard) Chairman of the Board, member of the Remuneration and Nominations Committee and Chairman of the Strategy and Investment Committee. Appointed August 988. Following progress through a multi-functional retail career that began in 975, Mark was appointed Managing Director of the ailing six-store Makro chain in 988. After successful repositioning of the chain, he founded Massmart in 990 to pursue an aggressive growth strategy in high-volume, low-gross margin, low-expense retailing and wholesaling. In 996, he was appointed Executive Chairman of Massmart and from July 2003 CEO and Deputy Chairman of the Board. At the end of June 2007 he relinquished his executive role to become non-executive Chairman. His role as architect and leader of Massmart has been widely recognised with numerous awards including that of the Ernst & Young South African Entrepreneur of the Year in 200. Mark currently serves as Chief Executive Officer of Transaction Capital (Pty) Limited, Chairman of Business Against Crime South Africa, and a director and executive committee member of Business Leadership South Africa. His commitment to education has led to his involvement as a benefactor, director or adviser to a number of educational institutions, including the Wits Business School where he is an Honorary Professor. Deputy Chairman of the Board and Lead Independent Director, and a member of the Remuneration and Nominations, Audit and Strategy and Investment Committees. Chris Seabrooke (57) BCom, BAcc, MBA, FCMA Appointed February Chris has, over the years, been a director of over 20 stock exchange-listed companies. He is currently CEO of Sabvest Limited (JSE), Chairman of Metrofile Holdings Limited and Set Point Group Limited (JSE), and a director of Datatec Limited (JSE/AIM), Net UEPS Technologies Inc (Nasdaq/JSE) and Brait S.A. (Luxembourg/London/JSE). He is also Chairman of the Alternative Equity Partners Fund and a director of a number of unlisted companies locally and internationally. He is a former Chairman of the South African State Theatre and former Deputy Chairman of both the inaugural National Arts Council of South Africa and the founding board of Business & Arts South Africa. Member of the Risk, and Sustainability and Transformation Committees. Appointed 25 February Dods was a career retailer from 963 until his retirement in 998, at which time he was the Chief Executive of JSE-listed Moregro (Morkels Retail Group). He has, over the past 25 years, served on and chaired the boards of a number of international and local public companies and is currently a director of Avusa Limited and various private companies. Dods Brand (67) Kuseni Dlamini (42) BA (Hons)(KZN), MPhil (Oxon) Chairman of the Remuneration and Nominations Committee. Appointed November Kuseni is the Chief Executive Officer of Old Mutual South Africa & Emerging Markets. He was head of Anglo American South Africa and member of the Executive Committee of Anglo American plc. He was Executive Chairman of Richards Bay Coal Terminal (RBCT) between 2005 and Kuseni previously worked for De Beers in South Africa and at its London office, and for AngloGold Ashanti s corporate office in Johannesburg. After graduating cum laude with a BA (Honours) degree from Natal University in Durban, he went to Oxford as a Rhodes scholar, where he read for his MPhil degree. In March 2008, Kuseni was named a Young Global Leader by the World Economic Forum (WEF). During the same month, Miningx selected him as one of the top 00 most influential people in South African mining. In May 2009, he was nominated to be part of the WEF s Global Agenda Council on the future of Mining and Metals. Kuseni is the Chairman of the Board of SANParks and a member of the National Advisory Council on Innovation which advises the Minister of Science and Technology. He is a former Non-Executive Director of Anglo Platinum and Chairman of Anglo Operations Limited. Kuseni was recently appointed Adjunct Professor at the Wits Business School where he is also a member of the Advisory Board. In May 200, he was made co-chairman of the 20th WEF on Africa Summit in Dar es Salaam, Tanzania. Member of the Risk Committee. Appointed November Lulu is Chief Operating Officer of Lereko Investments (Pty) Limited. She was Deputy Director General in the National Department of Public Works, responsible for establishing the national public works programme, and completed a five-year term as the CEO of the Independent Development Trust. She has served on various Government commissions, and is a non-executive director of FirstRand Limited, the Development Bank of Southern Africa and Sun International Limited. Dr Nolulamo ( Lulu ) Gwagwa (5) MSc (KZN), MSc (LSE), PhD (UCL) 6 Massmart Annual Report 200

12 Massmart at a Glance Member of the Strategy and Investment Committee. Appointed 25 August During his long retail career, Jim was both Chairman and Chief Executive of B&Q plc, a subsidiary of Kingfisher plc. As Chief Executive of New Look plc, he transformed a family business to a public company with a multi-national footprint. Currently, he is Chairman of Ultimate Products Limited and non-executive director of Furniture Village and Rosehold Limited, all UK-based companies. James ( Jim ) Hodkinson (66) Chairperson of the Sustainability and Transformation Committee and member of the Audit Committee. Appointed 25 August Phumzile is the Executive Chairperson of Afropulse Group (Pty) Limited, a women-led investment, investor relations and corporate advisory house. She was previously the economic adviser to the Minister of Minerals and Energy, and an executive director of dual-listed junior platinum miner, Anooraq Resources. Phumzile is a non-executive chairperson of Astrapak Limited, a non-executive director of Imperial Holdings Limited, Peermont Global (Pty) Limited, the Mineworkers Investment Company (Pty) Limited, Transaction Capital (Pty) Limited and a member of the Port Regulator. Phumzile Langeni (36) BCom (Natal) Chairman of the Audit and Risk Committees, member of the Remuneration and Nominations Committee. Appointed November 200. During his career in the South African hotel and tourism industry, Nigel has served as Managing Director of Holiday Inn and Executive Director of Rennies. He founded his own business, Sentry Group, which was sold to an international group in 200. He is a non-executive director of City Lodge Hotels Limited, Sun International Limited, Metrofile Holdings Limited and Indian Ocean Real Estate Company Limited. Nigel Matthews (65) MA (Oxon), MBA (UCT) Member of the Audit, Risk, and Strategy and Investment Committees. Appointed 25 February Peter is a private equity and corporate finance specialist and heads the private equity interests of the Oppenheimer family in South Africa. He was a founder of Primedia Limited and executive director from 992 to 2003, responsible for all corporate finance activities. Peter remains a non-executive director and member of the Audit Committee of Primedia. Peter Maw (49) BCom (Hons), CA(SA), HDip Tax Law Member of the Sustainability and Transformation Committee, and Remuneration and Nominations Committee. Appointed June Dawn is a director of several companies, including Engen Limited, Nozala Holdings (Pty) Limited and Sabvest Limited. She is also a director of the Financial Services Board Foundation Trust. She is chairperson of African International Advisors, Wesizwe Platinum, and is Deputy Executive Chairperson of Partnership Investments (Pty) Limited. Dawn Mokhobo (6) BA (Social Science) Member of the Sustainability and Transformation Committee. Appointed 30 August 990. Michael worked as a specialised retail consultant in New York and Toronto for nine years and joined Massmart as Development Director in 989. He left the Group in 997 to pursue his interests in private equity management and property development. Michael Rubin (60) BSc, MBA (UCT), MBA (Columbia) Massmart Annual Report 200 7

13 Massmart at a Glance EXECUTIVE COMMITTEE Grant Pattison Chief Executive Officer Guy Hayward Chief Financial Officer Divisional Chief Executive of Massdiscounters and Chairman of the Cellular Forum. Jan s early career was spent in financial roles in various industries until becoming a business manager at Clover SA for three years. He then spent seven years at SA Breweries in senior financial roles, before joining the Massmart Group as Financial Director of Massdiscounters in In April 2007, he was appointed Chief Executive of Massdiscounters and a member of the Massmart Executive Committee. Jan Potgieter (4) BCompt (Hons), CTA (Free State), CA(SA) Divisional Chief Executive of Masswarehouse, member of the Risk Committee and Chairman of the General Merchandise Forum. After qualifying as a Chartered Accountant in 989, Kevin consulted at both the Strategy Group (Deloitte) and Gemini Consulting. He joined UPD as Group Operations and Systems Director in 995 and became Group Chief Executive Officer in 996. Kevin joined Massmart as Divisional Chief Executive responsible for Makro and a member of the Massmart Executive Committee in Kevin Vyvyan-Day (45) BCom, BAcc (Wits), CA(SA) Divisional Chief Executive of Massbuild. Llewellyn spent thirteen years in the banking industry where he held senior positions in a number of specialist financial institutions before joining ABSA. In June 2003, Llewellyn joined Super Group, a JSE-listed supply chain and logistics company where his last position was Divisional MD responsible for the group s African operations. He joined Massmart in November 2008 as Divisional Chief Executive for Builders Warehouse and was appointed to the Massmart Executive Committee upon joining. Llewellyn Walters (46) BA, LLB (Wits) Divisional Chief Executive of Masscash and Chairman of the Food and Liquor Forum. After graduating from Natal University with a BCom degree and qualifying with his CA(SA) in 978, Robin spent six years in retailing and wholesaling at WG Brown before founding CCW in 985. In 998, he sold a controlling interest in CCW to Massmart and was appointed to the Massmart Executive Committee. He led the acquisition and integration of Browns and Weirs, and has spearheaded the growth of the Division to become South Africa s leading food wholesaler. Robin Wright (54) BCom (Natal), CA(SA) 8 Massmart Annual Report 200

14 Massmart at a Glance Divisional Chief Executive of New Formats. Joe joined Makro in 97. He worked for the Checkers Group from 978 to 988 after which he returned to Makro as Merchandise Director. He was appointed Managing Director of Makro in 993, Divisional Chief Executive of Makro in 999, Divisional Chief Executive of Massbuild in 2005 and Divisional Chief Executive of New Formats in February Joe has 39 years of mass merchant, general merchandise and FMCG experience. Gareth ( Joe ) Owens (6) Retail Director Masscash. Following a period managing Mala Mala Game Reserve and founding a small IT solutions provider, Jay joined Business Connexion as a Network Engineer before taking a position with Massdiscounters as IT Technical Manager in November 999. He was appointed to the Massdiscounters Board in 2002 as IT Director. In addition to his IT responsibilities, he assumed responsibility for the supply chain of that company in 2003 and was appointed to the Massmart Executive Committee as Group Commercial Executive in Effective June 2009 Jay has been appointed as Retail Director Masscash. He remains a member of the Massmart Executive Committee. Jay Currie (36) BSc (Natal) Group Human Capital Executive, Chairperson of the HR Forum and member of the Sustainability and Transformation Committee. Prior to joining Massdiscounters Pearl worked for Telkom and Old Mutual and for Umgeni Water as General Manager: Corporate Services. Prior to assuming responsibility for Human Capital on the Massmart Executive Committee from August 2007, Pearl was Director of Human Resources at Massdiscounters. She brings broad experience in managing and developing human capital to the Group. Pearl Maphoshe (42) BA (Hons), HDipEd (Durban-Westville), MA (London) Group Corporate Affairs Executive and member of the Sustainability and Transformation Committee. Brian s work experience includes executive positions at Masstores (Pty) Limited, an associate partner at Andersen Consulting (now Accenture) and Marketing Director at CNA. He joined Massmart as Group Projects Executive in September 2004 and was appointed Group Corporate Affairs Executive in September Brian joined the Massmart Executive Committee in July Brian Leroni (46) BA (Wits), MPhil (Stellenbosch) Group Commercial Executive and Chairman of the TIP and Operations Forums. Llewellyn graduated from the University of the Witwatersrand in 99 as a Physical Metallurgist. After seven years with Tongaat-Hulett group and three years with the Industrial Development Corporation, Llewellyn joined Massmart as Business Analyst in He has since held various positions within the Group, including Executive Assistant to the CEO and most recently, Managing Director of Builders Express. Llewellyn was appointed Group Commercial Executive and joined the Massmart Executive Committee in July Llewellyn Steeneveldt (4) BSc Eng (Phys Met), GDE (Industrial), MBA Massmart Annual Report 200 9

15 Reports to Shareholders CHAIRMAN S LETTER TO SHAREHOLDERS Mark J Lamberti Chairman For decades the leaders of Massmart have seen financial performance as a lagging indicator of the Company s health. This approach has resulted in a continual focus on human performance and operating performance, which are always the predictors and the long-term determinants of progress and growth. Over the past two years this ethos has been particularly relevant. In the confidence that Massmart people were doing the right things and that our operating metrics were sound, we continued to invest your capital with confidence, undeterred by the uncontrollable exogenous factors that dampened the financial result. In consequence, and in every respect, Massmart is a better Group today than it was before the start of the recessionary cycle: its strategic positioning is more acute; its competitive stance more aggressive; its geographic footprint larger; its leadership more nimble and assured; and its growth and performance potential much enhanced. ENVIRONMENT The state of the economy over the past year and the impact on Massmart of various short-term environmental factors are commented on elsewhere in this report. There are of course broader issues that occupy the thoughts and deliberations of your Board. These range from the impact of the global financial crisis on the export, financial, labour and consumer markets of South Africa, through the sometimes noisy evolution of our young democracy, to the world s leading edge developments in the art and science of retail. We do not aim to predict the economic future, but rather to develop a set of competencies that position Massmart as an effective competitor under all scenarios, able to respond rapidly to short-term changes in consumer demand. The control of margin, inventory and expenses captured in this report are indicative of how this can be achieved in volatile circumstances such as those of the reporting period. We are apolitical, but alive to the impact that thoughtless rhetoric and political posturing can have on the psyche of the country. Contrast the national pride and elation that surrounded the World Cup, with the despair in almost every quarter around the Public Sector strikes and the proposals that may see press freedom being curtailed. We are also deeply conscious of the enduring impact that Apartheid has had on our society. Our extraordinary socio-economic divide cannot be ignored by business and while we see education and training as the only sustainable palliative and invest accordingly, we are delighted that 5,86 of our staff have participated in one of South Africa s most successful broad-based black economic empowerment schemes. Assuming a share price of R48, and including dividends, R07.5 of value has been created per share since the scheme s inception, representing a gain on average of R39,000 per current participant. Massmart Annual Report

16 Reports to Shareholders CHAIRMAN S LETTER TO SHAREHOLDERS Over many years we have monitored closely the manner in which the world s most successful retailers excel in two areas: format renewal, which creates the relevant ambiance for merchandise presentation; and the supply chain where technology and logistics combine to improve service levels to consumers at lower cost. Our vigilance in both areas was evident over the past year in the latest generation Game, DionWired, Builders Warehouse and Cambridge stores, and in the dramatic improvement of our supply chain capability. STRATEGY Massmart is an African business founded and rooted in South Africa. There are compelling strategic and commercial reasons to favour a strong regional presence over a scattered intercontinental footprint, and we have no desire or intention to venture beyond the sub-continent. But we know that the markets of sub-saharan Africa are far from homogeneous. The wealthiest people on the continent reside within ten kilometres of our Group offices so do some of the poorest. Massmart has chosen to serve the entire socio-economic spectrum in 4 countries across the region through a multi-product, multiformat portfolio of 288 stores, founded on the belief that a low-price value proposition can only be sustained through high-volume, low-expense distribution. Over the past year this strategy was advanced in every way. As always, we entered new markets with new formats offering new products. We invested R369.9 million in the acquisition of 3 businesses, and integrated them into the Group with an ease that belies the risk and complexity involved in acquisitive growth. And, after many years of investment in replenishment information technology, the Massdiscounters supply chain experienced a step change in effi ciency with the opening of a 70,000m 2 distribution centre that will signifi cantly reduce the complexity and costs of placing the right quantity of goods on the shelf at the right price and time. This major endeavour was accomplished while making substantial progress with all of the other elements of the Chief Executive s strategic agenda. The pursuit of excellence imbedded in the leadership ethos of the Group found expression and in many cases public recognition, in the areas of Leadership and Transformation, Private Label, Financial Services and Sustainability. The annual Strategic Review is a highlight on the Board calendar, and this year the presentation of Vision revealed exciting medium-term growth prospects and heightened creativity and innovation in format renewal, penetration of the retail food market and the use of internet technologies to educate and respond to consumers. LEADERSHIP The biggest and most pressing threat facing South Africa today is the shortage of skills. We simply have too few competent managers, leaders, professionals and technicians to meet our need. This need is being fuelled not just by South African factors such as transformation, rapid economic growth, the emigration of young graduates seeking international experience, and by some escaping the high crime rate. It is also being fuelled by the worldwide exit from the workplace of my generation the baby boomers, by a decline, other than in India and East Asia, of graduates in the quantitative disciplines, and by the fact that the market for top level executives has become one of the world s few truly global markets. Massmart has addressed this by investing heavily to enable individuals with an appropriate education and a core competence to become general managers who understand urgent creation of shareholder value and possess the ability to lead business units or functions. More specifically the leadership development, retention and succession programmes have aimed to nurture individuals who can thrive on the ambiguities and stress of top level enterprise leadership. Finally, in responding to our transformation obligation we aggressively seek out the considerable and increasing Black talent and potential, and actively create the mechanisms, practices, processes and paths to senior executive competence and confidence. GOVERNANCE A section of this report provides extensive detail on the governance of Massmart and in particular our response to King III. While this will provide shareholders with assurance that your Board is structured appropriately and follows the processes necessary to ensure oversight and compliance, two issues warrant elucidation. Today anti-business sentiment and cynicism is a world-wide phenomenon, fuelled by the global financial crisis and the causal instances of appalling corporate behaviour. In addition, the socio-economic divide creates a fertile context for anti business sentiment in this country. Regardless of how well we as directors of companies deal with the many issues of strategy, risk, succession, remuneration and governance, we will not stem the tide of negative stakeholder sentiment unless we are seen sensitively to respond to broader societal issues. 24 Massmart Annual Report 200

17 Reports to Shareholders The Massmart Board therefore places the advancement of the company s sustainability agenda among its most important obligations. Allied to the above, executive remuneration has received much emotive attention but disappointingly little cogent analysis in recent times. It is clear that there must be a high correlation between corporate performance and reward. It is equally clear that for senior executives in large organisations there is a very lengthy time period of discretion; that is the time between when decisions are taken and when the efficacy of those decisions can be fully assessed. Put simply, the quality of today s decision may not be able to be measured for many years. Fine judgement is therefore an extremely precious characteristic. The compensation of the Board and senior executives, as described in this report, has been structured with these principles in mind. Scarce talent is acknowledged in fixed compensation, short-term incentives correlate with the performance of the individual s business unit, and retention and long-term alignment are assured through participation in the equity of the company. SHAREHOLDERS At the time of writing 72% of Massmart s shareholding is held by non-south African institutions. This is not by design and indeed since Massmart s listing in 2000, the frequency of management s interface with shareholders has been biased strongly towards South African institutions. We have neither a view nor an explanation for this, but we are humbled by the fact that leading international investors place South Africa and Massmart among their emerging market investment preferences. APPRECIATION The dramatic improvement in the Group s performance during the second half of the fi nancial year is a tribute to the Chief Executive, his executive colleagues and the more than 26,000 men and woman whose efforts and application throughout the recession positioned the Group to take full advantage of improving conditions. On behalf of the Board and shareholders I express sincere gratitude. It is rare for any group of individuals to be greater than the sum of its parts. The Massmart Board is an exception and it remains a consistent, efficient source of diverse good counsel. I thank each member for their wisdom and contribution and their confidence in my leadership. LOOKING FORWARD At the time of writing we have received a non-binding proposal from Wal-Mart that could lead to it making a firm cash offer to acquire the entire issued share capital of Massmart at a price of R48 per share. A due diligence which is a precondition to such an offer is currently underway. For the first time since its founding in 990, Massmart s future will not be determined by the Board. While your Board will make recommendations in due course in the best interests of Massmart, the Group s destiny resides in the sequential decisions of Wal-Mart and you the shareholder. I am confident that these decisions will be fully informed and sound. Over a twenty-two-year period I have been associated with Massmart and its six-store predecessor Makro in various leadership capacities. Whether or not any association continues is less important to me than the privilege of knowing that each year, without exception, we took one step closer to the scale and standards necessary to attract the interest of the world s largest retailer. In the process I met and worked with some of the finest people imaginable and I thank them all. Mark J Lamberti Chairman of the Board 6 October 200 Massmart Annual Report

18 Reports to Shareholders CHIEF EXECUTIVE OFFICER S REVIEW Grant Pattison Chief Executive Officer After five years of a strong consumer economy in South Africa which boosted net operating margins, the 200 financial year was the second consecutive year that Massmart s net operating margin declined. As the effects of the global economic crisis filtered through to the African economies, sales growths declined below expense inflation. Prior to the global economic crisis, we believed that South Africa and Africa had an exciting consumer growth story where mass-merchants such as ourselves would have an increasing role to play in society, bringing good quality and well-priced goods that enhance consumers lives. We still believe in this exciting opportunity but feel that it has been briefly postponed due to the crisis. So our response to effects of the crisis was threefold. Firstly, we did not try to predict the future but rather managed the business tightly to the most recent trading and economic trends. Secondly, we traded with confidence, certain that consumers would respond to value more so than ever. And thirdly, we continued to invest for longer-term growth, taking advantage of the opportunities that presented themselves in property, acquisitions and talent. FINANCIAL PERFORMANCE Our 200 second-half results suggest that the South African consumer has begun to recover as for that period the Group increased sales by 4.4%, operating profit before foreign exchange losses by 9.7% and headline earnings by 29.0% The Group s full-year financial performance, however, bears the scars of the challenging first half with the year s sales increasing by 0.0%, operating profit before foreign exchange losses increasing by 0.% and headline earnings decreasing by 5.7%. With Group comparable-store sales growth of 2.6% and product deflation of 0.4%, we therefore saw volume growth across all categories. With this level of comparable sales growth however, it was critical that we closely managed expenses and so comparable expenses increased by only 2.8% for the year. The large difference between total sales growth of 0.0% and comparable sales growth is indicative of the Group s continued investment in growth, with store space increasing by 8.5%, of which 3.% is in new stores and 5.4% through acquisition. Excellent control of expenses, margin and stock protected the income statement, enabling us to grow operating profit before foreign exchange losses by 0.%. Read more More detail on the financial performance can be found on page 30 Chief Financial Officer s Review Definitions Comparable sales Comparable sales are sales figures quoted for stores that have traded, and will trade, for all 2 months of the current and prior year. These stores sales would therefore exclude new store openings or store closings in the current and prior years. 26 Massmart Annual Report 200

19 Reports to Shareholders After adjusting for foreign exchange losses operating profit reduced by 4.3%. Independent data sources indicate that the Group has been trading well relative to our competitors in all major categories and has gained market share, particularly in large ticket items such as Multimedia, Technology and Appliances. ENVIRONMENT The South African economy has technically been out of recession for almost four quarters but the recovery in real retail sales growth lagged by six months and job creation is stagnant. The effect of the strengthening Rand dominated trading conditions and kept inflation low in all our product categories with Food and Liquor inflation at.4%, General Merchandise in deflation at 5.3% and Home Improvement inflation at.8%. Historically, Food and Liquor volumes do not respond significantly to lower prices and did not do so over the past year. General Merchandise and Home Improvement volumes however, usually do respond and this was particularly evident in the latter part of the financial year. Group product inflation -0.4% Food and Liquor.4% Home Improvement.8% General Merchandise -5.3% The 200 FIFA World Cup was an exciting, once in a lifetime experience for the country and we could certainly see the increased spend in our stores over that four-week period. We estimate this to have been R200m R300m of additional turnover, not significant in the year but welcome nevertheless. Labour relations were unfortunately strained in Massdiscounters as management sought more labour flexibility from the labour union, SACCAWU, in order to extract productivity improvements from our three-year investment in the supply chain. Unfortunately, we were unable to reach resolution and had to resort to retrenchment, which was devastating for those employees. We have provided, and continue to provide, those retrenched employees with as much support as possible. As a result of these labour disputes, there were some isolated labour-related disruptions to trading. More significantly however, the Game Lakeside Mall store in Benoni was deliberately destroyed by fire. We continue to co-operate with the police as they progress their investigations and the store will re-open in November 200. OPERATING REVIEW There were a few operating highlights this year: costs were tightly controlled increasing by only 2.8% on a comparable basis, working capital was well-managed releasing R292.6 million in cash, and capital of over R billion was spent in maintaining, improving and expanding the business. Overall we traded well and most measurements suggest we held or gained market share. In Food, the year began with wholesale volumes declining as deflation caused the system to destock and gross margins were lower as inflation profits turned into deflation losses. In General Merchandise, which was in deflation, sales volumes only responded in the second half and grew well. In Home Improvement, home owners spent confidently in our stores on what appeared to be mostly maintenance and home improvement categories, and spent less on the refurbishment and building categories. Read more More detail on the operational performance can be found in f Massdiscounters Divisional Review 66 f Masswarehouse Divisional Review 74 f Massbuild Divisional Review 82 f Masscash Divisional Review 90 Operational Review From a retail perspective, we focused on relevant product ranges with lower price points, offered aggressive prices in promotions and trading, and cleared slow-selling products early as cost-prices declined. Including acquisitions, this year we added 92,000m² of trading space, representing 8.5% more space. There were no new Makro stores in South Africa or new Game stores in Africa, but we expect to see progress on both those fronts in the 20 financial year. We did not make sufficient progress with improving customer service (advice and sales) in our retail businesses, although our in-stock service levels have improved. In Builders Warehouse we remain relatively poor in servicing the home improvement contractor. We also made insufficient progress in re-positioning Builders Trade Depot with a completed range to properly service general and specialist residential and commercial building contractors. Of the 3 businesses acquired during the year, only one has underperformed. Massmart Annual Report

20 Reports to Shareholders CHIEF EXECUTIVE OFFICER S REVIEW SUSTAINABLE DEVELOPMENT Last year I acknowledged self-critical concerns in this arena that included: the high percentage (3%) of HIV positive employees not registered on the Massmart treatment programme; our poorly structured approach to improving energy efficiency; indifferent implementation of our Eco-wise initiative; and our failure to invest % of profit after tax (PAT) in Corporate Social Investment (CSI) initiatives in our African operations. Read more More detail can be found on page 00 Corporate Accountability Not all these concerns have been fully resolved in the 200 financial year but I am encouraged by the progress that has been made. Changes to the way in which our HIV/Aids treatment programme is managed has led to closer monitoring by the business of our service provider, better information for divisional Human Resources Directors and more intensive follow-up protocols with HIV-positive employees. Early successes include the registration of 20 HIV-positive employees onto the programme in one month. I am an electrical engineer by training and was concerned about our ad hoc approach to implementing the energy efficiency initiatives that are important to our objective to reduce Group carbon emissions. A review was conducted and it became clear that there was an urgent need to improve the accuracy of electricity consumption data. So we extended the scope of a project to install independent electricity metering in more stores across the Group. As a result, we are now able to evaluate and target energy-savings initiatives more effectively. Disappointingly this has revealed that our objective to reduce energy consumption by 2% by June 20 is unlikely to be achieved. We are, in the context of more accurate consumption data, reviewing this target and will have a clearer perspective of the way forward in December 200. In 2008 Eco-wise was developed by the Group private label merchants to promote environmentally responsible merchandise. Last year I expressed concern that we had promoted only four Eco-wise lines during the year to June We have performed considerably better this year, having promoted approximately 34 Eco-wise products. A personal highlight was a profitable Builders Warehouse promotion that offered a comprehensive do-it-yourself range of energy-efficient solutions for the home. These included products such as wireless-controlled electricity consumption monitors, geyser blankets, solar geysers, occupancy sensors, compact fluorescent light bulbs and energy efficient wall heaters. Encouragingly, a similar Eco-wise promotion is being developed for launching a do-it-yourself range of water-wise products. In the case of CSI spending in Africa, I am pleased that we met the % PAT policy threshold that is applied in South Africa. Equally important is that we have started working on achieving better alignment between our sustainability initiatives and African retail imperatives, for example advocating better labelling standards for traditional medicines. Looking ahead, we have a full sustainability agenda that includes maintaining a Level 4 Broad-based Black Economic Empowerment (B-BBEE) rating, aggressively extending medical benefits coverage to more employees, developing a framework for reducing waste to landfill, understanding the challenges and opportunities of operating in water-scarce markets and re-launching our CSI initiatives so that they deliver more impactful social returns. I will continue to monitor the progress that we make in these areas, offering encouragement and advice where required. I also detect the early signs that we may be trying to do too much, too quickly, without paying sufficient attention to the quality of implementation and the potential commercial benefit. So this year I would like to start consolidating and prioritising Group sustainability activities, moving toward developing a focused dashboard of performance indicators that enables Massmart to start optimising the commercial, social and environmental impact in areas where we as retailers can achieve high leverage; for example, by focusing on opportunities to reduce product packaging and increase recycling. Controversially, I feel that a first step may require de-emphasising the significant effort and emphasis placed on activities to support reporting the myriad of Sustainability criteria advocated by well-intentioned codes and reporting competitions, and rather focusing on tracking only the essential data that drives sustainability performance in the areas where retailers like Massmart can achieve highest constructive impact. STRATEGIC VISION 203 Our Strategic Agenda has been reviewed and updated, focusing on Leadership and Transformation; Growth of the Core Business through investment in Supply Chain, Private Label and Financial Services; Organic Growth; New Formats and Categories; and Sustainability. We continue to focus on format renewal across the Group. All stores opened this year took significant steps forward in their in-store look and feel, and this will continue for several years. 28 Massmart Annual Report 200

21 Reports to Shareholders One new Strategic Agenda item has been added under the heading of Customer 2.0 which represents our desire to ensure all our trading formats are positioned to respond to continually changing customer demands and the trading opportunities created by the adoption of internet-based technologies. Within the opportunities identified in New Formats and Categories, we are going to invest in our participation in the Fresh Category in the retail, wholesale and commercial areas. We are learning at a fast pace in Retail Cash and Carry and believe there is much we can do across our other formats. In terms of delivery against the Strategic Agenda, we are proud to have made good progress across all fronts and have recruited an additional 39 graduates, hosted more than 23 senior leaders through our Corporate University, complied with all aspects of the Employment Equity Act and BEE Acts, achieved Level 4 B-BBEE status, achieved fourth place nationally in the external rating of our 2009 annual report, and opened our 70,000m² Gauteng RDC for Massdiscounters. APPRECIATION In tough times, there are more demands placed on our employees, service providers and suppliers. I am very grateful for the efforts of our 26,585 employees, and 8,54 product and service suppliers. Thank you for your support and efforts. I would also like to thank our Board and Shareholders for their support and counsel through the year. PROSPECTS For the 4 weeks to 3 October 200, total sales increased by 4.9% and comparable sales increased by 9.2%, continuing the trends experienced for most of the second half of the 200 financial year, specifically strong General Merchandise and Home Improvement trading performances. In the short term, we expect the Food and African businesses to continue to underperform due to food deflation and the strong Rand, respectively, but expect gradual improvement in both of these throughout the coming financial year. Acknowledging the concerns and uncertainty permeating the global economy, if current South African economic and trading trends continue for the financial year, Massmart should achieve profit growth, before any foreign exchange translation adjustments, ahead of sales growth for the full year. The financial information on which this outlook statement is based has not been reviewed or reported on by the Company s external auditors. CONCLUSION On 27 September 200, Massmart released an announcement describing a non-binding expression of interest received from Wal-Mart Stores, Inc, which could lead to Wal-Mart making a cash offer to acquire the entire issued share capital of our Company for a price of R48 per share. This has subsequently received extensive coverage in the local and international press. Wal-Mart is currently conducting due diligence on the Group and the first time that any further announcements may be made in this regard will be on or about 8 November 200. In the event that a firm offer is received from Wal-Mart, the directors of Massmart will obtain an independent opinion and express a view on the firm offer at that time. Difficult times present an opportunity to focus and learn. We have done both and are confident that the Group is in better shape than a year ago. We believe we managed the business well through the crisis, and have established good momentum in implementing our growth plans across the entire Group. Should the current mild economic recovery be sustained, we should see net margins expand in the years ahead. We can see areas of weakness too, but the opportunity to address or improve on these exceeds our capacity to respond. We have plenty to do. Our decision to continue to invest through the economic cycle should bear fruit in the years ahead. Prospects 4 weeks to 3 October 200 Total sales 4.9% Comparable sales 9.2% Grant Pattison Chief Executive Officer 6 October 200 Massmart Annual Report

22 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW We continually strive to improve the quality and relevance of Massmart s financial reporting to our stakeholders. In doing so, we ensure that our technical accounting disclosure remains of the highest standard, while also endeavouring to keep the details and our explanations clear and simple despite many accounting standards becoming increasingly complex and technical. Our efforts have been recognised in the Ernst & Young Excellence in Corporate Reporting Awards where Massmart has received an Excellent rating for the past five years and came fourth nationally in the recent 2009 awards. Guy Hayward Chief Financial Officer Key issues in the 200 financial year: f Accelerating sales growth from December 2009 f Low product sales inflation f Effective cost control f Good inventory and working capital management f Highest ever capital expenditure and investment levels ACQUISITIONS Almost all of the acquisitions concluded during the financial year, none of which were material, were part of our Retail Cash & Carry expansion in Masscash. Massbuild, specifically Builders Express, acquired three ex-mica stores, two of which are in KwaZulu-Natal and one in Johannesburg. In aggregate, 3 businesses, representing 20 stores and properties, were acquired for a cash consideration of R369.9 million, which was financed using short- and medium-term debt facilities, and gave rise to goodwill of R305.8 million. Further to these acquisitions, the remaining 49% minority interest in the Durban-based business, Cambridge Food, was acquired, in which the initial 5% was acquired in December The relating cash flow and other minority interests acquired is reflected in Other investing activities including minority interests acquired in the statement of cash flows. DISPOSALS With effect from May 200, the cell phone contract business of CellShack in Masscash was sold for cash. The proceeds and effect of this disposal are not material. 30 Massmart Annual Report 200

23 Reports to Shareholders ACCOUNTING POLICIES There were no significant changes in accounting policies during the year. Since 2007, the results for Makro Zimbabwe have been deconsolidated as Massmart cannot be said to be controlling the day-to-day management of that business following legislative changes in that country. Control is defined as the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The financial effect of this exclusion is minimal. Read more More detail on the accounting policies can be found in note on page 62 Group Financial Statements FINANCIAL TARGETS The Group has medium-term financial targets or measures that we believe represent optimal performance levels within the income statement, balance sheet, or the combination of both. Certain of these targets are stretch targets that will only be achieved in the medium term. These targets are also through-the-cycle targets, meaning that during a strongly negative or positive economic environment, we may under- or over-perform against those targets. These target ratios are shown below: Definitions Through-the-cycle The financial targets are intended to apply in a benign to positive economic environment, ie one representing the average growth rate of an economic cycle. Medium-term target ratios ROS > 5.5% ROE > 35% Gearing < 30% Dividend cover of x.7 Definition Return on sales (ROS) is the ratio of profit before tax, excluding foreign exchange amounts, to sales Return on equity (ROE) is the ratio of headline earnings to average ordinary shareholders equity Gearing is the ratio of average long-term interest-bearing debt to average ordinary shareholders equity Dividend cover represents the ratio of headline earnings to dividends paid to ordinary shareholders Return on sales (%) RETURN ON SALES (ROS) This ratio combines all the key income statement elements, being sales, gross margin, supplier income, expenses (including depreciation and amortisation) and net interest, but excludes foreign exchange translation gains or losses. Every key financial aspect of the retail or wholesale business model is therefore captured in this ratio. In addition, the largest asset investment in the Divisions is net working capital (being inventory and trade receivables), less the associated funding liability (in trade payables). The relative success of management s impact on net working capital will therefore be reflected in changed net finance charges or receipts from one year to the next. The reason foreign exchange translation gains or losses are excluded is because they are largely well beyond management s control, are volatile, and do not reflect the sustainable profitability of the Division or Group Actual Medium- International Medium-term trading targets (%) 200 term target benchmark Massdiscounters Masswarehouse Massbuild Masscash Corporate (0.6) (0.5) Massmart Group Massmart Annual Report 200 3

24 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW As a Division reaches new levels of trading or operating efficiency that we believe are permanent, then that Division s target ROS may be increased. The Group s target ROS is derived by applying each Division s target ROS to its actual sales. f Given the difficult economic and trading environment to June 200, it is unsurprising that all Divisions are currently operating well below their target, and previously achieved, ROS levels. f Although Masswarehouse is operating just below its medium-term ROS target, and has operated above this level in previous years, the aggressive store opening programme of at least one new store per year for the next four years makes it possible that profitability may not improve in this Division during this time. f Massbuild s higher relative cyclicality compared to the rest of the Group required the introduction of a target range, where the lower-end applies in a cyclical downturn while the upper-end applies in a positive environment. f Masscash was below its target through a combination of the adverse effects of deflation in Food during the year and the positive effect of the inclusion of higher net margin Retail Cash and Carry stores. Masscash s Wholesale business will always be vulnerable to a deflationary Food environment while, in contrast, it will tend to outperform in a high Food inflation environment. f The Corporate portion refers to the net interest charge that would accompany the targeted average debt level for the Group, as well as the BEE IFRS 2 charge and asset impairments. Progress to date Massmart s current ROS is 4.2% (2009: 4.6%). With the exception of the 2009 and 200 financial years, Massmart has grown its ROS every year since 2000 and we believe that the target of 5.5% remains achievable in the medium term. RETURN ON EQUITY Massmart is committed to delivering superior returns to shareholders. The Group s medium-term targets are to exceed a 35% return on average ordinary shareholders equity. The decline in the Group s profitability (measured by ROS) in 2009 and 200 during the economic recession, was the main cause of the decline in the Group s return on shareholders equity. This was also affected by the Group s ongoing investment in new stores and new businesses which increased the size of the balance sheet. As the Group s profitability improves, and as the new stores and business begin to trade optimally, the return on shareholders equity will improve to its previous higher levels. Progress to date Massmart s current return on average shareholders equity is 34.9% (2009: 4.7%). Return on equity (%) The Divisions are responsible for delivering operational returns, being the returns to their net working capital and non-current assets excluding goodwill and trademarks. In addition to these operational returns, Massmart, through the Board and Executive Committee, is responsible for delivering investment returns that will also include the book value of intangibles (specifically goodwill arising from acquisitions), as well as setting the Group s gearing levels that will influence returns to shareholders and the overall risk profile. Depending upon the purchase price, retail and wholesale acquisitions tend to generate significant accounting goodwill owing to the relatively low net asset values of these business models. The Divisions are recapitalised annually by Massmart with non-interest-bearing shareholders funds that are equivalent to the book value of long-term assets in each Division. Each therefore must fund its net working capital position through cash or interest-bearing debt, depending upon the characteristics of that business model. This process enables divisional returns to be evaluated and compared on a consistent basis across the Group, and from one year to the next. This policy has not been rigidly applied in Masscash owing to minority shareholders in that business. GEARING Massmart prefers some gearing, up to a maximum of 30%, in order to leverage the return on shareholders equity but without introducing excessive financial risk to the Group. Given the Group s high cash generation and our historical preference for leasing rather than owning our stores, it is difficult to permanently or meaningfully gear (ie maintain a net interest-bearing debt position) the Group over the long term. It should be noted here however, that our stores lease obligations represent a significant form of permanent gearing (these lease obligations currently represent a discounted present value of approximately R4.6 billion (2009: R4.7 billion) Gearing 7.9% 2.4% Average interestbearing debt for the year Average capital and reserves 3, ,895.3 Average interest-bearing debt is calculated by grossing up the net interest paid of R46.7 million (2009: R48.6 million) by the average interest rate of 8.0% (2009: 3.5%). 32 Massmart Annual Report 200

25 Reports to Shareholders Recently the Group has decided to own rather than lease certain of its larger standalone store formats, specifically Makro and Builders Warehouse, and this will add incrementally to the Group s gearing. Essentially however, this change does not represent a major financial shift, as all it will be doing is converting a fixed long-term lease commitment, which is recorded off-balance sheet, to an on-balance sheet asset and liability. As regards financing any acquisitions, depending on the target company s cash profile and cash generation ability, this gearing ratio may be increased, but probably to no higher than 50%. As the period-end balance sheet tends to be unrepresentative of the Group s average net cash or debt position during the year (showing higher cash balances as monthly creditors are paid after month-end), the Group s gearing levels are best calculated using the net interest paid (or received) for the period. Progress to date the Group s gearing was 7.9% (2009: 2.4%) for the financial year. DIVIDEND COVER Massmart s current dividend policy is to pay total annual cash distributions representing a x.7 dividend cover ratio, unless circumstances dictate otherwise. The reference point for the calculation is headline earnings, which includes the effect of the Thuthukani IFRS 2 charge and associated dividend. No adjustment will be made to the dividend calculation for the unrealised or non-cash portion of any foreign exchange translation gain or loss, unless the figures become very material. This ratio is not a target because it is already being achieved but is disclosed to give shareholders clarity on future dividend levels. The Board believes that this dividend cover ratio is appropriate given the Group s current and forecast cash generation, planned capital expenditure and gearing levels. This financial year however, the Board resolved to maintain the dividend at the same level as 2009, despite this dividend policy and marginally lower headline earnings. The dividend cover for the 20 financial year will revert to the original policy of x.7 dividend cover. The Board has no desire to build up a permanent cash reserve and so will, where practical, reduce dividend cover and/or may execute a share buyback depending upon the current share price and our view of its valuation in order to return surplus cash to shareholders. Historical dividend cover ratios: Dividend cover x.46 x.55 x.70 x.70 x2.00 x2.00 x2.00 x2.50 BLACK ECONOMIC EMPOWERMENT STAFF EQUITY ISSUE Massmart s Black Economic Empowerment (BEE) staff equity issue became effective from October Full details on this BEE staff equity issue were published in the June 2006 shareholders circular but the main financial points are repeated below: f Equity representing 0% of the Massmart ordinary issued shares, pre-dilution, or 9.% post-dilution, was issued. f There were two categories of participant, being general staff and scarce skills, and separate trusts were formed for both. f Although the underlying instrument is effectively an option with a strike price of R49.98, the actual legal instruments are two classes of preference shares. The reason preference shares were used was to give the participants voting rights and, in one case, a right to dividends as explained below: Store progress Opening balance 256 Game stores opened 7 Amanzimtoti (KwaZulu-Natal) Ballito (KwaZulu-Natal) Alberton (Gauteng) Lenasia (Gauteng) Mokopane (Limpopo) Nelspruit (Mpumalanga) Phuthaditjhaba (Free State) Game stores closed -3 Wynberg (Gauteng) Nelspruit (Mpumalanga) Nelspruit CBD (Mpumalanga) DionWired stores opened 5 Hyde Park (Gauteng) Grove (Gauteng) Woodlands (Gauteng) Nelspruit (Mpumalanga) Somerset West (Western Cape) Builders Warehouse stores opened 2 Bedworth Park (Gauteng) Kempton Park (Gauteng) Builders Express store opened Stellenbosch (Western Cape) Builders Express stores acquired 3 Shelley Beach (KwaZulu-Natal) Umhlanga (KwaZulu-Natal) Norwood (Gauteng) Builders Trade Depot store opened Ballito (KwaZulu-Natal) Builders Trade Depot store acquired Willowvale (Eastern Cape) Builders Trade Depot stores closed -3 Durban (KwaZulu-Natal) Witbank (Mpumalanga) Somerset West (Western Cape) CBW stores opened 2 Durban (KwaZulu-Natal) Isipingo (KwaZulu-Natal) CBW stores acquired 6 Port Elizabeth (Eastern Cape) Willowvale (Eastern Cape) Roodepoort (Gauteng) Roodepoort (Gauteng) Newtown (Gauteng) Soweto (Gauteng) Soweto (Gauteng) Johannesburg CBD (Gauteng) Johannesburg CBD (Gauteng) Pretoria (Gauteng) Mokopane (Limpopo) Tzaneen (Limpopo) Piet Retief (Mpumalanga) George (Western Cape) Mossel Bay (Western Cape) Manzini (Swaziland) Total stores in Massmart Annual Report

26 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW f The first category, A preference shares, was a once-off issue to the Thuthukani Empowerment Trust, for the benefit of all 4,500 permanent employees in the Group at that time. These shares have voting rights equal to those of ordinary shares and have a right to dividends on the following basis: 25% of the ordinary dividend in year one (being 2007), 50% of the ordinary dividend in year two (2008), 75% of the ordinary dividend in year three (2009), and 00% of the ordinary dividend in year four (200) and thereafter. These A preference shares are converted into Massmart ordinary shares, for the direct use or benefit of each beneficiary, in three equal annual tranches commencing on October 200. f The second category, B preference shares, was issued to the Black Scarce Skills Trust for the benefit of current and future black managers in the Group and so there will be ongoing issues from this trust. These shares have voting rights but do not attract dividends. These shares can convert into Massmart ordinary shares, for the direct use or benefit of each beneficiary, in four equal annual tranches commencing from the end of the second year of the issue date. At October 2006, the total IFRS 2 Share-based Payment charge arising from this BEE staff issue was R373 million. In terms of IFRS 2, this amount must be amortised over the life of the scheme, being six years, commencing from October The current year s charge was R69.7 million (2009: R66.9 million) and the charge for 20 is anticipated to be R64.2 million. Current South African tax legislation does not allow any tax deduction associated with this non-cash charge. Using the total IFRS 2 charge of R373 million at October 2006 relative to the Group s market capitalisation at the same date, suggests that the total likely dilution to ordinary shareholders of this transaction will only be 3.3%. This total, however, does not take into account forfeitures by employees which will reduce the dilution effect. INCOME STATEMENT Rm Rm % change Sales 47, , Gross profit 8,57.7 7, Gross margin 8.% 8.0% Other income (3.4) Expenses (6,640.3) (5,85.8) (3.5) Operating expenses as a % of sales 4.0% 3.6% Trading profit 2,04.4 2, Trading profit as a % of sales 4.4% 4.9% Foreign exchange loss (64.3) (78.4) Operating profit,866.7,950.6 (4.3) Operating profit as a % of sales 3.9% 4.5% Finance costs (92.6) (2.8) 7.9 Finance income (28.5) Net finance costs (46.7) (48.6) 3.9 Profit before taxation,820.0,902.0 (4.3) Profit before taxation as a % of sales 3.8% 4.4% Taxation (608.2) (620.4) 2.0 Profit for the year,2.8,28.6 (5.4) Headline earnings: Including foreign exchange,38.6,207. (5.7) Excluding foreign exchange,256.9,263.5 (0.5) Headline earnings per share (cents): Including foreign exchange (6.2) Excluding foreign exchange (.) Read more More detail on the consolidated income statement and related notes can be found in f Income statement 57 f Revenue (note 4) 75 f Net finance costs (note 9) 79 f Taxation (note 0) 80 f Earnings per share (note 2) 8 Group Financial Statements Read more More detail on the operational performance can be found in f Massdiscounters Divisional Review 66 f Masswarehouse Divisional Review 74 f Massbuild Divisional Review 82 f Masscash Divisional Review 90 Operational Review 34 Massmart Annual Report 200

27 Reports to Shareholders SALES The Group s average product selling price inflation rate, using the Group s sales mix, for the 200 financial year was -0.4%, ie deflation. An indication of the economic volatility recently experienced in South Africa is that this equivalent figure for 2009 was.4%. Inflation/deflation for each of the Group s major product categories is shown in the table alongside. As noted in previous years, dramatic changes in product inflation beyond an approximate range of 5.0% 8.0% are inevitably linked to significant changes in the Rand exchange rate. The recent strengthening of the Rand exchange rate caused disinflation (ie declining inflation) and ultimately deflation in both Food and General Merchandise. Group product inflation -0.4% Food and Liquor.4% Home Improvement.8% General Merchandise -5.3% Looking ahead to 200/, due to the stronger Rand there appears to be still some general downward pressure on product prices. South African core cost inflation however, remains at 5.0% 8.0% and inevitably these cost pressures will feed into product prices. Total sales of R47.5 billion increased by 0.0% over Comparable stores sales growth was 2.6% while non-comparable stores including acquisitions added 7.4%. With the Group s average product inflation rate of -0.4%, the low comparable sales growth still represented volume growth of about 3.0%. During the 200 financial year, the Group opened 8 new stores, closed or sold six stores, and acquired 20 stores, thereby increasing its trading area by an unweighted 8.5% to,79,466m². GROSS PROFIT The Group s gross margin of 8.06% is slightly above the prior year s 8.03% due to a combination of lower gross margins in Massdiscounters, Makro and Masscash, and higher gross margins in Massbuild. The lower gross margins in Massdiscounters were due to sales mix as value-seeking customers purchased predominantly lower-margin promotional product, while Food deflation compressed margins in Makro and Masscash. The higher gross margin in Massbuild was mainly due to much less merchandise clearance activity in 200 compared to Definitions Comparable sales Comparable sales are sales figures quoted for stores that have traded, and will trade, for all 2 months of both the current and prior years. These stores sales would therefore exclude new store openings or closings in the current and prior years. Unweighted New space has not been proportionately adjusted if the store was only open for part of the financial year. The Group s gross margin is dependent upon the sales mix across the Divisions and the required trading aggression occasioned by competitor activity. In a positive economic cycle, it should increase marginally owing to the increased contribution from the higher-margin Massbuild division. Gross profit includes rebates and other forms of income earned from suppliers as well as ongoing revenue from sales of cellular products and airtime. OTHER INCOME Other income of R99.6 million (2009: R03. million) comprises royalties and franchise fees from in-store third parties, property rentals, investment income excluding interest, and sundry third party management and administration fees. EXPENSES Rm Rm % change Depreciation and amortisation (382.8) (343.) (.6) Impairment of assets (3.7) (.6) (3.3) Employment costs (3,352.9) (2,965.8) (3.) Occupancy costs (,326.7) (,70.4) (3.4) Other operating costs (,574.2) (,370.9) (4.8) Total expenses (6,640.3) (5,85.8) (3.5) Insight Expenses Employment and occupancy costs together represent 70% of the Group s total expenses. Massmart Annual Report

28 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW Total expenses represent 4.0% of sales, a decline compared to the prior year s 3.6% of sales. Although total expenses increased by 3.5%, comparable expenses increased by only 2.8% demonstrating the Divisions ability to control costs when the trading environment demanded it. The major expense categories and significant expenses included in total expenses are discussed in more detail below. Employment costs, the Group s single largest cost category at 50.5% of total expenses, are 3.% higher than the prior year. On a comparable basis, these costs increased by 5.0%. Included in employment costs are IFRS 2 Share-based Payments charges of R49.4 million (2009: R33.5 million) which arise from shares and options issued to beneficiaries of the Massmart Employee Share Trust, the Thuthukani BEE Staff Scheme and Black Scarce Skills Trust. Excluding these IFRS 2 charges, total employment costs are 3.0% higher than the prior year. The Group employed 8.4% more employees (on a full-time equivalent basis or FTE) compared to 2009, increasing from new stores and acquisitions. up by 3.% R3,352.9m Employment costs R2,965.8 million in 2009 For the forthcoming financial year, the Group s salary increases are between 6% and 8% and the wage increases, which have all been finalised, are in a range of 7% and 8%. Occupancy costs, the Group s second biggest operating cost at 20.0% of total expenses, increased by 3.4%. On a comparable basis, these costs increased by 5.4%. Expressed as a percentage of sales, occupancy costs, at 2.8% are higher than the prior year equivalent of 2.7%. Property lease costs comprise only 69% of this total cost, the balance comprises associated property costs including municipal rates and services. Property lease costs increased by 2% while the balance of the expenses in this category increased by approximately 8% due to significantly increased municipal rates and service fees. The lease-smoothing accounting policy applicable to operating leases (thereby affecting all store leases) has the effect of keeping comparable-store lease charges broadly equal from one year to the next, and so any increase in property lease costs between the years would be from new stores. Another effect of this accounting policy is that annual lease escalations no longer increase the Group s lease charge. Adjusting for the non-cash lease-smoothing adjustment in both years shows that annual cash occupancy costs increased by 5.6% and total net trading space increased by 8.5%. up by 3.4% R,326.7m Occupancy costs R,70.4 million in 2009 Depreciation and amortisation is the Group s third largest cost category at 5.8% of total expenses. Owing to ongoing store refurbishments and new stores, the depreciation and amortisation charge increased by.6% which is ahead of sales growth, and will continue to increase ahead of sales growth due to the Group s capital expansion programme. Most Divisions refurbish their stores on a regular basis, resulting in steadily higher depreciation charges. The three major cost categories described above represent 76.3% of the Group s total expenses. Other operating costs represent every other item of expense in the Group, including for example: insurance, bad debts, travel, professional fees, advertising and marketing, stationery and consumables. Combined, this category represents the most manageable, or variable, costs and so while total costs in this category increased by 4.8%, comparable costs increased by only 2.8% due to intense management focus. It is unlikely that this level of cost-containment will be sustained and so this category will increase at a level approximating national inflation rates. OTHER SIGNIFICANT ITEMS As noted in the summarised income statement above, included in operating profit is a net unrealised loss on foreign currency transactions and translations of R64.3 million (2009: net loss of R78.4 million). The translation of Massdiscounters African balance sheets accounted for R64.2 million of this (2009: R06.6 million loss), there was a net loss from other foreign monetary balances of R5. million (2009: R24.0 million gain) and the balance came mostly from unrealised losses on landed forward foreign exchange contracts of R49.0 million (2009: R4.2 million gain). More detail is provided in note 7 on page 77 and note 39 on page 2 on the nature of the Group s foreign currency exposure, particularly with regard to Massdiscounters African stores. When a new store is opened, large once-off or exceptional operating costs can be incurred in preparing the store (including temporary staff, marketing initiatives, special promotions, signage, amongst others). These costs are referred to as store pre-opening costs and in 200 amounted to R35.9 million (2009: R33.8 million). 36 Massmart Annual Report 200

29 Reports to Shareholders TRADING AND OPERATING PROFIT Group trading profit, which is shown before accounting for the foreign currency translation movements, grew by 0.3% which is a great performance relative to the tough trading environment experienced for almost half of the 200 financial year. Expressed as a percentage of sales, Group trading profit deteriorated from 4.9% to 4.4%. Group operating profit, which includes the foreign currency translation movements, was 4.3% below the prior year. The Group s financial performance has been covered in detail above, but can broadly be summarised as: f Total sales boosted by new stores and acquisitions during the year; f Low comparable sales due to a difficult trading environment and very low product inflation; f Lower gross margins in Massdiscounters, Makro and Masscash, and higher gross margins in Massbuild; f Great cost control across the entire Group; and f Therefore only one Division, Massbuild, holding its operating profit margins above the prior year. up by 0.3% R2,04.4m Trading profit R2,097.5 million in 2009 NET FINANCE COSTS Although average Group gearing was higher than 2009, net interest paid was below the prior year due to lower commercial interest rates. Taking into account anticipated capital expenditure and excluding any unforeseen developments or new initiatives, the Group will remain net geared for the next three to four years. Using net interest paid as a proxy, the Group s average net gearing for the 200 financial year was 7.9% (2009: 2.4%). TAXATION The total tax charge represents an overall tax rate of 33.4% (2009: 32.6%). For several years two factors have caused the Group s tax rate to be higher than the standard South African corporate rate, the first is the charge from the Secondary Tax on Companies (STC) payable on net dividends paid, and the second is the effect of significant nondeductible expenses, specifically the IFRS 2 charge. In the current year, STC added 4.6% (2009: 3.8%) to the tax rate while the non-deductible IFRS 2 charge had a further adverse effect of 2.3% (2009: 2.0%). Excluding the impact of STC and IFRS 2, we expect Massmart s future effective tax rate to be at or near the South African corporate rate of 28.0%, although higher tax rates in certain foreign jurisdictions may marginally increase this. Massmart is unconcerned at any specific element of historical tax risk in the Group, but there remains the uncertainty that material adjustments arising from potentially unfavourable tax assessments of previous tax returns, some of which have not yet been assessed by SARS, could impact future tax charges. Extending this uncertainty is that SARS can reopen any tax assessment within three years of issuing such assessment. HEADLINE EARNINGS Headline earnings of R,38.6 million (2009: R,207. million) are 5.7% lower than the prior year. Adjusting for the after-tax effect of the foreign currency translation movement, increases revised headline earnings to R,256.9 million (2009: R,263.5 million) representing a decline of only 0.5%. Taxation reconciliation South African corporate taxation 28.0% in % Secondary Tax on Companies +3.8% in % IFRS % in % Other -.2% in % Overall tax rate 32.6% in % Total tax charge R620.4 million in 2009 Headline earnings (cents) R608.2m Headline earnings per share (HEPS) of cents is 6.2% lower than the 2009 HEPS of cents. Adjusting for the after-tax effect of the foreign currency translation movement, increases revised HEPS to 626. cents (2009: cents) representing a decline of.%. After adjusting for the potential future conversion of 9.07 million shares (2009: 4.52 million shares), the diluted HEPS is cents (2009: 59.6 cents). Under the calculation required by IFRS, the number of potentially dilutive shares has increased due to the significantly higher weighted-average Massmart share price during this financial year Massmart Annual Report

30 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW STATEMENT OF FINANCIAL POSITION Rm Rm Assets Non-current assets 4, ,397.5 Current assets 9,34.5 8,29.4 Total assets 4, ,526.9 Equity and liabilities Capital and reserves 3, ,054.7 Minority interest Total equity 3,59.8 3,096.7 Non-current liabilities Current liabilities 9, ,57.9 Total equity and liabilities 4, ,526.9 This review covers the consolidated balance sheet and the related notes. NON-CURRENT ASSETS Rm Rm Non-current assets 4, ,397.5 Property, plant and equipment 2,055.2,696.6 Goodwill,875.0,588.2 Other intangibles Investments Other financial assets Deferred taxation Read more More detail on the consolidated statement of financial position and related notes can be found in f Statement of financial position 59 f Property, plant and equipment (note 3) 82 f Goodwill (note 4) 84 f Other intangibles (note 5) 85 f Investments (note 6) 86 f Other financial assets (note 7) 88 f Deferred taxation (note 8) 89 f Inventories (note 9) 90 f Trade, other receivables and prepayments (note 20) 9 f Minority interest (note 23) 96 f Non-current liabilities (note 24) 97 f Non-current provisions (note 25) 98 f Trade and other payables (note 26) 99 f Provisions (note 27) 99 f Other current liabilities (note 28) 200 Group Financial Statements Property, plant and equipment and goodwill together represent 79.0% (2009: 74.7%) of the Group s total non-current assets. Massmart continually refurbishes older stores and is building new stores, and so during this year expenditure of R520. million (2009: R598.9 million) was spent on property, plant and equipment. Of this, R9.6 million (2009: R295.4 million) was replacement capital expenditure, while the balance of R328.5 million (2009: R303.5 million) was invested in new capital assets, including new stores. Acquisitions added a further R205.8 million (2009: R33.0 million) to Group property, plant and equipment. Capital expenditure and depreciation (Rm) Goodwill increased by R286.8 million, primarily reflecting the goodwill arising from this year s acquisitions (R305.8 million). Under IFRS all goodwill must be tested annually against the value of the business units with which it is associated and, if overstated, that goodwill must be impaired. No goodwill impairment was necessary this year or in the prior year. Other intangibles primarily represent computer software that IFRS requires to be disclosed in this category. In terms of IFRS the depreciation charge arising from this asset category is classified as an amortisation charge. Capital expenditure for 20 is budgeted to be R90 million and includes R87.5 million for the new Makro store and the investment in 29 other new stores to be opened during the 20 financial year, representing new space growth of about 8.0% Replacement Expansion Depreciation INVESTMENTS AND OTHER FINANCIAL ASSETS Investments comprise mainly a R223.6 million (2009: R96.7 million) investment in an international treasury, shipping and trading business unit, revalued to reflect the foreign-denominated net assets within that business unit. The R60.8 million (2009: R52.4 million) shown as a bare dominium revaluation represents the Group s proportionate share of the estimated market value of the right to acquire bare dominiums in certain Makro stores. 38 Massmart Annual Report 200

31 Reports to Shareholders Other financial assets of R270.3 million (2009: R256.7 million) include executive and employee loans of R26. million (2009: R98.9 million) owed by participants in the Massmart employee share purchase trust that attract zero percent interest. This loan amount reduces as employees sell their shares and repay the associated loans, and increases where executives elect to own Massmart shares, funded with these loans, rather than options issued by the trust. The finance lease deposit of R5. million (2009: R5.8 million) is related to the financing of the Makro Strubens Valley store built in DEFERRED TAX The deferred tax asset arises primarily from numerous temporary differences, including tax deductions on trademarks, the operating lease liability arising from the lease-smoothing accounting policy, and unutilised assessed losses. This net asset will reduce over time as the associated tax benefits are utilised. CURRENT ASSETS Rm Rm Current assets 9,34.5 8,29.4 Inventories 5,60.5 4,893.2 Trade, other receivables and prepayments 2,322.6,85. Taxation Cash and bank balance,368.3,055.8 Capital expenditure, acquisitions and buybacks (Rm) Total capex Acquisitions Share buybacks Net inventories represent approximately 52.6 days sales (using the historic basis), a slight deterioration on the prior year s figure of 50.5 days. Given the strong sales growth in Massdiscounters, particularly Game South Africa, and Builders Warehouse, these Divisions have increased their inventory levels. Inventory days In general, Massdiscounters, being a retail discounter with 02 stores, has the highest inventory levels and its sales days in inventory are almost double those for Massmart s wholesale businesses (Makro and Masscash). Builders Warehouse also has higher inventory days than the Group average, given the broader and deeper merchandise range in its stores. General Merchandise net inventory of R2,468.5 million (2009: R2,362.8 million) represents almost half of total Group inventory, while Food net inventory at R,647.6 million (2009: R,429.0 million) is the second largest Group inventory category but has the fastest stock-turns. This inventory category has increased due to the Retail Cash & Carry stores acquired in Masscash. Home Improvement net inventory levels have increased from the new stores in that Division and higher sales growth Total trade and other receivables and prepayments, net of provisions, is 25.5% higher than the prior year s figure. Included here are net trade accounts receivable of R,26.2 million (2009: R,077.6 million), which increased by 2.9%. Although trade credit is offered to certain customers in Massbuild and in Masscash, it is wellcontrolled, insured with a credit risk insurer, and kept within the Group s parameters, and does not affect the Group s working capital. The improved situation is also reflected in lower allowances for doubtful debts at year-end, which reduced from 4.7% of total trade receivables to 4.4% at June 200. For more detail, refer also to the commentary on credit risk in the Financial risks section in note 39 on page 2. NON-CURRENT LIABILITIES Rm Rm Non-current liabilities Non-current liabilities: Interest-bearing Interest free Non-current provisions Deferred taxation Massmart Annual Report

32 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW Major items included in the total of R895.3 million (2009: R858.3 million) are medium-term bank loans, capitalised finance leases, the operating lease liability arising from the lease-smoothing adjustment, non-current provisions and deferred tax. Non-current interest-bearing liabilities are medium-term bank loans and this balance increased during the financial year as a new R500 million three-year amortising loan was raised. Interest is fixed on this loan at 9.8%. The two five-year amortising loans of R250 million each were originally raised during the 2006 financial year to finance the Massbuild acquisitions and interest on both loans is fixed at 8.8% and 8.7% respectively. These loans will be paid-down during the 20 financial year. Capitalised finance lease balances are R76.7 million (2009: R86.3 million). The largest balance in non-current non-interest-bearing liabilities is the operating lease liability of R422.8 million (2009: R463.6 million) arising from the lease-smoothing accounting policy and which will be released over the remaining period of the Group s operating leases. Included in non-current provisions is the long-term provision of R58.3 million (2009: R55. million) arising from the actuarial valuation of the Group s liability arising from post-retirement medical aid contributions owed to current and future retirees. This liability is unfunded. With effect from 999, post-retirement medical aid benefits were no longer offered to new employees joining the Group. The deferred tax liability arises primarily from prepayments and property, plant and equipment. CURRENT LIABILITIES Rm Rm Current liabilities 9, ,57.9 Trade and other payables 9,94.3 7,670.3 Provisions Taxation Other current liabilities Deferred taxation Included in the total trade and other payables figure are trade payables of R7,329.0 million (2009: R6,28.2 million) representing approximately 60 days of cost of sales (using the historic basis), which is higher than the prior year s figure of 56 days. As noted earlier, owing to payments to creditors being made shortly after each month-end, the Group trade payables balances at year-end are not representative of the average during the remaining financial period. The amount by which the yearend trade payables is overstated in comparison to the average cannot be accurately calculated but is approximately R.5 billion. The current taxation liability reflects the Group s liability for provisional corporate tax payments that are generally payable within a few days of the financial year-end. Major items in Other current liabilities include R27.9 million (2009: R29.3 million) being the short-term portion of the medium-term loans noted above. CASH FLOW STATEMENT The waterfall graph alongside illustrates the cash generated by the Group and then how the cash was applied. Free cash flow is commonly used in business to describe the cash residue with which the Board can decide to either invest in further growth and/or return the cash to shareholders as dividends or share buybacks, and in 200 the Group s free cash flow was R.8 billion (2009: R.4 billion). Insight Cash flow analysis Working capital movements can be volatile. Depending upon creditor payment cycles the extent of the movement tends to be overstated at month- and year-end and so is generally not indicative of the intra-year average. Trading represents Operating cash before working capital movements. Free cash flow represents cash inflow from ordinary trading, before cash outflow relating to the expansion or contraction of the business. 40 Massmart Annual Report 200

33 Reports to Shareholders Massmart s cash flow waterfall (Rm) 3,000 2,500 2,000,500, Trading Working capital Cash inflow Interest paid Cash outflow Investment and dividend income Tax paid Replacement Free Dividends capex cash flow Expansion capex Sales proceeds Other Acquisitions Net movement Cash flow from operating activities Rm Rm Cash flow from operating activities Operating cash before working capital movements 2, ,398.2 Working capital movements Cash generated from operations 2, ,462.0 Interest received Interest paid (92.6) (2.8) Investment income Taxation paid (552.8) (700.3) Dividends paid (822.4) (867.4) Net cash inflow from operating activities, Cash generated from operations is higher than the prior year figure and is higher than this year s operating profit before depreciation, amortisation and impairment of R2,47.5 million (2009: R2,373.7 million), demonstrating the fundamental cash underpin to Massmart s earnings. Cash taxation paid decreased owing to lower taxable income in 200 and some timing differences on tax payments. The total cash dividend paid is lower than the prior year figure due to there having been treasury shares owned by the Group for part of the current financial year. Cash flow from investing and financing activities Rm Rm Cash flow from investing activities Investment to maintain operations (284.0) (354.5) Investment to expand operations (346.) (340.) Proceeds on disposal of property, plant and equipment Proceeds on disposal of assets classified as held for sale 74.3 Investment in subsidiary (369.9) (98.5) Disposal of subsidiary Other investing activities (63.8) 8. Net cash outflow from investing activities (,30.7) (697.4) Read more More detail on the consolidated statement of cash flows can be found in note 38 on page 209 Group Financial Statements Cash generated from operations (Rm) ,804.0,898. 2,32.7 2, ,639.4 Cash flow from financing activities Net cash outflow from financing activities 93.8 (60.7) Net decrease in cash and cash equivalents Foreign exchange movements taken to statement of changes in equity (30.9) (27.3) Cash and cash equivalents at the beginning of the year,025.,02.9 Cash and cash equivalents at the end of the year,30.9,025. Massmart Annual Report 200 4

34 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW Total capital expenditure (replacement and expansion) was R630. million, a slight decline on the prior year s total of R694.6 million. In 2009, the R74.3 million proceeds on disposal of assets classified as held for sale are from the sale of the Massdiscounters consumer credit book and business, effective on the first day of that financial year. The Investment in subsidiaries has been described in more detail in the Acquisitions paragraph on page 30. FINANCIAL RISKS Liquidity risk Liquidity risk is considered low owing to the Group s conservative funding structure and its high cash generation. Massmart s liquidity requirements are continually assessed through the Group s cash management and treasury function. The Group has total banking facilities, incorporating overnight, short- and medium-term borrowings, letters of credit, forward exchange contracts and electronic fund transfers, of R4,266.5 million (2009: R2,548.0 million). As at June 200, total interest-bearing debt amounted to R708.7 million (2009: R388.0 million). Read more More detail on financial risks and sensitivity analyses can be found in note 39 on page 2 Group Financial Statements As the Group begins to build inventory levels for the festive season, net interestbearing debt will increase up to a maximum of approximately R2.0 billion in October/ November, but will reduce rapidly as Christmas and year-end trading accelerates with commensurately higher cash proceeds. Interest risk Interest rate exposure is actively monitored owing to the Group s significant intra-month cash movements and the seasonal changes in its net funding profile during the financial year. As noted above, interest rates on the three medium-term bank loans are fixed at 8.8%, 8.7% and 9.8%, respectively. Of the Group s total financial liabilities of R9.9 billion, 93% or R9.2 billion of this is represented by non-interest-bearing trade and other payables funding. Credit risk Credit is available to wholesale customers at Makro, Massbuild and Masscash, and is adequately controlled by using appropriately trained personnel, applying credit granting criteria, continual monitoring and the use of software tools. A portion of the trade debtors book in Masscash is insured and a further portion is secured through general notarial bonds, pledges and other forms of security. Similarly, the trade debtors books in Builders Warehouse and Trade Depot are also insured. Currency risk Where possible and practical, currency risk in the Group is actively managed. All foreign-denominated trading liabilities are covered by matching forward-exchange contracts. At financial year-end, there were open forward exchange contracts totalling R699.9 million (2009: R377.3 million) of which 99.5% (2009: 97.9%) were US Dollar liabilities. The sensitivity of the Group to this exposure is shown in note 39 on page 2. In brief, if the Rand strengthened by 5% from the year-end rate of R7.67/US Dollar, there would be a R6.7 million charge, while a 5% weakening would give rise to a R6.7 million gain (2009 equivalent figures were R.3 million). Foreign-denominated assets are not covered by forward exchange contracts, as these are permanent assets held for the long term. The Group s exposure to the African currencies has been explained in note 7 on page 77 and further detail on the sensitivity analysis can be found in note 39 on page Massmart Annual Report 200

35 Reports to Shareholders TECHNICAL REVIEW The appropriate accounting policies, supported by sound and prudent management judgement and estimates, have been consistently applied. The Group s accounting policies are governed by IFRS and the AC 500 series as issued by the Accounting Practices Board. Guidance has been obtained from IFRICs and circulars effective on 6 October 200. Owing to the nature and volume of Exposure Drafts (EDs), no review has been provided except for the lease exposure draft specifically discussed in note 2 on page 70. The Group believes that accounting standards set the minimum requirement for financial reporting. The financial statements in this annual report have been prepared with the aim of exposing the reader to a very detailed view of the numbers, using a simplified approach, in the hope of facilitating a deeper and informed understanding of the business. XBRL XBRL is becoming a standard means of communicating information between businesses and on the internet. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data. In South Africa, the development and drive for adoption is done by XBRL SA, a not-for-profit organisation. Members include large corporate organisations, audit firms, regulators and accounting software vendors. The main purpose of this organisation is to create awareness within the South African market, while the members contribute to the development of taxonomies relevant specifically to South African reporting requirements (JSE Listings Requirements, Companies Act Fourth Schedule disclosure requirements, etc). A few reasons for the slow acceptance in South Africa is that too few people have XBRL experience, software companies are not promoting XBRL and regulators cannot receive information in XBRL format. Given the world-wide growth of XBRL over the past decade, the growing acceptance of IFRS and increased globalisation of business, it is inevitable that South Africa will follow. It is expected that the road to adoption of XBRL in South Africa will be started with a voluntary filing programme and later, companies will be mandated to use XBRL as a format for filing purposes. Read more The detailed technical review can be found in note 2 on page 70 Group Financial Statements Definitions XBRL extensible Business Reporting Language XBRL is a language for the electronic communication of business and financial data which may revolutionise business reporting around the world. Insight Taxonomies Dictionaries used by XBRL. They define the specific tags for individual items of data (such as profit ). Different taxonomies will be required for different financial reporting purposes. XBRL SA requires their own financial reporting taxonomies to reflect the South African local accounting regulations. Massmart has not yet implemented XBRL, but intends to do so in time. GOING-CONCERN ASSERTION The Board has formally considered the going-concern assertion for Massmart and its subsidiaries and believes that it is appropriate for the forthcoming financial year. See page 56 for more detail. APPRECIATION As always, I would like to acknowledge and pay tribute to the high-quality performances and significant efforts invested by my financial colleagues and their teams at all the Massmart Divisions and at the Massmart corporate office. Guy Hayward Chief Financial Officer 6 October 200 Massmart Annual Report

36 Ten-year Review DEFINITIONS AND FORMULAS Employment costs Includes the IFRS 2 Share-based Payment expense. Other operating costs Includes the foreign exchange gains and losses. Net finance costs Interest received less interest paid. EBITDA Earnings before interest, taxation, depreciation, amortisation and asset impairments. Trading profit before interest and taxation Earnings before interest, taxation, asset impairments, the BEE IFRS 2 charge and foreign exchange movements. Comparable sales Sales figures quoted for stores that have traded, and will trade, for all 2 months of the current and prior year. FTE (full-time equivalents) Includes all permanent employees and the permanent equivalent of temporary employees and contracted workers. Trading space (m 2 ) Trading space excludes parking, yard, warehouse space, office space and receiving areas. Sales per store (R000) Sales Number of stores Sales for Shield, CellShack, Saverite, Kawena and Kangela are excluded as they do not have stores. Sales per FTE (R000) Sales FTEs Sales per trading m 2 (R000) Sales Trading m 2 Sales for Shield, CellShack, Saverite, Kawena and Kangela are excluded as they do not have stores. Net asset turn Sales Net assets The Group defines net assets as capital reserves and interest-bearing LT liabilities. Gross margin (%) Gross profit Sales Operating margin (%) Operating profit Sales Trading profit before interest and taxation margin (%) Trading profit before interest and taxation Sales EBITDA margin (%) EBITDA Sales Effective tax rate (%) Taxation Profit before tax Note 0 on page 80 of the financial section holds further information. Return on average shareholders equity (%) Headline earnings Average of opening and closing equity attributable to equity holders of the parent Return on capital employed (%) Operating profit before asset impairments Average of opening and closing capital employed balances The Group defines capital employed as capital and reserves and interest-bearing LT liabilities. Debt: Equity (%) Debt Capital and reserves Debt comprises non-current interestbearing liabilities. Cash earnings cover Operating cash flow per share Headline earnings per share Net cash to total equity (%) Cash and cash equivalents, net of borrowings Total equity at the end of the year Current ratio Current assets Current liabilities Quick ratio Current assets excluding inventory Current liabilities Inventory days Inventory Total cost of sales Inventory turn Total cost of sales Inventory Payable days Trade payables Total cost of sales Asset turn Sales Total assets Total liabilities to total equity Current and non-current liabilities Total equity Headline earnings Headline earnings Weighted average number of shares in issue Diluted headline earnings Headline earnings Diluted weighted average number of shares in issue Attributable earnings Earnings attributable to the equity holders of the parent Weighted average number of shares in issue Dividends/distribution Distribution to shareholders Cash generated from operations before working capital movements Cash generated from operations before working capital movements Weighted average number of shares in issue Operating cash flow Net cash flow from operations Weighted average number of shares in issue Net cash flow from operations is after working capital movements, and excludes exceptional items and dividends paid. Net asset value Capital and reserves Total number of shares in issue Dividend cover Headline earnings per share Interim and final dividend per share Massmart Annual Report

37 Ten-year Review INCOME STATEMENT IN RANDS as at 27 June 200 Nine-year growth (%) * 2007 INCOME STATEMENT (Rm) Continuing operations: Sales , , , ,807.6 Cost of sales (38,879.3) (35,35.0) (3,78.7) (28,435.7) Gross profit 8.3 8,57.7 7, ,76.6 6,37.9 Other income Depreciation and amortisation costs (382.8) (343.) (297.8) (240.9) Impairment of assets (3.7) (.6) (4.7) (26.3) Employment costs (3,352.9) (2,965.8) (2,723.) (2,449.8) Occupancy costs (,326.7) (,70.4) (952.3) (846.0) Foreign exchange (loss)/profit (64.3) (78.4) 62.5 (4.4) Other operating costs (,574.2) (,370.9) (,427.3) (,25.3) Operating profit 24.,866.7,950.6,993.,673.3 Net finance costs (46.7) (48.6) (59.7) (44.4) Exceptional items Profit before tax 24.9,820.0,902.0,933.4,628.9 Taxation (608.2) (620.4) (632.8) (554.8) Profit for the year from continuing operations 23.3,2.8,28.6,300.6,074. Discontinued operation: Profit/(loss) for the year Loss on disposal Profit for the year,2.8,28.6,300.6,074. Attributable to: Equity holders of the parent 22.7,29.9,20.9,256.6,049.9 Preference shareholders Minority interest Profit for the year 23.3,2.8,28.6,300.6,074. Trading profit before interest and taxation ,04.4 2, ,002.4,795.3 EBITDA , , ,295.6,940.5 Headline earnings 20.3,38.6,207.,26.9,083.3 Share-based payment expense Massmart Holdings Limited Employee Share Trust Massmart Thuthukani Empowerment Trust Massmart Black Scarce Skills Trust Total Annual growth (%) Total sales Comparable sales Estimated Group sales (deflation)/inflation (%) (0.4) Trading profit Profit before tax (4.3) (.6) Definitions/explanations to the ratios and terms above can be found on page 47. * 2008 was a 53-week period. For comparative purposes, the adjusted pro forma 52-week period has been used where appropriate. 50 Massmart Annual Report 200

38 Ten-year Review Sales (Rbn) 29, , , , ,709.2,568.4 (24,650.0) (2,202.0) (20,83.2) (7,39.5) (4,2.) (9,680.5) 5,33.6 4,79.5 3, , ,597., (202.9) (57.5) (33.5) (07.8) (06.2) (83.0) (5.4) (74.6) (49.5) (39.7) (9.) (2,079.0) (,656.7) (,46.6) (,68.5) (,07.2) (778.8) (740.5) (644.0) (563.7) (408.8) (366.0) (277.5) (3.7) (28.0) 3.4 (8.7) (,08.0) (89.4) (76.) (67.0) (64.2) (533.8) , (32.2) (20.2) (7.2) (50.4) (4.) (30.6), (444.6) (307.5) (253.9) (25.2) (64.4) (63.0) Trading profit before interest and taxation (Rm) (82.) (.8) , ,536.4, ,300.2, , , , Headline earnings (Rm) (2.2) (.2) ,083.3,26.9,207.,38.6 Massmart Annual Report 200 5

39 Ten-year Review STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS as at 27 June 200 STATEMENT OF FINANCIAL POSITION (Rm) Nine-year growth (%) * 2007 Assets Non-current assets 6.8 4, , , ,448.2 Current assets 3.8 9,34.5 8,29.4 7, ,40.4 Inventory 5.3 5,60.5 4, , ,027.3 Assets classified as held for sale 67.6 Total assets 4.7 4, ,526.9, ,849.6 Equity and liabilities Total equity 2.8 3,59.8 3, , ,264.8 Non-current liabilities ,05.9,22.2 Current liabilities 4.7 9, ,57.9 8,8.5 7,462.6 Trade and other payables 6.9 9,94.3 7, , ,755.7 Total equity and liabilities 4.7 4, ,526.9, ,849.6 STATEMENT OF CASH FLOWS (Rm) Operating cash before working capital movements 24. 2, , ,394.9,926.4 Working capital movements (73.2) (28.3) Cash generated from operations , , ,32.7,898. Net interest paid (46.7) (48.6) (64.) (44.4) Investment income Dividends received Taxation paid (552.8) (700.3) (668.) (53.6) Dividends paid (822.4) (867.4) (709.9) (565.) Net cash flow from operating activities, Investment to maintain operations (284.0) (354.5) (268.3) (52.9) Investment to expand operations (346.) (340.) (309.6) (37.9) Other (500.6) (2.8) (320.3) (220.0) Net cash flow from investing activities 6.4 (,30.7) (697.4) (898.2) (690.8) Net cash flow from financing activities 93.8 (60.7) (222.7) (288.4) Net increase/(decrease) in cash and cash equivalents (9.4) (66.) Foreign exchange losses taken to FCTR (30.9) (27.3) 4.6 (.5) Cash and cash equivalents for the period (86.8) (67.6) Cash and cash equivalents at the beginning of the period,025.,02.9,208.7,376.3 Cash and cash equivalents at the end of the period,30.9,025.,02.9,208.7 Definitions/explanations to the ratios and terms above can be found on page 47. * 2008 was a 53-week period. For comparative purposes, the adjusted pro forma 52-week period has been used where appropriate. ** The opening cash flow in 2005 does not agree to the closing cash flow in 2004 due to the results being restated for IFRS from The difference relates to Makro Zimbabwe being consolidated as a result of IFRS. 52 Massmart Annual Report 200

40 Ten-year Review Total assets (Rbn) 3,034. 2,769.6,789.5,483.3,230., , , ,39.8 4, ,74.8 2, ,22.0 2, , ,236.7,98.9, ,68.4 8,33.2 7,09.3 6,043. 4, ,43.4,952.4,559.0,46.5,39.,426.7,25.7, , , ,873. 3, , , , ,00.7 4, , , ,247. 9,68.4 8,33.2 7,09.3 6,043. 4, , Cash generated from operations (Rm),543.6,36.5, (63.6) ,804.0,247.0, (32.7) (22.0) (5.5) (50.4) (4.) (487.4) (337.5) (24.2) (77.5) (90.9) (46.4) (402.8) (46.4) (28.7) (66.6) (90.7) (48.0) (78.5) (256.) (36.3) (83.6) (76.3) (94.6) (84.) (57.6) (263.3) (26.6) (73.) (32.3) (96.9) (696.8) (35.7) (208.8) (47.2) (58.9) (459.5) (,0.5) (435.3) (509.0) (96.6) (645.8) (22.6) (39.8) 30.8 (233.9) (626.8) (4.2) (0.5) (62.4) ,026.2** (83.4), , ,804.0,898. 2,32.7 2, ,639.4 Return on capital employed (%) Massmart Annual Report

41 Ten-year Review STORES AND PRODUCTIVITY MEASURES IN RANDS as at 27 June 200 RATIOS/INDICATORS Nine-year growth (%) * 2007 Operating statistics Depreciation and amortisation costs as a % of sales (0.8) (0.8) (0.8) (0.7) Impairment costs as a % of sales (0.0) (0.0) (0.0) (0.) Employment costs as a % of sales (7.) (6.9) (7.0) (7.0) Occupancy costs as a % of sales (2.8) (2.7) (2.4) (2.4) Total expenses as a % of sales (4.3) (3.8) (3.7) (4.0) Number of stores by chain Game Dion 6 DionWired Massdiscounters Makro Masswarehouse Builders Warehouse Builders Trade Depot Builders Express Massbuild Wholesale cash and carry Retail cash and carry Masscash Total number of stores FTE (full-time equivalents) ,585 24,58 24,308 24,436 Trading space (m 2 ).4,79,466,087,459,047, ,277 Sales per store (R000) 53,575 59,350 52,67 36,895 Sales per FTE (R000),785,759,603,422 Sales per trading m 2 (R000) Definitions/explanations to the ratios and terms above can be found on page 47. * 2008 was a 53-week period. For comparative purposes, the adjusted pro forma 52-week period has been used where appropriate. ** Includes the two Makro Zimbabwe stores from 2005, the date from which the results have been consolidated due to IFRS, and excludes them from 2007, the date from which the results have been deconsolidated. 54 Massmart Annual Report 200

42 Ten-year Review Number of stores (0.7) (0.6) (0.6) (0.5) (0.6) (0.7) (0.0) (0.3) (0.2) (0.2) (0.) (6.9) (6.5) (6.0) (5.7) (6.) (6.7) (2.5) (2.5) (2.4) (2.0) (2.2) (2.4) (3.7) (3.) (2.3) (.9) (3.0) (4.6) ** ,42 20,277 7,565 6,763 4,882 3, ,6 877, , , , ,29 22,509 43,22 36,662 29,007 4,88 95,640,337,42,354,26, Sales per m 2 (R000) Trading space (000m 2 ) ,048,087,79 Massmart Annual Report

43 Ten-year Review RETURNS, PROFITABILITY AND SHARE INFORMATION IN RANDS as at 27 June 200 Nine-year growth (%) * 2007 Productivity ratios Net asset turn Gross margin (%) Operating margin (%) Trading profit before interest and taxation margin (%) EBITDA margin (%) Effective tax rate (%) Profitability and gearing ratios Return on average shareholders equity (%) Return on capital employed (%) Debt: Equity (%) Cash earnings cover Solvency and liquidity ratios Net cash to total equity (%) Current ratio Quick ratio Inventory days days Inventory turn Payable days days Asset turn Total liabilities to total equity Per share performance (cents) Headline earnings Diluted headline earnings Attributable earnings Dividends/distribution Cash generated from operations before working capital movements 23.8,69.0,20.9, Operating cash flow 23.2, Net asset value 2.2,722.0,57.5,359.8,3.5 Dividend cover Stock exchange information Shares in issue (millions) Weighted average number of shares (millions) Diluted weighted average number of shares (millions) Shares traded (millions) Percentage of shares traded (%) Earnings yield (%) Dividend yield (%) Market capitalisation (Rm) 24, ,04.2 2,37.5 7,694.4 Share price South African (cents): High 2,580 9,029 9,724 9,997 Low 7,275 5,650 5,90 4,85 Closing 2,200 8,000 6,49 8,800 Definitions/explanations to the ratios and terms above can be found on page 47. * 2008 was a 53-week period. For comparative purposes, the adjusted pro forma 52-week period has been used where appropriate. 56 Massmart Annual Report 200

44 Ten-year Review Operating margin (%) Return on equity (%) ,89.7 8, , ,70.3 2,670.6,832.8 Market capitalisation (Rbn) 6,408 5,370 3,359 2,222,550,455 4,85 3,45 2,080, ,387 4,477 3,258 2,00, Massmart Annual Report

45 Ten-year Review INCOME STATEMENT, STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS IN US DOLLARS as at 27 June 200 INCOME STATEMENT ($m) Nine-year growth (%) * 2007 Continuing operations: Sales 7.0 6, , , ,82.0 Cost of sales (5,09.0) (3,906.2) (4,347.7) (3,938.5) Gross profit 8.3, Other income and expenses (88.) (643.9) (709.) (650.8) Operating profit Finance costs (6.) (5.4) (8.2) (6.) Exceptional items Profit before tax Taxation (79.9) (68.6) (86.6) (76.8) Profit for the year from continuing operations Discontinued operation: Profit/(loss) for the year Loss on disposal Profit for the year Attributable to: Equity holders of the parent Preference shareholders Minority interest Profit for the year Headline earnings STATEMENT OF FINANCIAL POSITION ($m) Total equity Net cash/(borrowings) Total assets 5.4,863.0,577.7,495.,506.9 Inventories Trade and other payables 7.6, STATEMENT OF CASH FLOWS ($m) Cash generated from operations Net cash flow from operating activities Net cash flow from investing activities 6.4 (48.6) (77.) (22.9) (95.7) Exchange rates (Rand/US$) At year-end Average for the year Definitions/explanations to the ratios and terms above can be found on page 47. * 2008 was a 53-week period. For comparative purposes, the adjusted pro forma 52-week period has been used where appropriate. 58 Massmart Annual Report 200

46 Ten-year Review Sales ($bn) 4, , , ,248.3,643.0,58.2 (3,839.6) (3,44.2) (2,950.8) (,9.6) (,387.6) (,270.4) (620.8) (53.2) (43.5) (259.6) (206.3) (22.6) (5.0) (3.3) (.) (5.6) (.4) (4.0) (69.3) (49.5) (37.) (23.8) (6.2) (8.3) (3.2) (0.3) Total assets ($bn) ,285.9,208.5, Cash generated from operations ($m) (7.6) (78.8) (63.6) (56.2) (9.3) (84.8) Massmart Annual Report

47 Ten-year Review PROFITABILITY AND SHARE PERFORMANCE IN US DOLLARS as at 27 June 200 RATIOS/INDICATORS Nine-year growth (%) * 2007 Profitability and gearing ratios Return on average shareholders equity (%) Return on capital employed (%) Debt: Equity (%) Liquidity ratios Current ratio Inventory days Per share performance (cents) Headline earnings Diluted headline earnings Attributable earnings Dividends/distribution Cash generated from operations before working capital movements Operating cash flow Net asset value Dividend cover Stock exchange information Market capitalisation ($m) 3, ,028.2, ,457.6 Exchange rates (Rand/US$) At year-end Average for the year Definitions/explanations to the ratios and terms above can be found on page 47. * 2008 was a 53-week period. For comparative purposes, the adjusted pro forma 52-week period has been used where appropriate. Technical clarification: These amounts exclude amounts relating to the discontinued operation (Furnex). 2 These amounts have not been restated for IFRS. 3 These amounts have not been restated for IFRS or for SAICA s reinterpretation of IAS 7 Leases. 60 Massmart Annual Report 200

48 Ten-year Review Return on equity (%) Return on capital employed (%),79.,328., Massmart Annual Report 200 6

49 Operational Review THE ECONOMY OVER THE YEAR TO JUNE 200 This report provides a brief summary of the key economic trends and developments that formed the backdrop to the Group s 200 financial year. All information has been extracted from reports from the Stellenbosch Bureau for Economic Research which, in turn, relies on data released by StatsSA. LOOKING BACK The South African economy emerged from recession during Massmart s June 200 financial year. Growth in national Gross Domestic Product (GDP) turned positive in the third quarter of the 2009 calendar year (being the first quarter of the 200 financial year). The much-anticipated recovery in overall consumer spending was however, delayed and so only recorded positive growth in the first quarter of 200 (the third quarter of the Group s 200 financial year), after declining during the whole of the 2009 calendar year. This positive domestic economic news flowed from the declining South African interest rate environment and the gradual recovery of the global economy, albeit that the latter is still beset with much uncertainty. The South African Reserve Bank (SARB), which follows an inflation-targeting methodology that influences monetary policy, has steadily lowered commercial interest rates since December 2008 as consumer inflation began to decline. From that date, interest rates have dropped by a cumulative 550bps to March 200 (now 600bps following a further 50bps drop in September 200). South African consumer inflation, measured as Consumer Price Inflation (CPI), has been on a downward trajectory and was 4.2% at the June 200 financial year-end, and was still lower in July 200 (3.7%). This improvement has largely been caused by the continued Rand strength. As shown in the graph below, South African national real retail sales growth declined steadily from June 2006 following the first interest rate increases. This declining growth turned negative in May 2008 and remained negative for most of The first positive national real retail sales growth was reported in January 200 and this has recorded positive growth since then. LOOKING AHEAD Although there remains some uncertainty about the sustainability and longevity of the global economic recovery, the 20 South African economic outlook for consumer spending appears benign, positively influenced by the likelihood of low inflation, low interest rates, steady rates of employment and firmer house prices for the period to June 20. National inflation (CPI) is forecast to average 4.6% for the 200 calendar year and 5.5% for 20. Consequently, interest rates may only increase for the first time in the third quarter of 20 suggesting that there may be steady and low interest rates for the Group s June 20 financial year, which will be positive for consumer spending on general merchandise and home improvement products. Growth in real final household consumption expenditure is forecast to recover from a low of -3.% in 2009 (calendar year), to 2.5% in 200 and 3.6% in 20. National retail sales (% monthly real growth) June 2006 June 2007 June 2008 June 2009 June 200 Massmart Annual Report

50 Operational Review MASSDISCOUNTERS DIVISIONAL REVIEW Although market conditions across Africa continued to be challenging, Massdiscounters reported pleasing sales growth, driven by double-digit growth in Game South Africa. During the year under review, we grew South African comparable sales by 0.9%, while growth in comparable store expenses was negative. This is a result of more than 8 months of stringent cost control, which enabled us to fund our re-investment in price aggression. Throughout the recession we reinforced our positioning by making our value-offering more compelling and relevant through smarter merchandise selection and innovative marketing campaigns. We also focused on building our portfolio of private brands to provide a lower price-point alternative for cost-conscious consumers. At DionWired we continue to deliver more choice and value and offer differentiated merchandise ranges that inspire and excite our customers. We are South Africa s leading electronics destination store and strive to attract customers through being informative and friendly. The building of the 70,000m² Gauteng regional distribution centre (RDC) was completed in June 200 and will service 68 stores encompassing all Gauteng DionWired, Game SA and Game Africa stores in the SADEC region. By closing or consolidating all existing Gauteng warehouses and storage facilities, we will be able to extract important efficiencies and achieve significant savings once fully operational. Significantly, 200 marked the 40th year of trading for Game and we celebrated with various birthday campaigns. What s the Big Deal? was well executed, boosting sales by 40% over the promotional period, helping us to gain market share and achieve growth rates not experienced since THE MASSDISCOUNTERS BRANDS Massdiscounters operates two retail formats: Game and DionWired. Game is a discount retailer of general merchandise FMCG, and non-perishable groceries for home, leisure and business use, operating throughout South Africa and in twelve major cities in sub-saharan Africa. DionWired is a South African electronics and appliances speciality store catering for the middle- to upper-end income consumer. During the past financial year we opened seven new Game stores, bringing its footprint to 9 stores and opened five new DionWired stores taking the total number of DionWired stores to. f 26 stores acquired July 998 f Now 9 stores f Operating in SA, Botswana, Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia f General merchandise and FMCG f LSM 5 0 f 20 Dion stores acquired 3 May 993 f Dion stores rebranded to Game stores f Launched greenfield DionWired concept stores in 2006 f Now stores f Operating in SA f General merchandise f LSM 8 0 Insight Living Standards Measure (LSM) The South African Advertising Research Foundation (SAARF) Living Standards Measure (LSM) has become the most widely used segmentation tool in South Africa. It is a means of segmenting the South African market that cuts across race, gender, age or any other variable used to categorise people. Instead, it groups people according to their living standards. Game At Game our positioning offers middle-income (LSM 5 0) customers the widest range of branded products at the best price. The Game business model is promotionally driven, with five million leaflets distributed each week. Our market-leading sales volumes and strong vendor collaboration allow us to offer our customers very well priced products that represent great value. DionWired The DionWired slogan is Experience the future. DionWired s product displays create an easy, exciting and interactive shopping experience, offering the latest in leading branded home entertainment, computing, digital photography and appliances. DionWired sells complete technological solutions, thereby demonstrating the interconnectivity of the latest product innovations. The IT experts servicing our in-store service centre, the Propeller Heads, are on hand to offer the best advice, upgrades and onsite repairs and services. Massmart Annual Report

51 Operational Review MASSDISCOUNTERS DIVISIONAL REVIEW Although our products are well priced, DionWired s retail positioning is not primarily as a discounter. Our main proposition is to offer the widest range of some of the world s biggest and leading brands such as Apple, Smeg, Miele, Marantz, Hewlett Packard and Sony to middle- to higher-end consumers (LSM 8 0) who demand exceptional value and a great shopping experience. This concept, launched in 2006, has proved to be exceptionally successful and during the year we almost doubled the store base and so established a national footprint. Much time was spent understanding and refining the business model and we are excited about the brand s potential and future plans. We repositioned the brand s relevance to distinguish between different customer segments and differentiated the brand in a busy market-place. OPERATING ENVIRONMENT Highlights f Strong performance by Game SA with profits up 20% f DionWired now a national brand with stores f New 70,000m² Gauteng regional distribution centre operational f Level 4 B-BBEE contributor Group contribution During tough times Game customers seek value in terms of price and quality, and the past year was no different. Despite South African interest rates having been reduced by 550 basis points since December 2008, consumer debt as a proportion of household income has not reduced significantly which negatively affected the disposable income of many of our consumers. There was however, resurgence in demand for durable and semi-durable goods in the second half of the year, as the lagged positive effect of the interest rate cuts began to kick in. Contributing to this was the fact that we experienced 4.2% product deflation for the 200 financial year. Game benefited from the soccer mania that hit the country with the 200 FIFA World Cup boosting sales. Incremental sales during the tournament were approximately R20 million, driven mainly by the sale of flat screen and high definition televisions but also soccer gear and accessories. 37 Massdiscounters Masswarehouse Massbuild Masscash Sales (%) 26 We introduced a new look and feel to our design and layout at selected Game stores and intend rolling this out to all future stores. Our offerings in the hi-tech and multimedia categories were also broadened and enhanced to better service upper LSM consumers. We also launched a Merchandise 200 initiative, which focuses on significantly enhancing our ranges in the Top 20 stores while reducing the ranges in the smallest sites. We continue to seek out and introduce the world s leading consumer brands alongside the aggressive rollout of private label. Private label products now make up.4% of our sales, exceeding our short-term target of 0%. Our African operations were negatively affected by the stronger Rand in two ways, first, it pushed up imported product prices in those African countries and, second, caused us to report lower Rand profits from those countries. In the previous financial year, of course, we experienced the reverse effect when the Rand initially weakened for much of the year. The Rand volatility also contributed to large changes in the translation effects of the African balance sheets. Despite the difficult trading environment, our profitability ratios remain intact and we believe that our business model for Africa remains sustainable Trading profit before taxation (%) Massmart Annual Report 200

52 Operational Review FINANCIAL PERFORMANCE week 52 week 52 week 53 week Sales Rm 2,64.9, ,29.8 0,406.5 Trading profit before interest 3 Rm Trading profit before interest as % sales % Operating profit before interest Rm Operating profit before interest as % sales % Net finance costs Rm Trading profit before taxation 3 Rm Trading profit before taxation as % sales % Operating profit before taxation Rm Operating profit before taxation as % sales % Inventories Rm 2,34.7,856.0,766.8 Inventory days days Net capital expenditure Rm Cash flow from operating activities Rm (6.2) Number of stores Trading area m 2 355,423 34, ,285 Average trading area per store m 2 3,485 3,674 3,759 Number of employees 8,876 9,469 9,87 Sales per store R000 9,264 20,495 2,553 Sales per m 2 R Sales per employee R000,37,83,032 Store progress Game Opening balance 87 Stores opened 7 Amanzimtoti (KwaZulu-Natal) Ballito (KwaZulu-Natal) Alberton (Gauteng) Lenasia (Gauteng) Mokopane (Limpopo) Nelspruit (Mpumalanga) Phuthaditjhaba (Free State) Stores closed (3) Wynberg (Gauteng) Nelspruit (Mpumalanga) Nelspruit CBD (Mpumalanga) Total stores in DionWired Opening balance 6 Stores opened 5 Hyde Park (Gauteng) Grove (Gauteng) Woodlands (Gauteng) Nelspruit (Mpumalanga) Somerset West (Western Cape) Total stores in 200 Net capital expenditure is defined as capital expenditure less disposal proceeds. 2 The ratios have been calculated using year-end balance sheet figures. 3 Trading profit is earnings before asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements. 4 Definitions/explanations to the ratios and terms above can be found on page 47. The Division reported total sales of R2.2 billion, representing respectable growth of 8.6%. Comparable sales growth was 3.2% while our annual sales inflation was -4.2%. Given the difficult consumer environment, the total sales growth in Game South Africa of 5.2% was pleasing (0.9% comparable) and was at the upper-end of the market growth. African store total sales decreased by 5.% in local currencies (and by 23.0% in Rands) Game DionWired Massmart Annual Report

53 Operational Review MASSDISCOUNTERS DIVISIONAL REVIEW Trading profit before interest and taxation of R642.7 million was 5.5% lower than the prior year. This excludes the impact of net foreign currency translation losses caused by weaker African currencies. These translation losses are mostly unrealised non-cash amounts that arise from the translation of certain balance sheet items in the African Game stores and are materially influenced by the movement in the exchange rate on the date of the financial year-end compared to that of the prior year. Massdiscounters executives are managed and rewarded on profit growth excluding the impact, positive or negative, of these foreign exchange movements. Trading profit before taxation was 7.5% lower than the prior year. The Division s resultant return on sales (profit before taxation/sales) of 5.7% was satisfactory given the difficult South African consumer environment. Inventory levels were well managed with stock days at 84.9 and the total inventory balance was 5.0% higher than the prior year, the result of sales growth and new store openings. Capital expenditure of R285.7 million was higher than the prior year s R23.6 million, with the increase mainly relating to the expenditure on the Gauteng RDC, as well as ongoing IT investments and store refurbishments. TRADING PROFIT BEFORE TAX RETURN ON SALES Actual 200 Medium-term 5.7% target Trading profit before tax return on sales has been calculated using profit before tax adjusted for asset impairments, the BEE IFRS 2 charge and net foreign exchange movements. IMPROVING EFFICIENCIES With the 70,000m² Gauteng RDC operating from July 200 and the 9,500m² Western Cape RDC being fully operational from 2008, we are well positioned to extract efficiencies from our in-bound supply chain. More of the key parameters we set originally have been met and, in many cases, exceeded. Western Cape stores that were supplied by that RDC saw in-stock service levels % 2% better than those stores that were supplied by off-site facilities and direct supplier deliveries. Cost savings were achieved from the closure of the now unnecessary off-site storage facilities. 70 Massmart Annual Report 200 International benchmark Wal-Mart ex-food 8.0% 7.4%

54 Operational Review Gauteng Regional Distribution Centre DionWired Hyde Park With two of the three RDCs in our planned national distribution network now operational, we expect further efficiencies when the Durban RDC is completed in June 202. With the opening of our RDCs, our back-of-store systems and processes underwent a complete overhaul and certain jobs such as data capturing and receiving became redundant. Despite our best efforts to find alternative staffing models, we regrettably had to retrench 504 people in June 200 as a result of this change in the business model. We improved business productivity by increasing sales per employee and reducing expenses as a percentage of sales. These developments are the fruit of three years of space- and employee-optimisation initiatives. Space planning, which studies the most profitable use of shelf-space and generally results in more shelf-space being available, allows for new product offerings, such as food, in selected Game stores. This will appeal to customers seeking convenience, value and excellent pricing. In terms of information technology, we switched from Best of Breed to Best of Suite to reduce complexity and improve our long-term agility and efficiency. New Thin Client hardware was deployed into all stores. This new hardware is cheaper to deploy and support as well as being less prone to abuse by users and more resistant to viruses. We entered into a long-term partnership with JDA that will see the replacement of the Just Enough replenishment software with JDA Demand and Fulfilment software. We plan to implement a further two JDA modules over the next three years to optimise our enterprise planning, price and markdowns processes. A new innovative mobility solution was piloted in two stores which comprises a handheld device and printer that allows for previously desk-bound activities to be completed more efficiently on the floor. This is the first step in a process that will see us introduce technologies to reduce queues and boost customer service in the next year. INVESTING IN OUR HUMAN RESOURCES Our Retail Academy forms the crux of our programme to develop our leadership pipeline. An assessment centre evaluates employees on a range of metrics including a work sample test, psychometric assessment, EQ and IQ tests. Training consists of four tiers, with each tier aligned to a level on the National Qualifications Framework. Massdiscounters also participates in various learnership projects. We embarked on an unprecedented project with the Wholesale and Retail SETA where we developed a recognition of prior learning initiative. This project gives team members the opportunity of receiving a national qualification through the South African Qualifications Authority. Read more More information on the Group s investment in Human Capital can be found on page 08 Corporate Accountability Massmart Annual Report 200 7

55 Operational Review MASSDISCOUNTERS DIVISIONAL REVIEW Massdiscounters also made good progress with our B-BBEE strategy, improving our score from 58.6% to 68.8% from Level 5 to Level 4, externally verified and audited by Empowerdex. Encouragingly, 94% of our junior managers, 85% of middle managers and 53% of senior managers are black. In addition, of the total 65 employees on learnerships, more than 98% are black. We also partnered with the Wholesale and Retail SETA, Outlearning and the Thabo Mbeki Trust for disabled persons to host disabled persons on the SETA s Operations Learnership. Ten learners successfully completed phase in various Gauteng stores. The project not only provided work experience for disabled learners, but also sensitised Game team members to the needs of disabled employees. We hope to roll out the programme nationally next year. In the area of enterprise development, we ensure early payment to black suppliers and have achieved 00% in this area on the scorecard. INVESTING IN OUR COMMUNITY Supporting projects that improve the education of disadvantaged children remains a priority for Massdiscounters. Through our Tools-to-Teach project we have been a committed partner to Rally-to-Read, an annual event where volunteers deliver purpose-built units containing teaching materials, books and educational supplies to teachers in rural schools around the country. Game donated R.2 million in stationery kits to schools during the year under review. One of the other ways we raise funds is through our Gift Wrap service during the December 2009 festive period and Game shoppers raised R800,000 through this initiative last year. In 2009, we launched Tools to Play, with the handover to disadvantaged communities in KwaZulu-Natal of 45 play-kits packed with educational toys. Each play-kit contains 60 educational toys that enhance early childhood development. We also support the Game Vodacom Wheelchair Project, which provides wheelchairs to disabled schoolchildren. This year we donated wheelchairs valued at R.2 million to 400 children around the country. Game and DionWired also raised R. million for the National Council for Persons with Disabilities in South Africa by selling Casual Day stickers at stores. Read more More information on the Group s investment in Corporate Social Investment can be found on page 2 Corporate Accountability Through our Smile initiative, staff members who volunteer their services with a registered charity can apply for R5,000 worth of Game products to donate to the charity. In 200 Game entered 40 teams of employees, comprising 96 swimmers, in the Midmar Mile Company Relay as part of Game s commemorative 40th birthday. Game has supported this event for many years and donates R,000 to charity for each swimmer who completes the race. We have sponsored eight top performing learners from Umlazi Comtech School on full bursaries for the past four years. This year the learners will complete Grade and depending on their academic performance in Grade 2, we intend to provide them with bursaries to attend a tertiary institution of their choice. DionWired upgraded the learning environment of more than 00 blind and partially sighted learners from Filadelfia Secondary School in Gauteng through sponsoring the school with state-of-the-art computer equipment and specialised software to the value of R205,000. DionWired also aided learners at KwaZulu-Natal s Browns School by donating high-tech Smart Boards that revolutionise special-needs education. Our R92,000 investment provided a massive pre-loaded resource library enabling teachers to tap into lessons and information from around the world that have been created using special software tailor-made for children with learning disabilities. INVESTING IN OUR ENVIRONMENT We continued to drive energy efficiency at stores and warehouses with a particular focus on using the latest technologies in our lighting and cooling systems. In the next financial year we will launch a company-wide environmentally-focused programme that will give guidance to all our merchandise, marketing and operational activities. We endeavour to introduce and promote green products where possible to encourage consumers to become more aware of their options and the impact of their choices Read more More information on the Group s investment in Climate Change and Environment can be found on page 0 Corporate Accountability 72 Massmart Annual Report 200

56 Operational Review on the environment. For example, compact fluorescent light bulbs are featured in our weekly promotions and we have introduced private label rechargeable batteries under the Logik brand. These have been co-branded with the Eco-wise brand to expand our green product range. OPPORTUNITIES IN AFRICA Our strategy in Africa is to grow our footprint by venturing into new countries and extending our store base in countries in which we currently trade. We hope to open a further seven stores in the next three years. Because we offer a wide range of quality products under one roof, backed by guarantees and excellent service, our stores are attractive to African customers. Having established and managed operations in a number of countries, we are better able to understand risks and opportunities as regards the legislation and regulatory environment. The multiple stores also enable us to build our brand equity. RISKS AND REWARDS In addition to traditional media such as newspaper and television, increasingly community portals and social media represent new ways of communicating with our customers. Game s 40th Birthday campaigns utilised this approach, which integrated different media types to drive consumers into a network of media options. This provides direction for future marketing efforts. A pilot introducing a no-frills, well-priced, convenient food offering in some of our Game SA stores will be launched. We also aim to increase the contribution of private label sales in our stores to 5% over the medium term. Having attracted cash-strapped consumers, we hope to be well positioned to retain them as the economy recovers and their purchasing patterns potentially broaden. The Consumer Protection Act will come into operation during the next financial year and we have put plans in place to mitigate associated risks. A quality control office within our merchandising section was established and an electronic supplier management process was activated. We already meet most of the Act s requirements pertaining to marketing initiatives, store policies and customer promises. New store customer policies have been documented and staff members have undergone training to ensure that we comply with all legal requirements. Our business remains susceptible to foreign exchange rate fluctuations. We manage this by regularly repatriating cash, undertaking currency sensitivity analyses and maintaining optimal funding and management of the foreign operations balance sheets. We also drive up private label sales and engineer new products at more competitive price-points to protect ourselves against a weakening of the Rand and ensuing product inflation. Whilst Massdiscounters remains primarily a cash business, credit sales doubled after we launched the Game private label credit card. Administered and financed by a third party, RCS, the card has increased equity in the Game brand and helped us to take market share from other credit retailers. Credit sales remain at less than 6% of total sales. FUTURE OUTLOOK Game SA and DionWired remain focused on differentiating their market positioning and entrenching world-class retail disciplines and technology as part of their day-to-day operations. The Western Cape and Gauteng RDC networks are expected to deliver more supply chain efficiencies, which include improving customer service through bolstering stock levels. These will be further enhanced when the Durban RDC completes the national network. With four DionWired stores opening in the next year, 3 Game SA stores in the next two years, and seven stores opening in Africa over the next three years, we expect our new stores to extend our brands into the communities, making our lowest prices and after-sales service guarantees more accessible to more customers. Massdiscounters directorate Grant Pattison Chairman Jan Potgieter Chief Executive Richard Fuller Store Operations Director Ann Hansen Financial Director John Hart IT & Logistics Director Guy Hayward Non-executive Director Richard Millson Marketing Director Rogany Ramiah Human Resources Director Llewellyn Steeneveldt Non-executive Director Mark Turner Africa Director Tyrone Vieira Merchandise Director Ilan Zwarenstein Non-executive Director Massmart Annual Report

57 Operational Review MASSWAREHOUSE DIVISIONAL REVIEW Despite trading in a difficult consumer market in South Africa, Masswarehouse delivered a solid performance with four Makro stores achieving record sales in excess of R billion for the period under review. The Division also achieved R4 billion worth of general merchandise sales and more than R2 billion in liquor, both for the first time. Despite the national retail chains continuing their expansion into the liquor market, it was a noteworthy achievement that we reported 7.8% sales growth in liquor and therefore gained market share. We also managed to reduce our average stock holding by R37 million or 3.2% of inventory, while substantially increasing in-stock service levels and rolling out forecasting and replenishment IT systems across our business. Makro stores successfully implemented a 200 FIFA World Cup-related merchandise and sales strategy, helping to drive R70 million worth of sales during the tournament. Our two stores in Bulawayo and Harare in Zimbabwe have been excluded from our financial figures since THE MAKRO FORMULA The Makro retail model is unusual in that it sells general merchandise to retail customers, while most of its food and liquor is sold to wholesale customers. This blend gives the brand a robustness that enables it to trade comfortably through most economic cycles. The big-box warehouse club format with our no-frills approach keeps costs down and provides the platform for our high-volume, low-margin sales offering of quality branded merchandise. Our customer database generated by customers Makro store cards used at the point of purchase helps us to keep track of the spending patterns of our.5 million active members and we communicate regularly with them through targeted promotional material. f Now 3 stores in SA f Operating in SA, Zimbabwe f Food/liquor/general merchandise f Liquor and general merchandise LSM 6 0 and food LSM 2 6 Insight Living Standards Measure (LSM) The South African Advertising Research Foundation (SAARF) Living Standards Measure (LSM) has become the most widely used segmentation tool in South Africa. It is a means of segmenting the South African market that cuts across race, gender, age or any other variable used to categorise people. Instead, it groups people according to their living standards. OUR VALUE PROPOSITION Makro s offerings are tailor-made to fit a variety of customer needs across all our merchandising categories. Our food offering caters to wholesale shoppers ranging from informal traders and grocery store owners to hoteliers, restaurateurs, offices and schools. Wholesale customers account for up to 75% of Makro s food sales and most shop during the week for the convenience of our wide range of good value, quality consumables. At weekends, our focus shifts to promoting good buys for retail food and grocery shoppers who can achieve substantial savings on their monthly household basket compared to other mass retail outlets. Our liquor offering also caters to both the retail and wholesale customer. Our liquor outlets, immediately adjacent to our main outlet, continue to increase their range of premium brands, especially in wine and whisky. These products are sold at a low margin to maintain and grow our share of the market. At the same time we have maintained a strong presence in beer and budget brands for liquor wholesalers looking for good value. OUR OPERATING ENVIRONMENT It was another tough year for retailers and the impact of the nationwide job losses in 2009 affected both the food and liquor side of our business. This was compounded by general merchandise experiencing recessionary trading conditions while the food category experienced high deflation. Consumer confidence improved somewhat in the second half of the financial year, partly as a result of the World Cup, and so we saw an increase in the demand for general merchandise from early 200. Operating margins came under pressure, driven by a shift towards greater promotional spending by customers, heightened competitor discounting in the market and disinflation within the food category. Faced with these trading challenges, we managed to rein in Massmart Annual Report

58 Operational Review MASSWAREHOUSE DIVISIONAL REVIEW expenses and reported expense growth of only 4.8%, well below inflation. This was despite slightly higher volumes through our stores and huge increases in electricity tariffs. Personnel costs grew just 2.8% and we managed this through tighter labour scheduling and by reducing headcount through natural attrition, without resorting to retrenchments. Operating margins contracted slightly in 200. All three major categories margins declined, with the greatest decline being in General Merchandise. The exception was our cellular business where margins improved as a result of a change in mix from contract to pre-paid business, a direct consequence of the 2009 introduction of the new Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA). The impact of the 200 FIFA World Cup changed the momentum of our sales patterns not only across obvious categories such as soccer balls and television sets, but also in food and liquor as corporate customers increased their entertainment spend during the tournament. In previous years, Makro saw sales to foreign customers from neighbouring countries grow rapidly, this trend however, slowed as a result of the stronger Rand and with economic activity declining in Zimbabwe. Highlights f General merchandise sales reach R4 billion for the first time f Improved B-BBEE rating to Level 4 contributor f Dropped stock levels and improved service levels f Four new stores to be opened in next four financial years Group contribution Massdiscounters Masswarehouse Massbuild Masscash During the year we refurbished our largest and most profitable store, Germiston. Our new store in Vanderbijlpark will open in October this year (200). FINANCIAL PERFORMANCE week 52 week 52 week 53 week 37 Sales (%) 26 Sales Rm,50.2,02.4 9,92.0 0,03.8 Trading profit before interest 3 Rm Trading profit before interest as % sales % Operating profit before interest Rm Operating profit before interest as % sales % Net finance costs Rm Trading profit before taxation 3 Rm Trading profit before taxation as % sales % Operating profit before taxation Rm Operating profit before taxation as % sales % Trading profit before taxation (%) 30 Inventories Rm,6.0,59.2,043.6 Inventory days days Net capital expenditure Rm Cash flow from operating activities Rm Number of stores Trading area m 2 8,208 7,859 7,859 Average trading area per store m 2 9,093 9,066 9,066 Number of employees 2,644 2,805 2,770 Sales per store R , ,03 762,462 Sales per m 2 R Sales per employee R000 4,350 3,958 3,578 Net capital expenditure is defined as capital expenditure less disposal proceeds. 2 The ratios have been calculated using year-end balance sheet figures. 3 Trading profit is earnings before asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements. 4 The above results exclude Makro Zimbabwe. Details can be found in note 8 on page Definitions/explanations to the ratios and terms above can be found on page Massmart Annual Report 200

59 Operational Review Sales for the year totalled R.5 billion, up 3.6% over the past year. Food and Liquor contributed 63.3% to total sales (2009: 63.6%) and General Merchandise 36.7% (2009: 36.4%). Trading profit before interest and taxation of R700.8 million was.7% lower than the prior year and grew below sales growth. Working capital management remains a strength of Makro and this year was no exception. Due to lower commercial interest rates, trading profit before taxation of R758.6 million was 5.5% lower than the prior year. The Division s resultant return on sales (profit before tax/sales) of 6.6% was very satisfactory given the difficult South African consumer environment. Capital expenditure for the year amounted to R77.5 million, down on the R02.6 million spent in This was partly due to delaying some replacement and refurbishment in recognition of the difficult business environment. Material investments during the year included R5.7 million for various store refurbishments (2009: R34. million); R.3 million on IT replacements and upgrades (2009: R9.9 million); and R6.2 million on the construction of the new Vanderbijlpark store of which only a small portion of the spend is included in 200. In addition, R4. million was spent on an Eskom Demand Side Management project to install energy-efficient lighting in all stores. Store progress Makro Opening balance 3 No store movement during the current year Total stores in *Excluding two Zimbabwean stores, deconsolidated since A reduction in closing inventory of R.8 million (0.2%) compared to June 2009 was achieved despite higher volumes and increased cost of stocks. A 20% improvement in the Stock Funding Ratio (an indicator of the level of inventory funded by trade payables) was also achieved. There was a six-day improvement in stock turns and seven-day improvement in the working capital cycle, resulting in an increase of R94.7 million in cash at year-end. TRADING PROFIT BEFORE TAX RETURN ON SALES Actual 200 Medium-term 6.6% target International benchmark Metro AG C&C 7.0% 5.0% Trading profit before tax return on sales has been calculated using profit before tax adjusted for asset impairments, the BEE IFRS 2 charge and net foreign exchange movements Makro Massmart Annual Report

60 Operational Review MASSWAREHOUSE DIVISIONAL REVIEW IMPROVING EFFICIENCIES We continue to drive process optimisation by leveraging our existing IT infrastructure and applications. An advanced SAP Forecasting and Replenishment solution that was first implemented 8 months ago, continued to be steadily rolled out across suppliers and we were able to significantly reduce stockholding in the stores while at the same time increasing in-stock service levels. During the reporting period we streamlined the in-bound supply chain, implementing a revised logistics process whereby stock ordered from suppliers was picked up at the supplier s premises or warehouse as opposed to being delivered to Makro stores by the supplier. The initiative was successfully piloted with our key sugar suppliers and will be expanded across more product categories in the coming year. When we moved to our new purpose-built head office in Sunninghill, Sandton, in April 200, we deployed the latest network and telephony infrastructure. The move to an IP-based telephony solution is in partnership with Alacatel-Lucent and Cisco. This has established a platform for future IP-based communications across Makro and the Massmart Group. We continue to refresh our technology by replacing point of sales devices across three stores towards the end of 2009, with no disruption. The new devices not only limit potential down-time, but enhance customer service and enable us to deploy more energy-efficient technologies across our stores. In order to improve pricing accuracy and enhance customer service, we successfully implemented an Electronic Shelf Edge Labelling solution at the Makro Woodmead liquor store and will look to roll it out to other stores. INVESTING IN AFRICA Our operations in Zimbabwe remain deconsolidated from our financial results. Our stores in Bulawayo and Harare are profitable but will require large investment to enable them to carry sufficient stock to grow significantly. Uncertainty around that country s proposed Indigenisation legislation has meant that we have had to delay this 78 Massmart Annual Report 200

61 Operational Review Makro Silver Lakes investment for the time being. If enacted, it appears that this legislation would force foreign-owned companies to sell a majority shareholding to indigenous Zimbabweans. We continue to look for attractive investment opportunities, including opening new Makro stores on the rest of the continent, though first and foremost we remain focused on growing in the South African market. INVESTING IN OUR HUMAN RESOURCES The retention of quality management and staff remains a priority for our division. We maintain low levels of staff turnover due to our policy of offering our staff fair and market-related remuneration, rewarding incentive schemes and consistent world-class training and development opportunities. We performed exceptionally well with our B-BBEE scorecard, improving from a Level 6 contributor at 50.4% to a Level 4 contributor with 65.6%. Our pipeline of black employees is robust, with 78% of our skilled technical staff; 5% of professionally skilled staff; 6% of our senior management; and 25% of top management being black. With staff turnover being low, one of the biggest challenges is to find suitable empowerment candidates at the top, senior and professionally qualified management levels. There are however, a number of programmes in place to develop future talent across all levels including those targeting graduates, school learners, as well as junior and senior management. During the reporting period, ten employees graduated with a Retail Management Diploma and three cadets completed their BCom degrees. We also granted loans to black wholesale customers of R4.5 million and made more than R45 million in early payments to black owned suppliers. In addition, we provided training, marketing expenses and discounts to various Banner Groups. These members meet to select products for upcoming specials and members Makro cards are loaded with details of the promotional prices. SMS alerts are sent to them when their discounts have been activated. In this way we ve helped many small entrepreneurs grow their businesses. Read more More information on the Group s investment in Human Capital can be found on page 08 Corporate Accountability Massmart Annual Report

62 Operational Review MASSWAREHOUSE DIVISIONAL REVIEW INVESTING IN OUR COMMUNITY Each Makro store sponsors CSI initiatives that help the local communities in which they operate. At a divisional level Makro continues to sponsor 500 meals a day through the African Children s Feeding Scheme which reaches children in poor communities in Soweto. We also provide food to the Centurus Trust Feeding Scheme which serves 400 meals a day to children in the farm schools around Hartebeestpoort Dam near Johannesburg. In keeping with our focus on sponsoring projects that improve education, we donated R.2 million in vouchers for 35 schools in the Excellence in Education Awards, an initiative which recognises the exceptional improvement in a school s Matric results. The vouchers can be used to buy stationery, educational aids and sports equipment. Read more More information on the Group s investment in Corporate Social Investment can be found on page 2 Corporate Accountability Makro also partners the Starfish Foundation and the Thandanani Community-based Organisation which provide support to orphaned and vulnerable children affected by HIV/Aids. The division supports the Vacation Schools initiative, which is run by the Tomorrow Trust. This project provides mentors as well as educational and community support to students from vulnerable households to bolster their secondary studies. INVESTING IN OUR ENVIRONMENT Building our new Makro store in Vanderbijlpark has given us the opportunity to install the latest energy-saving technologies. Most exciting is the store s 00% green refrigeration plant. This will not only consume just half of the energy required by traditional refrigeration processes, but will also use sophisticated technology to reclaim all heat generated by the refrigeration units to heat hot water geysers. The building will also utilise high efficiency freezer glass doors and automated sliding doors to reduce the energy needed to keep our products cold by 70%, as well as using natural lighting for the trading floor, saving approximately 48,000Kwh per month. Motion detectors activating the overhead lighting will also be installed in all offices. In conjunction with Fujitsu IT Company, Makro E-waste container hubs at all Makro sites have been widely used by the public. The containers provide a way for customers to safely dispose of their electronic waste such as laptops, desktops, printers, monitors and cell phones. These are then reused, recycled or deployed, preventing hundreds of kilograms of electronic waste ending up in the country s landfills. Read more More information on the Group s investment in Climate Change and Environment can be found on page 0 Corporate Accountability We were also the first retailer in SA to embark on a programme with Eskom where rebates were offered to customers who exchanged their old electric cooking appliances for gas cookers. Eskom is also currently undertaking a light bulb exchange programme at various Makro stores. We now offer three recycled stationery brands under the brands Remarkable, Renewed and Recycled. These are available in the stationery department as part of our Eco-wise offering. Wherever possible, our merchants are requested to support products that are green, such as ensuring that the wood used by suppliers is from sustainable forests and is certified by the Forest Stewardship Council (FSC). As part of our sustainability drive, we embarked on a store-wide IT infrastructure and server consolidation project utilising the latest virtualisation technology. This helped us to significantly reduce the infrastructure required to operate stores successfully and to reduce each store s carbon footprint. The approach will now be adopted for all future store rollouts and technology upgrades. 80 Massmart Annual Report 200

63 Operational Review RISKS AND REWARDS The South African economic environment remains uncertain and volatile. In this environment, knee-jerk responses by our competitors and suppliers to slash prices can disrupt commercial activity. We mitigate this risk by sticking to our model of driving volumes off a low-cost structure. Any future weakening in the value of the Rand will lead to higher inflation in food and general merchandise, and therefore possibly higher interest rates too, and so we remain focused on managing our costs and pricing accordingly. Some South African provinces have still not finalised their liquor regulations and our attorneys remain engaged with the authorities to address licence-related issues. In order to meet the requirements of the forthcoming Consumer Protection Act, training sessions were held to help educate staff and vendors about the new regulations. All our buyers and merchants have attended and a website has been created where vendors can download quality assurance certificates. We also appointed a new ethics officer during the reporting period who manages all ethics-related calls to our tip-off line. Most of the 64 calls received were related to HR issues and almost all calls suggesting potential fraud or misappropriation were investigated and shown to lack foundation. During the year we also designed, implemented and embedded a Makro Risk Framework to provide a structure within which risk management, risk reporting, compliance, governance and internal control self assessment can be managed and directed. FUTURE OUTLOOK Our strategy at Makro remains one of securing a greater share of our customers discretionary spending. We do this by offering more exclusive deals and focusing on everyday low prices. By being 7% 8% cheaper on a basket of goods and not limiting quantities, we are able to reduce the overall cost of a monthly shop for our customers, making sure customers see value in a bulk buy and that they keep coming back. Makro s new store in Vanderbijlpark represents another excellent growth opportunity as we will be able to access an entirely new customer base. Makro will also utilise the buying power of our commercial clients. By supplying them with a wider range of products, from their office equipment right down to their tea and coffee, and by expanding our service delivery, we plan to drive mutual growth with our top suppliers and business customers over the coming year. Masswarehouse directorate Grant Pattison Chairman Kevin Vyvyan-Day Chief Executive Bruce Cayzer Food Director Guy Hayward Non-executive Director Garry Hendry Liquor Director Doug Jones Financial Director Derick Kalan General Merchandise Director Gert Lourens Operations Director Chris Nezar Marketing Director Pieter Schoeman IT Director Llewellyn Steeneveldt Non-executive Director Ilan Zwarenstein Non-executive Director Massmart Annual Report 200 8

64 Operational Review MASSBUILD DIVISIONAL REVIEW Massbuild delivered solid sales growth over the reporting period, despite the national Hardware, Paint and Glass categories experiencing a negative sales growth year. Our three brands, Builders Warehouse, Builders Express and Builders Trade Depot, operating in different market segments, protected our business from the difficult economic conditions, which more severely impacted many of our competitors. Builders Warehouse and Builders Express reported an exceptional performance, with strong comparable sales growth which suggests large market share gains. Due to negative comparable sales growth however, Builders Trade Depot reported lower profit than the prior year which was representative of the lack of business opportunities available to building contractors generally. We introduced our new Builders Warehouse store format consisting of 4,000m² of retail space and 4,000m² of yard space in Bedworth Park, Vanderbijlpark. Although smaller than traditional Builders Warehouse stores, these stores stock the entire range of our bigger stores and we expect them to have a higher return on sales per square metre. Massbuild also opened a Builders Trade Depot store in Ballito, KwaZulu-Natal and acquired three ex-mica stores (two in KwaZulu-Natal and one in Norwood, Gauteng). We have rebranded these as Builders Express stores and expect them to trade well in their chosen markets. We plan to open three new Builders Warehouse stores over the coming financial year, including our first store in KwaZulu-Natal at Riverhorse, as well as new format stores in Witbank and Woodlands in Pretoria. THE MASSBUILD BRANDS Massbuild operates three complementary brands: Builders Warehouse, which operates large DIY and home improvement stores in major urban areas; Builders Express, a chain of smaller neighbourhood home and garden improvement stores; and Builders Trade Depot, a chain of building contractor outlets located in industrial sites in peri-urban and urban areas. Massmart initially acquired five Builders Warehouse stores operating in Johannesburg and Pretoria in 2003, bought and rebranded three De La Rey stores in the Western Cape in 2005 and now operates 24 Builders Warehouse stores in seven provinces. Builders Warehouse follows the big-box or warehouse retail format, offering home owners, DIY enthusiasts and building and maintenance contractors a comprehensive range of competitively priced products under one roof, with a large garden centre display and builders supplies yard. The format is unique in that it is the only home improvement warehouse in the country. Builders Express was formed in 2005 when Massmart bought and rebranded 4 Servistar stores operating in the Eastern Cape and KwaZulu-Natal. Massbuild now operates 2 home and garden Builders Express stores in four provinces that cater to home owners. They have a strong focus on convenient locations, aesthetically pleasing displays, customer-friendly store layout and personalised service and advice. Builders Express is integrated into Builders Warehouse with a single management structure. Builders Trade Depot was created when 34 Federated Timber stores were acquired and rebranded in Seven smaller stores have since been closed and, after the store conversions and acquisitions to date, Builders Trade Depot now operates 3 outlets catering mostly for medium- to large-sized contractors and tradesmen engaged in building, maintenance and renovation projects. It also focuses on servicing the needs of construction entrepreneurs who need trade credit, telephonic ordering and want bulk goods delivered from low-cost outlets. f Five Builders Warehouse stores acquired in February 2003 f Three De La Rey stores acquired in June 2005, rebranded to Builders Warehouse f Now 24 stores f Operating in SA f Home improvement supplies/tools/ building materials f LSM 5 0 f 4 Servistar stores acquired in June 2005, rebranded to Builders Express f Now 2 stores f Operating in SA f Home improvement supplies/tools/ building materials f LSM 5 0 f 34 Federated Timbers stores acquired in June 2005, rebranded to Builders Trade Depot f Now 3 stores f Operating in SA, Mozambique f Building materials/tools f LSM 4 8 Insight Living Standards Measure (LSM) The South African Advertising Research Foundation (SAARF) Living Standards Measure (LSM) has become the most widely used segmentation tool in South Africa. It is a means of segmenting the South African market that cuts across race, gender, age or any other variable used to categorise people. Instead, it groups people according to their living standards. Massmart Annual Report

65 Operational Review MASSBUILD DIVISIONAL REVIEW OUR VALUE PROPOSITION Builders Warehouse and Builders Express are both pioneers in introducing retail principles to the South African DIY and home improvement sector and attaching garden centres to hardware stores. The clean, friendly and uncluttered look and feel of our stores offer customers a shopping experience not traditionally associated with the industry. Our new stores aim to introduce retail theatre where lighting, colour and ambience enhance the shopping experience, signage is clean and bold, and product displays are enticing. Highlights f Double digit sales growth achieved in difficult market f Launched new store format f Acquired Kangela in Mozambique f Branding opportunities maximised Several of our private brands, including Mastercraft and Builders Pride, have become household names, with our customers assured of stringent quality control and best supplier practices. During the year private label contributed more than 8% to sales at higher margins, a trend that we expect to continue. In both the residential and commercial property markets, Builders Trade Depot s value proposition to customers is our ability to consistently deliver an appropriate, professional range at highly competitive basket prices, combined with exceptional contractor support services in a relationship-driven environment. OUR OPERATING ENVIRONMENT Despite a weak residential property market and negative growth in national Building Plans Passed and Buildings Completed data, Builders Warehouse and Builders Express managed to readily grow sales and to capture significant market share, particularly in the additions and alterations market. While growth of new housing developments remained sluggish, we saw an increase in smaller residential repair- and alterations-oriented projects. We believe that this was indicative of consumers spending more time at home and wanting to improve the look of their homes. Given the difficult environment, our product solution and format gave us the ability to remain relevant to our customers as we continued to provide a one-stop, project-complete product offering. Our wide product offering means we remain relevant to customers through their life stages whether they are graduates decorating their first home, a married couple tackling home improvement projects or retirees scaling down. During the year we managed to take market share from competitors, especially independent operators, who found it difficult to optimally manage stock levels and cash flow during the recession. We also actively campaigned in the contractor market and were able to gain new customers, despite limited work availability, as many contractors changed their focus to maintenance work. Group contribution Massdiscounters Masswarehouse Massbuild Masscash 3 Sales (%) Historically we focused on advertising our brands, but over the past year we began to build brand associations across logical product ranges. Because our stores straddle all aspects of home improvement and construction, from garden tools to plumbing and electrical products, we are able to create common categories and project-complete ranges across our different businesses. To maintain our price perception we operate an everyday low pricing strategy, which applies to more than 200 key items through our stores. We undertake regular shopouts of our competitors and communicate differences in prices on a basket of goods to our merchants and buyers. While this information is analysed centrally, we give our store managers flexibility to roll out price cuts so that they are able to offer their customers competitive pricing in their particular store. Although our Builders Warehouse and Builders Express stores target customers in the LSM 5 0 range, our Builders Trade Depot stores target a wider target market as they supply contractors who build houses in the wealthier income bands, as well as affordable housing. The successive interest rate decreases over the past two years have meant that our customers do have more money in their pockets, although generally debt levels remain high. In a tight economy, customers look for stricter cost management on building projects and are able to do this by better managing material and labour costs. By trading in convenient locations and opening our doors seven days a week, we offer a convenient way for customers to control their cost of materials. During the past year, we saw sales in most categories increase, with paint particularly delivering excellent growth across all the Builders brands. 84 Massmart Annual Report Trading profit before taxation (%) 34

66 Operational Review Apart from developing the new regional store format, we will look to establish stores which are conveniently situated for customers to make smaller purchases. These stores amongst the roofs will be positioned as neighbourhood hardware stores under the Builders Express brand. FINANCIAL PERFORMANCE week 52 week 52 week 53 week Sales Rm 6, , , ,662.9 Trading profit before interest 3 Rm Trading profit before interest as % sales % Operating profit before interest Rm Operating profit before interest as % sales % Net finance costs Rm Trading profit before taxation 3 Rm Trading profit before taxation as % sales % Operating profit before taxation Rm Operating profit before taxation as % sales % Inventories Rm Inventory days days Net capital expenditure Rm Cash flow from operating activities Rm Number of stores Trading area m 2 384, , ,388 Average trading area per store m 2 5,06 5,036 5,065 Number of employees 6,409 6,074 6,625 Sales per store R000 80,495 78,938 8,809 Sales per m 2 R Sales per employee R Store progress Builders Warehouse Opening balance 22 Stores opened 2 Bedworth Park (Gauteng) Kempton Park (Gauteng) Total stores in Builders Express Opening balance 7 Store opened Stellenbosch (Western Cape) Stores acquired 3 Shelley Beach (KwaZulu-Natal) Umhlanga (KwaZulu-Natal) Norwood (Gauteng) Total stores in Builders Trade Depot Opening balance 32 Store opened Ballito (KwaZulu-Natal) Store acquired Willowvale (Eastern Cape) Stores closed (3) Durban (KwaZulu-Natal) Witbank (Mpumalanga) Somerset West (Western Cape) Total stores in Net capital expenditure is defined as capital expenditure less disposal proceeds. 2 The ratios have been calculated using year-end balance sheet figures. 3 Trading profit is earnings before asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements. 4 Definitions/explanations to the ratios and terms above can be found on page 47. Builders Warehouse Builders Trade Depot Builders Express Massmart Annual Report

67 Operational Review MASSBUILD DIVISIONAL REVIEW The Division reported total sales of R6.4 billion, representing growth of 3.6%. Comparable sales increased by 3.4% and annual sales inflation was estimated at.8%. Trading profit before interest and taxation of R277.3 million was 24.6% higher than the prior year. Despite working capital management improving, lower commercial interest rates reduced interest received and so trading profit before taxation of R308.5 million was 4.2% above the prior year. In Builders Warehouse, total stock increased by.8% from R565.9 million to R632.9 million mainly as a result of sales growth and the two new stores. Capital expenditure of R45.9 million is consistent with the prior year (R49.7 million) and arose by opening two new stores, refurbishing existing stores and installing CCTV security at selected sites. TRADING PROFIT BEFORE TAX RETURN ON SALES Actual 200 Medium-term 4.8% target International benchmark Home Depot/B&Q 7.0% to 9.0% 0.0% Trading profit before tax return on sales has been calculated using profit before tax adjusted for asset impairments, the BEE IFRS 2 charge and net foreign exchange movements. IMPROVING EFFICIENCIES We continued our aggressive management of costs at store level, from managing our resources more efficiently to better staff training and improving productivity levels. During the year we also embarked on a process to improve supply chain efficiencies and appointed independent advisors to assist with the development of our supply chain strategy. Much of the improvement in stock profile, stock availability and inventory reduction can be attributed to the 2009 implementation of the SAP auto-replenishment software. With approximately 70% of our stock now auto-replenished centrally in 86 Massmart Annual Report 200

68 Operational Review Builders Warehouse Kempton Park Builders Trade Soweto Builders Warehouse, Builders Express, and auto-replenishment trials in Builders Trade Depot, we will have more of the right stock available at the right place, at the right time to meet our customers requirements. INVESTING IN OUR HUMAN RESOURCES A number of programmes were implemented to improve staff morale, productivity and to build a positive culture amongst our staff. To encourage employees to work as a team, be goal driven and to drive efficiencies, we introduced a team building exercise called Home Team Heroes to take advantage of the hype generated around the 200 FIFA World Cup. Staff members were assessed on a range of measures including customer service, respect for their colleagues and timeous attendance to all outstanding issues and stood the chance of winning a car. Teams competed at regional level, linking across the business. As a result of this, and other initiatives, our annual staff turnover has dropped from 7% to 2% over the past year in Builders Warehouse and from 3% to 26% in Builders Express. Our performance on our independently verified B-BBEE scorecard for Builders Warehouse and Builders Express combined, moved from 40.2% to 50.7%, securing our position as a Level 5 contributor from Level 7. Builders Trade Depot achieved 46.% during the same period, becoming a Level 6 contributor. We have also been pushing our suppliers to improve their B-BBEE credentials, driving transformation into our supply chain. Read more More information on the Group s investment in Human Capital can be found on page 08 Corporate Accountability INVESTING IN OUR COMMUNITY Massbuild provides support to a range of corporate social investment initiatives, which focus on developing enterprises and improving education in disadvantaged communities. Builders Warehouse continues to sponsor vegetable tunnels, and erected 90 tunnels that reach 30 disadvantaged schools across the country. These enable schools to grow vegetables such as spinach and tomatoes to feed less privileged children. Builders Warehouse continues its support of the Hot Dog Café and The Coffee Stop concepts, where we sponsor ambitious talented, but unemployed, youngsters, to start their own businesses. This year one Coffee Stop was opened and 6 Hot Dog Café franchises opened at selected Builders Warehouse and Builders Express stores. Read more More information on the Group s investment in Corporate Social Investment can be found on page 2 Corporate Accountability Massmart Annual Report

69 Operational Review MASSBUILD DIVISIONAL REVIEW We embarked on the fifth consecutive year of partnership with Men on the Side of the Road and Primedia to provide training to 50 men and women focusing on skills development aligned to our industry such as painting, tiling and bricklaying. INVESTING IN OUR ENVIRONMENT Through our Eco-wise range we help to empower our customers to better manage their water and electricity usage. We provide a complete offering from solar geysers, to water tanks for rainwater collection to enable them to reduce their carbon footprint and impact on the environment. Our stores continue to promote energy-efficient and green technologies as part of our environmental programme and buyers and merchants engage proactively with suppliers to determine which of their products have garnered independent environmental endorsements. These endorsements indicate to consumers that the products comply with a published set of environmental criteria. Sales of Eco-wise products, which include energy-saving light bulbs, continue to grow. Our new store designs make use of energy-efficient technologies including innovative roofing panels that make use of natural lighting. This has been implemented in the new Builders Warehouse Bedworth Park store and the new Builders Trade Depot Ballito store. It is intended to implement this process in the new Woodlands and Witbank Builders Warehouse stores with an anticipated decline in electricity usage of 0,000kWa/month. This roll-out will continue in Builders Warehouse over the next three to four years, and Builders Trade Depot stores will be investigated for a similar rollout. Read more More information on the Group s investment in Climate Change and Environment can be found on page 0 Corporate Accountability 9 Builders Warehouse stores with adjacent garden centres are fitted with water tanks to harvest rainwater, which we use to water our nurseries. In Builders Express, where possible a smaller system will be rolled out in 20, whilst this process is still being investigated in the Builders Trade Depot stores. We also started to provide battery disposal units at some of our Builders Warehouse stores. During the coming year we will expand this initiative so that customers can also dispose of fluorescent tubes and power tool batteries. We hope next to provide facilities that enable our customers to safely dispose of insecticide bottles. OPPORTUNITIES IN AFRICA Limited competition in the home improvement, DIY and building contractor markets in Africa make the continent attractive from a long-term expansion perspective. Builders Trade Depot acquired 3 Kangela stores in Mozambique during the reporting period and we will look to improve trading in the existing stores and to open more stores in the coming years. In early 200 in Namibia, we signed a deal to purchase Pupkewitz Megabuild, a Windhoek-based business with 6 stores around the country. This transaction is still conditional upon the Namibian authorities approval. Builders Warehouse stores in Botswana and Zambia are also in the pipeline sites have been established and plans are being finalised. RISKS AND REWARDS General stagnation in the national Hardware, Paint and Glass categories as well as a slowdown in new building plans, buy-to-let property purchases, and delays in government s affordable housing programme could negatively affect Massbuild s business. Apart from benefiting from market share gains, we are also well positioned to take advantage of the growth in the additions and alterations business, which we believe, will shield our business. 88 Massmart Annual Report 200

70 Operational Review Builders Express Robindale, Randburg We embarked on a feedback survey using the latest cell phone technology, which included interviewing 900 consumers and employees. We also held focus groups with particular customer groups, such as plumbers and electricians, to determine what they wanted to see in our stores. The process yielded useful information about our customers buying patterns and shopping experiences. We plan to use this to change our in-store processes to better meet our customers requirements and expect this to inform our marketing strategy over the next few years. We make every effort to ensure that we are 00% compliant with the Occupational Health and Safety Act. Nearly half of our stores store bulk material on high racks and during the year an unfortunate incident occurred where a customer was injured while shopping at one of our stores. We arranged for treatment at a private clinic and provided compensation as well as an ex-gratia payment for her pain and suffering. As with many businesses in South Africa, we face the risk of armed robberies aimed at our cash, especially during the Festive season. We have introduced drop safes into all our stores and outsourced cash management and collection to a third party to protect our stores from being targeted. FUTURE OUTLOOK We expect some improvement in the South African residential housing and commercial sector, with continued growth in the additions and alterations market, as well as an increase in demand for affordable housing, to underpin sales going forward. The energyefficient home improvement market is also set to drive sales, as consumers struggle to manage increasing electricity costs. Longer term, our focus remains on creating an enjoyable shopping experience for our customers, to build consumer loyalty across all sectors and to move closer to our strategy of being the number one home improvement and building materials business in southern Africa. Massbuild directorate Grant Pattison Chairman Llewellyn Walters Chief Executive and Managing Director (Builders Warehouse) Madeline Chalmers Supply Chain Director Thashmi Doorasamy Human Resources Director Neville Hatfield Merchandise Director Guy Hayward Non-executive Director Chris Lourens Operations Director Alex Rymaszewski Store Development Director André Steyn Director (Builders Express) Andries Strydom Director (Builders Trade Depot) Chris Tugman IT Director Simon White Financial Director Ilan Zwarenstein Non-executive Director Massmart Annual Report

71 Operational Review MASSCASH DIVISIONAL REVIEW For the year under review, Masscash continued to outperform its wholesale competitors despite the effect of very low food inflation and the impact of the South African job losses in 2009 which affected our core consumer market s spending power. We made a number of acquisitions in support of our retail strategy of offering customers high quality and affordable products in the most convenient locations. To this end, we bought the remaining 49% interest in Cambridge Food, a controlling interest in Sunshine supermarkets and a controlling interest in Astor, which comprises a combination of retail and wholesale outlets. In addition to these acquisitions, we opened three new retail stores during the year, two Astor stores in Soweto, Gauteng, and one Cambridge store in KwaMashu, KwaZulu-Natal. All retail stores will be rebranded under the Cambridge Food brand by the end of the next financial year. We also bought controlling interests in DF Scott, Finro and Mikeva all wholesale businesses operating in the Eastern and Western Cape. Kawena wholesales food in Mozambique and this acquisition is part of our intent to grow a wholesale and retail footprint into sub-saharan Africa, starting with those countries closest to South Africa. f 4 CCW stores acquired in June 998 f 22 Brown and Weirs stores acquired in July 200 f Two chains combined under CBW format from July 200 f Now 9 stores f Operating in SA, Botswana, Lesotho, Mozambique, Namibia, Swaziland f Food/liquor/groceries/ethnic cosmetics f LSM 2 6 f Six Jumbo stores acquired in April 200 f Now six stores f Operating in SA f Food/groceries/ethnic cosmetics f LSM 2 6 We sold the cellular contract base of CellShack as we believe it did not fit the Masscash core business model. THE MASSCASH BRANDS Masscash consists of wholesale food and cosmetics business interests as well as retail outlets, all of which target the lower LSM groups. Our Wholesale Division consists of CBW, Jumbo Cash & Carry, and Shield as well as a number of independent wholesalers operating under their own brands. Our recently formed retail division consists of the Thaba Cash & Carry, Sunshine, Cambridge and Astor brands. CBW wholesales food, liquor, groceries and cosmetics in bulk to independent general dealers, government feeding schemes, franchise members, small traders and hawkers in peri-urban and rural areas within southern Africa. Jumbo sells mainly cosmetics, toiletries and hair-care products to individual customers and independent general dealers. Shield is a voluntary buying association that buys products in bulk on behalf of 456 members who own wholesale or retail food businesses in South Africa, Botswana, Namibia and Swaziland. We also manage the brands of a number of our wholesale customers. At the lowest end of the market, we provide marketing support such as supplying signage and leaflets to spaza shop and shebeen owners through our Banner Group initiative. Masscash owns the rights to these brands and logos. We offer wholesale customers with more formal operations the ability to trade under national retail brands such as Saverite, Multisave, Powersave and Liquorland. Our marketing team offers wide-ranging support to these supermarkets and bottle stores, assisting owners with marketing initiatives such as designing of leaflets, signage and implementing national television and radio advertising campaigns. f 378 members acquired March 992 f Now 456 members and 57 outlets f Operating in SA, Botswana, Lesotho, Namibia, Swaziland f Food/groceries f LSM 2 6 Insight Living Standards Measure (LSM) The South African Advertising Research Foundation (SAARF) Living Standards Measure (LSM) has become the most widely used segmentation tool in South Africa. It is a means of segmenting the South African market that cuts across race, gender, age or any other variable used to categorise people. Instead, it groups people according to their living standards. Massmart Annual Report 200 9

72 Operational Review MASSCASH DIVISIONAL REVIEW On the retail side, the three-store Thaba Cash & Carry was acquired in 2007 as part of our strategy of developing a model to serve wholesale and retail customers in the same store. Cambridge Food, with six stores, was acquired in 2008, while Top Spot and two Sunshine stores were acquired in July Service departments, made up of an on-site bakery, butchery and fresh fruit and vegetable offering, is an important component of this retail offering. We are in the process of consolidating all 20 of our retail outlets under the Cambridge brand. Highlights f Retail offering expanded f Focused on three key regions Developing a single national brand f Wholesale division-wide full suite IT system rolled out f Kawena in Mozambique acquired OUR VALUE PROPOSITION All our stores apply the philosophy of supplying the right range of products at competitive prices to low- to middle-income wholesale customers. We keep costs down by employing a no-frills cash and carry warehouse format, coupled with basic distribution centres that supply our private label and important general merchandise ranges. Our private label food brands, Econo and Heritage, offer our customers exceptional value and the assurance of stringent quality and safety controls. Our retail stores are well located, close to high traffic commuter nodes, and offer the best quality at affordable prices. OPERATING ENVIRONMENT An estimated one million jobs were lost in South Africa in 2009 as a result of the global recession, affecting not only our customer base which is made up mainly of traders, but in turn their customers. This, coupled with sales deflation of 0.6% which included deflation in commodities such as oil, rice and maize, resulted in a decline in profitability as expense inflation was closer to 7%. Group contribution Massdiscounters Masswarehouse Massbuild Masscash 26 The underlying causes of commodity deflation include volatility of agriculture supplies driven by global warming, bio-fuels, extreme climatic conditions and the stronger Rand. A strengthening Rand typically reduces the price of imported categories such as rice and oil. In addition, the record South African maize crop has seen the price of this staple food fall from R,700/ton to R,00 by June 200. The tightening of the credit market did not impact our business as much as the formal retailers as our customers are generally less credit-sensitive. Many of our customers rely on social grants to fund their purchases and government s increased expenditure on grants from 3.2% of South Africa s Gross Domestic Product to 3.5% was therefore welcomed. Over the long term we face increased competition in our chosen markets, with the major retail chains targeting the lower LSM sector more aggressively. However, we believe that to date they have been less successful in developing the appropriate smaller-store format for this market and so it continues to be dominated by independent retailers and informal traders who typically have a lower cost base and an owner-manager mindset. Masscash continues to service these independent retailers efficiently through our cash and carry and voluntary buying group formats Sales (%) Trading profit before taxation (%) Our retail offering made good progress, assisted by the decision to bring all retail stores under the Cambridge brand. A more contemporary design to appeal to our customers was introduced and the new look and feel will be rolled out first to all new stores and then to older acquired ones in a refurbishment programme. 34 Fresh departments, offering meat as well as fruit and vegetables, have proven very successful in enticing customers and optimising trading margin. Our customers depend on public transport and therefore shop for dry groceries and perishable products several times a week, and so we have dedicated more trading space in our Cambridge stores to perishable goods. In addition, our private labels programme reported 25% sales growth, with the new lines (fish and chicken) performing particularly well. 92 Massmart Annual Report 200

73 Operational Review FINANCIAL PERFORMANCE week 52 week 52 week 53 week Sales Rm 7,48.0 5,25.7 3, ,60.4 Trading profit before interest 3 Rm Trading profit before interest as % sales % Operating profit before interest Rm Operating profit before interest as % sales % Net finance costs Rm Trading profit before taxation 3 Rm Trading profit before taxation as % sales % Operating profit before taxation Rm Operating profit before taxation as % sales % Inventories Rm,354.4,077.6,094.5 Inventory days days Net capital expenditure Rm Cash flow from operating activities Rm Number of stores Trading area m 2 32,20 270, ,007 Average trading area per store m 2 3,3 3,422 3,479 Number of employees 8,395 5,93 4,893 Sales per store R000 48,927 63,047 58,023 Sales per m 2 R Sales per employee R000 2,075 2,565 2,729 Store progress CBW Opening balance 73 Stores opened 2 Durban (KwaZulu-Natal) Isipingo (KwaZulu-Natal) Stores acquired 6 Port Elizabeth (Eastern Cape) Willowvale (Eastern Cape) Roodepoort (Gauteng) Roodepoort (Gauteng) Newtown (Gauteng) Soweto (Gauteng) Soweto (Gauteng) Johannesburg CBD (Gauteng) Johannesburg CBD (Gauteng) Pretoria (Gauteng) Mokopane (Limpopo) Tzaneen (Limpopo) Piet Retief (Mpumalanga) George (Western Cape) Mossel Bay (Western Cape) Manzini (Swaziland) Total stores in Jumbo Opening balance 6 No store movement during the current year Total stores in Net capital expenditure is defined as capital expenditure less disposal proceeds. 2 The ratios have been calculated using year-end balance sheet figures. 3 Trading profit is earnings before asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements. 4 Shield is shown as average sales to each independently owned outlet (ie this represents only a portion of the outlet s sales). 5 Definitions/explanations to the ratios and terms above can be found on page CBW Jumbo Massmart Annual Report

74 Operational Review MASSCASH DIVISIONAL REVIEW The Division reported total sales of R7.4 billion, representing growth of 4.5%. Comparable sales growth was.% and our annual sales deflation was 0.6%. Acquisitions during the year caused the significantly higher total, compared to comparable, sales growth. Trading profit before interest and taxation of R483.6 million was 0.4% higher than the prior year. This growth was achieved by a steady sales performance, boosted by maintaining our low-cost operating structure, the positive effect of the higher net margin retail food stores and the loss in the prior year of the very low margin cigarette sales. Net interest received declined, despite better working capital management, due to lower commercial interest rates. Debtors remain well controlled and stock levels increased by 25.7% to R.4 billion representing 30.9 days. Total capital expenditure of R98.3 million for the year was 8.6% lower than the prior year s R20.8 million. In addition, the total amount invested in acquisitions totalled R54.0 million. TRADING PROFIT BEFORE TAX RETURN ON SALES Actual 200 Medium-term 2.9% target International benchmark Makro South America 3.0% 3.0% Trading profit before tax return on sales has been calculated using profit before tax adjusted for asset impairments, the BEE IFRS 2 charge and net foreign exchange movements. As wholesale food volumes tend to be constant, the Division s sales performance is materially affected by the level of sales inflation. As inflations slows or moves into deflation, the Division s ability to hold its trading profit margin comes under pressure and, with deflation, will even reduce. As the higher net margin Retail Cash and Carry stores gain momentum however, the target profit margin may be increased above 3.0%. 94 Massmart Annual Report 200

75 Operational Review Cambridge KwaZulu-Natal Jumbo Crown Mines IMPROVING EFFICIENCIES Masscash serves its customers through low-cost stores located in areas which are easily accessible. Our low-cost base is essential for maintaining our competitive pricing. To support this, our management structure is decentralised, but with centralised support in terms of accounting systems, supplier relations and business management. This facilitates a marketing strategy where ranges, pricing and promotional support, as well as trade credit, are specifically tailored for the individual requirements of local customers and markets. A flexible purchasing strategy coupled with the leveraging of Group volumes facilitates the procurement of products at the lowest price. The store-by-store rollout of our point-of-sale IT system, Arch Retail, continued during the financial year and will significantly enhance the use of management information and fundamentally improve the way we do business. We began rolling out the Arch Retail Management System in 2009 and 70 stores now have access to it. The system allows for a common masterfile of stock data across the Division and seamlessly integrates with the Division s accounting and finance functions. Through the stock masterfile, the new system provides our buyers with powerful reporting functionality, thereby improving the quality of their information when assessing sales trends and negotiating with suppliers. INVESTING IN OUR HUMAN RESOURCES We continued to invest significantly in up-skilling and training our staff. Employees attended courses ranging from soft-skills development to diversity awareness and health and safety. Adult Basic Education and Training remains an ongoing offering for our employees and we granted 26 learnerships to black staff. We have adopted a multi-faceted approach to transforming our business, including aligning our training interventions with succession planning and our talent management strategy. We have an ownership mentality across our national, regional and store leadership teams, all of whom are empowered to trade and who are incentivised through profit sharing at various levels. Minority partners that previously sold a majority share in Read more More information on the Group s investment in Human Capital can be found on page 08 Corporate Accountability Massmart Annual Report

76 Operational Review MASSCASH DIVISIONAL REVIEW their businesses to Masscash are accommodated and, for the most part, continue to operate successfully within the Division, thus retaining important entrepreneurial talent in the business. Masscash achieved a Level 5 B-BBEE score at 59.% from Level 6 at 50.3%, audited by Empowerdex, driven higher mainly by improvements in skills development. Finding appropriate equity candidates for senior management positions remains a challenge, but with some progress being made this year. For several years we have implemented a staff HIV/Aids programme, with the objective of encouraging our employees to test their HIV status and thereafter offering free counselling and antiretroviral therapy. Approximately 233 of our employees now access ARV treatment through the Company s treatment programme. In 2009, 859 staff underwent voluntary counselling and testing. Masscash trading hours do not require that we employ a large number of non-permanent staff and as a result concerns around labour broking do not affect our business. INVESTING IN OUR COMMUNITIES Masscash supports projects that focus on building food security and improving educational outcomes for disadvantaged students. Thousands of children continue to receive a balanced meal at container kitchens sponsored by Masscash. During the reporting period we donated 6 more kitchens to schools throughout the country, adding to the 7 already in place. Each container costs about R67,000 and a Masscash store then adopts a container and provides food on an ongoing basis for volunteers to prepare and distribute to school children. At Kromhoek, we sponsored grandmothers who support their orphaned grandchildren as well as donating R2,000 to grandmothers in the Valley of,000 Hills who also take care of Aids orphans. Read more More information on the Group s investment in Corporate Social Investment can be found on page 2 Corporate Accountability Masscash provided ongoing support to the Dinelei Crèche, the Joshuas and other projects in the inner city of Johannesburg. During the reporting period we trained 30 home-based crèche principals through the African Self Help Group Soweto. We also donated more than R500,000 to the Wildlands Trust in support of their Treepreneur project which provides food in exchange for indigenous tress to reforest areas and create carbon credits. Staff members volunteer their time on several projects including an Easter drive to collect children s books from staff to donate to the Baragwanath children s ward. Our employees partnered Mpumelelo School, one of the poorest schools in Gauteng, launching a feeding scheme and supplying computers for disadvantaged learners. Masscash staff members are now working towards setting up a school library on the premises. OPPORTUNITIES IN AFRICA For several years we have had a presence in Namibia and Botswana and, as a first step into Portuguese-speaking Africa, we acquired the Kawena group of stores in Mozambique. We intend to use this as a base to develop a wholesale and retail footprint in the rest of that country. Our operations in Botswana experienced a difficult year as the political and economic situation in Zimbabwe normalised and so cross-border demand decreased. Masscash intends to expand into the rest of Africa once we have bedded down our existing operations. 96 Massmart Annual Report 200

77 Operational Review Cambridge Kwa Mashu KwaZulu-Natal RISKS AND REWARDS Continued high unemployment, deflation particularly in commodities, and the risk of a double-dip recession could affect the discretionary spend of our customers through further job losses. We also face increasing competition from retailers penetrating the lower LSM groups. We are confident that the Masscash model which is underpinned by a low-cost philosophy will continue to play a significant role in the food supply chain. Service departments and perishable categories account for an increasingly large part of our customers grocery baskets. This presents an opportunity for us to grow in these areas and to build a business that differentiates itself from existing national players. A single, powerful national retail brand will also provide significant benefits. Uncertainty around South African provincial liquor legislation continues to present a challenge, with several stores battling to get licences processed. Periodic xenophobia also remains a concern as many of our customers are foreign nationals. FUTURE OUTLOOK The LSM 2 6 market remains highly fragmented but Masscash is well positioned to offer new retail formats and to expand our current footprint to better supply food, cosmetics, liquor, cigarettes and cellular to lower-end consumers. Future growth will focus on building our Retail Division, expanding the wholesale range to include meat and fruit and vegetables and growing the franchise and Banner Group formats. Masscash directorate Grant Pattison Chairman Robin Wright Chief Executive Jane Bruyns Human Resources Director Jay Currie Retail Director Neville Dunn Operations Director Guy Hayward Non-executive Director Dino Holmes Financial Director Pearl Maphoshe Non-executive Director Michael Marshall Business Systems & Process Director Llewellyn Steeneveldt Non-executive Director Ilan Zwarenstein Non-executive Director Massmart Annual Report