CONTENTS STAKEHOLDERS GUIDE

Transcription

1 2010 ANNUAL REPORT

2 CONTENTS MASSMART AT A GLANCE 1 Financial Highlights 1 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 12 Our Investment Proposition 14 Executive Directors 15 Non-executive Directors 16 Executive Committee 18 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 100 Introduction 103 Sustainable Development Beliefs 104 Broad-based Black Economic Empowerment 106 Human Capital 108 Climate Change and Environment 110 Corporate Social Investment 112 CORPORATE GOVERNANCE 114 Corporate Governance 117 Audit Committee 123 Remuneration of Directors and Executives 126 Risk 130 Compliance, Transparency and Accountability 136 Investor Relations 139 King III Question and Answer 141 GROUP FINANCIAL STATEMENTS 150 Approval of the Annual Financial Statements 153 Directors Report 154 Income Statement 157 Statement of Comprehensive Income 158 Statement of Financial Position 159 Statement of Cash Flows 160 Statement of Changes in Equity 161 Notes to the Annual Financial Statements 162 COMPANY FINANCIAL STATEMENTS 226 Income Statement 229 Statement of Comprehensive Income 229 Statement of Financial Position 230 Statement of Cash Flows 231 Statement of Changes in Equity 232 Notes to the Annual Financial Statements 233 SHAREHOLDER INFORMATION 238 Notice of Annual General Meeting 241 Notice of Amendments to the Massmart Holdings Limited Employe Share Scheme 247 Form of Proxy 251 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. 1. 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 100 Operational Review page 62 Chief Executive Officer s Review page 26 Corporate Governance page COMMUNITIES Massmart operates from 263 sites in South Africa and 25 sites in 13 other sub-saharan countries and is integrally involved with the communities around its operations. Corporate Accountability page 100 Corporate Governance page 114 Operational Review page 62 Chairman s Letter to Shareholders page CUSTOMERS Massmart appeals to a wide variety of customers ranging from LSM 2 to 10. Operational Review page 62 Chairman s Letter to Shareholders page 23 Group Financial Statements page 150 Corporate Accountability page SUPPLIERS Massmart sources goods and uses the services of approximately 8,541 active suppliers. Group Financial Statements page 150 Operational Review page 62 Chief Executive Officer s Review page 26 Chief Financial Officer s Review page 30 Corporate Accountability page 100 Corporate Governance page 114 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.

3 Massmart at a Glance FINANCIAL HIGHLIGHTS down up by 10.0% R47,451.0m Total sales 2009: R43,128.7m up by 0.1% R2,031.0m Operating profit before foreign exchange movements 2009: R2,029.0m 34.9% Return on equity 2009: 41.7% PER SHARE PERFORMANCE FINANCIAL STATISTICS down by 5.7% down by 6.2% down R1,138.6m Headline earnings 2009: R1,207.1m 567.2c Headline earnings 2009: cents 4.4% Trading profit before interest and taxation margin 4.9% in 2009 down up by 7.2% R2,639.4m Cash generated from operations 2009: R2,462.0m 386.0c Dividends 2009: cents 51.8% Return on capital employed 62.2% in 2009 Read more More detail on definitions and explanatory notes can be found on page 47 Ten-year Review More detail on headline earnings per share can be found in note 12 on page 181 Group Financial Statements up by 13.5% 1,722.0c Net asset value 2009: 1,517.5 cents up 11.1% Debt: equity 4.9% in 2009 Massmart Annual Report

4 Massmart at a Glance OUR BUSINESS MODEL SELL BUY SELL BUY High-volume Low-margin Massdiscounters General merchandise discounter Masswarehouse Channel Warehouse club Massmart Holdings Overall Group strategy and performance management and Shared Services Food wholesaler, retailer and buying association Masscash SELL BUY Home improvement retailer and building materials supplier Massbuild High-volume Low-margin BUY SELL Massmart is a managed portfolio of four divisions, each focused on high-volume, low-margin, low-cost distribution of mainly branded consumer goods for cash, through 288 stores in 14 countries in sub-saharan Africa. 2 Massmart Annual Report 2010

5 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

6 Massmart at a Glance OUR VISION AND MISSION OUR VISION Our Vision Our Customers Our Community will regard Massmart s wholesale and retail formats as their first choice when buying those categories of merchandise offered by the formats. Our Suppliers will regard Massmart as a valued partner in accessing and understanding their end-consumers. Career Retailers will regard Massmart as the preferred employer in the distribution industry. Our Investors will regard Massmart as a portfolio rendering superior returns relative to the JSE Retail sector. including Government, will regard Massmart as a socially accountable corporation. OUR MISSION Massmart is a South African-based, globally competitive, regional management group, invested in a portfolio of differentiated, complementary, focused wholesale and retail formats, each reliant on high volumes and operational excellence as the foundation of price leadership, in the distribution of mainly branded consumer goods for cash. The Group actively seeks the continual improvement of performance in the portfolio and its parts, through strategic and structural clarity, high market shares, excellent management, principle-driven ethical leadership, cost-effective technology and the sharing or agglomeration of capabilities, knowledge, resources, influence and information. To this end, thought leadership, individual and collective performance, and collaboration throughout the Group are appropriately rewarded, with executive management incentivised predominantly on Group performance. 4 Massmart Annual Report 2010

7 Massmart at a Glance CORPORATE ACCOUNTABILITY HIGHLIGHTS Value added (Rm) 10,130.6 Massdiscounters Masswarehouse Massbuild Masscash Other R3,434.5m R1,446.9m 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 (%) 6.1 Massdiscounters No testing conducted Masswarehouse 2.8% Massbuild 3.5% Masscash 16.7% 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 (%) 66.1 Massdiscounters 68.8% Masswarehouse 65.6% Massbuild 50.7% Masscash 59.1% 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 CO 2 e(kg)/m 2 Masscash CO 2 e(kg)/m 2 Corporate social investment (Rm) 20.6 Massdiscounters Masswarehouse Massbuild Masscash Other R7.0m R6.1m R1.6m R3.9m R2.0m Read more Additional detailed information about the indicators covered in this scorecard is available on page 100 Corporate Accountability Massmart Annual Report

8 Massmart at a Glance OUR SHARES AND SHAREHOLDER INFORMATION KEY INFORMATION Ordinary shares Authorised 500,000,000 Issued 201,495,504 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 2001 Share code MSM Shareholder spread Shares % 1-1,000 shares 1,716, ,001-10,000 shares 10, ,000 shares 100,001-1,000,000 shares 1,000,001 shares and over 5,209,631 9,492,838 26,878, ,197, Shareholders split between public and non-public Shares % Non-public: Directors and Group Executives of the Company 3,709, Non-public: Share trust 68, Public shareholders 197,717, High, low and closing share price (cents per share) Distribution of shareholders Closing 4,387 8,800 6,149 8,000 12,200 High Low 6,408 9,997 9,724 9,029 12,580 4,185 4,185 5,910 5,650 7,275 Shares Unit Trusts/Mutual Fund 77,393,104 Pension Funds 58,891,368 Other Managed Funds 13,900,026 Foreign Government 11,902,359 10,477,480 8,356,461 5,342,888 2,166,028 Private Investors Custodians Insurance Companies Charity American Depositary Receipts Investment Trust Local Authority Hedge Fund Remainder 994, ,038 85,978 30,689 11,262,865 % Massmart Annual Report 2010

9 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 R12.95) Massmart trading volumes (000 s) 280, , , , ,000 80,000 40,000 0 SHV s 31% shareholding in Massmart sold to local and international investors in January Dec-00 Jun-01 Dec-01 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-10 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 15,121, Lazard Asset Management LLC Group 13,907, Baillie Gifford & Co Ltd 10,900, Massmart Annual Report

10 Massmart at a Glance GROUP PROFILE MASSMART GROUP MASSDISCOUNTERS General merchandise discounter Divisions Stores and outlets 288 stores 91 stores 11 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 R47,451.0 million Sales R12,164.9 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 0.1% to R2,031.0 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 11 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 2010

11 Massmart at a Glance MASSWAREHOUSE MASSBUILD MASSCASH Warehouse club Home improvement retailer and building materials supplier Food wholesaler, retailer and buying association 13 warehouse clubs 24 stores 21 stores 31 stores 91 stores 6 stores 517 outlets SA, Zimbabwe (2 Zimbabwe stores not consolidated and excluded from 13 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 R11,501.2 million Sales R6,366.9 million Sales R17,418.0 million Sales 24% Sales 13% Sales 37% Trading profit before tax* R758.6 million Trading profit before tax* R308.5 million Trading profit before tax* R510.1 million Trading profit 34% Trading profit 14% 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

12 Massmart at a Glance GROUP PROFILE MASSMART GROUP MASSDISCOUNTERS General merchandise discounter Divisions 2010 trading space (m 2 ) 1,179, , net new stores target net new trading space target (m 2 ) 202, ,871 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 66.1% up from 55.7% f Seven new Game stores in South Africa f Five new DionWired stores f Johannesburg, Gauteng, RDC opened in June 2010 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 10 Massmart Annual Report 2010

13 Massmart at a Glance MASSWAREHOUSE MASSBUILD MASSCASH Warehouse club Home improvement retailer and building materials supplier Food wholesaler, retailer and buying association 118, , , ,000 5,154 30, % Target 5.0% International 7.0% to 9.0% Target 10.0% 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 2010 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

14 Massmart at a Glance STORE REGIONAL MAP INTERNATIONAL A total of 25 stores GHANA NIGERIA 1 1 UGANDA 1 TANZANIAA 1 1 ZAMBIA MALAWI MOZAMBIQUE 1 1 ZIMBABWE NAMIBIA BOTSWANA SWAZILAND LESOTHO SOUTH AFRICA MAURITIUS Chain Country Stores City Game Botswana 2 Francistown and Gaborone Ghana 1 Accra Malawi 1 Blantyre Mauritius 1 Quatre Bornes Mozambique 1 Maputo Namibia 2 Oshakati and Windhoek Nigeria 1 Lagos Tanzania 1 Dar es Salaam Uganda 1 Kampala Zambia 1 Lusaka Makro Zimbabwe* 2 Bulawayo and Harare CBW Botswana 9 Francistown, Gaborone x2, Mahalapye, Maun x3, Palapye and Selebi Phikwe Lesotho 2 Maseru x2 Namibia 1 Windhoek Swaziland 1 Manzini * Two Makro Zimbabwe stores were not included in the table of stores on page 13 as their results have not been consolidated. See note 8 in the annual financial statements on page 179 for further details. 12 Massmart Annual Report 2010

15 Massmart at a Glance SOUTH AFRICA MAKHADO A total of 263 stores POLOKWANE MOKOPANE TZANEEN LIMPOPO PRETORIA RUSTENBURG KRUGERSDORP MAFIKENG NORTH WEST HAZYVIEW WITBANK G AUT AU TE TEN ENG NG GAUTENG JOHANNESBURG POTCHEFSTROOM MIDRAND VANDERBIJLPARK SECUNDA VRYBURG NELSPRUIT GROBLERSDAL OLIFANTSFONTEIN MPUMALANGA SWAZILAND ERMELO MANGUZI PIET RETIEF VEREENIGING ZAMDELA KLERKSDORP MKUZE NONGOMA UPINGTON NEWCASTLE KIMBERLEY WELKOM MTUBATUBA QWA QWA FREE STATE DUNDEE PHUTHADITJHABA ESHOWE LADYSMITH FICKSBURG BLOEMFONTEIN ULUNDI RICHARDS BAY GINGINDLOVU KWAZULU-NATAL LESOTHO NORTHERN CAPE SPRINGBOK VRYHEID EMPANGENI PIETERMARITZBURG BALLITO UMHLANGA ISIPINGO LADYBRAND BOTSHABELO DURBAN THABA NCHU KOKSTAD PA P PARK RYNIE PORT SHEPSTONE P SHELLEY BEACH MARGATE WILLOWVALE UMTATA AMANZIMTOTI A QUEENSTOWN VREDENBURG KING WILLIAM S TOWN GONUBIE EASTERN CAPE 11 CAPE TOWN PAARL WORCESTER BUTTERWORTH UITENHAGE EAST LONDON WESTERN CAPE STELLENBOSCH SOMERSET WEST HERMANUS Chain Game DionWired Makro Builders Warehouse Builders Trade Depot Builders Express CBW Jumbo Total KNYSNA GEORGE MOSSEL BAY South Africa PORT ELIZABETH JEFFREYS BAY International Total Key to information Colour denotes the stores by chain Number denotes the number of stores in that specific region Denotes cities and towns Massmart Mas Mass smart Annual Report

16 Massmart at a Glance OUR INVESTMENT PROPOSITION Massmart is a South African retail and wholesale distributor, with 263 stores in South Africa and 25 stores elsewhere in sub-saharan Africa. f Continuously improving the productivity of capital, space and labour f Strengthening supply chain activities f Upweighting Group private label efforts f Inter-divisional collaboration f Complementing store growth through targeted acquisitions and greenfield opportunities f Consistent merchandise innovation f Board composition two executive and 11 non-executive directors f Recognised record of good disclosure f Compliant with King III Report and the JSE SRI criteria f Member of the Ethics Institute of Southern Africa f Merchandise Massmart is the third largest distributor of consumer goods in Africa, and is the leading retailer of general merchandise, liquor, home improvement and building supplies, and the leading food wholesaler f Formats trading through a variety of formats f Customers serving all mass-market consumers f Geography operating in 14 sub-saharan African countries Diversification Growth Strategic and structural clarity Investment Proposition Good governance Management depth, quality and diversity Low risk f Earnings underpinned by high cash generation f Limited balance sheet financial leverage f Conservative throughthe-cycle store opening plans f Through four focused Divisions, each a leader in its target market and business model f Where additional value is created through inter-divisional collaboration f And behaviour is aligned through short- and long-term incentives f While adhering strictly to organic and acquisitive growth criteria f The 46 Group and Divisional Executives hold 98 qualifications of which 58 are degrees, are an average age of 45 years, and 13% are African, Coloured or Indian 14 Massmart Annual Report 2010

17 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 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 1 July Guy Hayward (45) BCom, CTA (UCT), CA(SA) Chief Financial Officer, member of the Risk, and Strategy and Investment Committees. Appointed 15 May Guy graduated from the University of Cape Town in 1986 and, after serving articles with Deloitte Haskins & Sells, qualified as a Chartered Accountant in During the 1990s 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 Guy is also a Governor of Hilton College. Massmart Annual Report

18 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 1 August Following progress through a multi-functional retail career that began in 1975, Mark was appointed Managing Director of the ailing six-store Makro chain in After successful repositioning of the chain, he founded Massmart in 1990 to pursue an aggressive growth strategy in high-volume, low-gross margin, low-expense retailing and wholesaling. In 1996, 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 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 1 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), Net1 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 1963 until his retirement in 1998, 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 1 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 100 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 2010, he was made co-chairman of the 20th WEF on Africa Summit in Dar es Salaam, Tanzania. Member of the Risk Committee. Appointed 1 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 (51) MSc (KZN), MSc (LSE), PhD (UCL) 16 Massmart Annual Report 2010

19 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 1 November 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 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 1992 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 1 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 (61) BA (Social Science) Member of the Sustainability and Transformation Committee. Appointed 30 August Michael worked as a specialised retail consultant in New York and Toronto for nine years and joined Massmart as Development Director in He left the Group in 1997 to pursue his interests in private equity management and property development. Michael Rubin (60) BSc, MBA (UCT), MBA (Columbia) Massmart Annual Report

20 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 (41) 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 1989, Kevin consulted at both the Strategy Group (Deloitte) and Gemini Consulting. He joined UPD as Group Operations and Systems Director in 1995 and became Group Chief Executive Officer in 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 1978, Robin spent six years in retailing and wholesaling at WG Brown before founding CCW in In 1998, 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) 18 Massmart Annual Report 2010

21 Massmart at a Glance Divisional Chief Executive of New Formats. Joe joined Makro in He worked for the Checkers Group from 1978 to 1988 after which he returned to Makro as Merchandise Director. He was appointed Managing Director of Makro in 1993, Divisional Chief Executive of Makro in 1999, 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 (61) 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 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 1991 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 (41) BSc Eng (Phys Met), GDE (Industrial), MBA Massmart Annual Report

22 Reports to Shareholders Reports to Shareholders 20 Massmart Annual Report 2010

23 Shareholders Game Alberton Gauteng Regional Distribution Centre Game Boksburg Massmart Annual Report

24 Reports to Shareholders REPORTS TO SHAREHOLDERS 20 Chairman s Letter to Shareholders 23 Chief Executive Officer s Review 26 Chief Financial Officer s Review Massmart Annual Report 2010

25 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 15,186 of our staff have participated in one of South Africa s most successful broad-based black economic empowerment schemes. Assuming a share price of R148, and including dividends, R of value has been created per share since the scheme s inception, representing a gain on average of R139,000 per current participant. Massmart Annual Report

26 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 14 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 13 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 2010

27 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 R148 per share. A due diligence which is a precondition to such an offer is currently underway. For the first time since its founding in 1990, 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 2010 Massmart Annual Report

28 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 2010 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 2010 second-half results suggest that the South African consumer has begun to recover as for that period the Group increased sales by 14.4%, 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 10.0%, operating profit before foreign exchange losses increasing by 0.1% 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 10.0% and comparable sales growth is indicative of the Group s continued investment in growth, with store space increasing by 8.5%, of which 3.1% 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 0.1%. 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 12 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 2010

29 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 1.4%, General Merchandise in deflation at 5.3% and Home Improvement inflation at 1.8%. 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 1.4% Home Improvement 1.8% General Merchandise -5.3% The 2010 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 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 R1 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 2011 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 13 businesses acquired during the year, only one has underperformed. Massmart Annual Report

30 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 (31%) 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 1% of profit after tax (PAT) in Corporate Social Investment (CSI) initiatives in our African operations. Read more More detail can be found on page 100 Corporate Accountability Not all these concerns have been fully resolved in the 2010 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 12% by June 2011 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 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 1% 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 2013 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 2010

31 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 231 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 8,541 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 14 weeks to 3 October 2010, total sales increased by 14.9% and comparable sales increased by 9.2%, continuing the trends experienced for most of the second half of the 2010 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 2010, 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 R148 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 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 14 weeks to 3 October 2010 Total sales 14.9% Comparable sales 9.2% Grant Pattison Chief Executive Officer 6 October 2010 Massmart Annual Report

32 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 2010 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, 13 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 51% 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 2010, 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 2010

33 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 1 on page 162 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 x1.7 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 (%) 2010 term target benchmark Massdiscounters Masswarehouse Massbuild Masscash Corporate (0.6) (0.5) Massmart Group Massmart Annual Report

34 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 2010, 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 2010 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 2010 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: 41.7%). 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 17.9% 12.4% 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: 13.5%). 32 Massmart Annual Report 2010

35 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 17.9% (2009: 12.4%) for the financial year. DIVIDEND COVER Massmart s current dividend policy is to pay total annual cash distributions representing a x1.7 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 2011 financial year will revert to the original policy of x1.7 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 x1.46 x1.55 x1.70 x1.70 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 10% of the Massmart ordinary issued shares, pre-dilution, or 9.1% 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 1 Stellenbosch (Western Cape) Builders Express stores acquired 3 Shelley Beach (KwaZulu-Natal) Umhlanga (KwaZulu-Natal) Norwood (Gauteng) Builders Trade Depot store opened 1 Ballito (KwaZulu-Natal) Builders Trade Depot store acquired 1 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 16 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

36 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 14,500 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 100% of the ordinary dividend in year four (2010) 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 1 October 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 2011 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, , Gross margin 18.1% 18.0% Other income (3.4) Expenses (6,640.3) (5,851.8) (13.5) Operating expenses as a % of sales 14.0% 13.6% Trading profit 2, , Trading profit as a % of sales 4.4% 4.9% Foreign exchange loss (164.3) (78.4) Operating profit 1, ,950.6 (4.3) Operating profit as a % of sales 3.9% 4.5% Finance costs (92.6) (112.8) 17.9 Finance income (28.5) Net finance costs (46.7) (48.6) 3.9 Profit before taxation 1, ,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 1, ,281.6 (5.4) Headline earnings: Including foreign exchange 1, ,207.1 (5.7) Excluding foreign exchange 1, ,263.5 (0.5) Headline earnings per share (cents): Including foreign exchange (6.2) Excluding foreign exchange (1.1) Read more More detail on the consolidated income statement and related notes can be found in f Income statement 157 f Revenue (note 4) 175 f Net finance costs (note 9) 179 f Taxation (note 10) 180 f Earnings per share (note 12) 181 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 2010

37 Reports to Shareholders SALES The Group s average product selling price inflation rate, using the Group s sales mix, for the 2010 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 11.4%. 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 1.4% Home Improvement 1.8% General Merchandise -5.3% Looking ahead to 2010/11, 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 10.0% 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 2010 financial year, the Group opened 18 new stores, closed or sold six stores, and acquired 20 stores, thereby increasing its trading area by an unweighted 8.5% to 1,179,466m². GROSS PROFIT The Group s gross margin of 18.06% is slightly above the prior year s 18.03% 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 2010 compared to Definitions Comparable sales Comparable sales are sales figures quoted for stores that have traded, and will trade, for all 12 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: R103.1 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) (343.1) (11.6) Impairment of assets (3.7) (1.6) (131.3) Employment costs (3,352.9) (2,965.8) (13.1) Occupancy costs (1,326.7) (1,170.4) (13.4) Other operating costs (1,574.2) (1,370.9) (14.8) Total expenses (6,640.3) (5,851.8) (13.5) Insight Expenses Employment and occupancy costs together represent 70% of the Group s total expenses. Massmart Annual Report

38 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW Total expenses represent 14.0% of sales, a decline compared to the prior year s 13.6% of sales. Although total expenses increased by 13.5%, 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 13.1% 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 R149.4 million (2009: R133.5 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 13.0% 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 13.1% 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 13.4%. 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 12% while the balance of the expenses in this category increased by approximately 18% 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 15.6% and total net trading space increased by 8.5%. up by 13.4% R1,326.7m Occupancy costs R1,170.4 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 11.6% 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 14.8%, 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 R164.3 million (2009: net loss of R78.4 million). The translation of Massdiscounters African balance sheets accounted for R64.2 million of this (2009: R106.6 million loss), there was a net loss from other foreign monetary balances of R51.1 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 177 and note 39 on page 211 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 2010 amounted to R35.9 million (2009: R33.8 million). 36 Massmart Annual Report 2010

39 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 2010 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% R2,104.4m 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 2010 financial year was 17.9% (2009: 12.4%). 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 R1,138.6 million (2009: R1,207.1 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 R1,256.9 million (2009: R1,263.5 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 -1.2% 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 cents (2009: cents) representing a decline of 1.1%. After adjusting for the potential future conversion of 9.07 million shares (2009: 4.52 million shares), the diluted HEPS is cents (2009: 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

40 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW STATEMENT OF FINANCIAL POSITION Rm Rm Assets Non-current assets 4, ,397.5 Current assets 9, ,129.4 Total assets 14, ,526.9 Equity and liabilities Capital and reserves 3, ,054.7 Minority interest Total equity 3, ,096.7 Non-current liabilities Current liabilities 9, ,571.9 Total equity and liabilities 14, ,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, ,696.6 Goodwill 1, ,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 159 f Property, plant and equipment (note 13) 182 f Goodwill (note 14) 184 f Other intangibles (note 15) 185 f Investments (note 16) 186 f Other financial assets (note 17) 188 f Deferred taxation (note 18) 189 f Inventories (note 19) 190 f Trade, other receivables and prepayments (note 20) 191 f Minority interest (note 23) 196 f Non-current liabilities (note 24) 197 f Non-current provisions (note 25) 198 f Trade and other payables (note 26) 199 f Provisions (note 27) 199 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 R520.1 million (2009: R598.9 million) was spent on property, plant and equipment. Of this, R191.6 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 2011 is budgeted to be R910 million and includes R87.5 million for the new Makro store and the investment in 29 other new stores to be opened during the 2011 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: R196.7 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 2010

41 Reports to Shareholders Other financial assets of R270.3 million (2009: R256.7 million) include executive and employee loans of R216.1 million (2009: R198.9 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 R51.1 million (2009: R51.8 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, ,129.4 Inventories 5, ,893.2 Trade, other receivables and prepayments 2, ,851.1 Taxation Cash and bank balance 1, ,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 102 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 R1,647.6 million (2009: R1,429.0 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 R1,216.2 million (2009: R1,077.6 million), which increased by 12.9%. 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 For more detail, refer also to the commentary on credit risk in the Financial risks section in note 39 on page 211. NON-CURRENT LIABILITIES Rm Rm Non-current liabilities Non-current liabilities: Interest-bearing Interest free Non-current provisions Deferred taxation Massmart Annual Report

42 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 2011 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: R55.1 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 1999, 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, ,571.9 Trade and other payables 9, ,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: R6,128.2 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 R1.5 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 R217.9 million (2009: R129.3 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 2010 the Group s free cash flow was R1.8 billion (2009: R1.4 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 2010

43 Reports to Shareholders Massmart s cash flow waterfall (Rm) 3,000 2,500 2,000 1,500 1, 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) (112.8) Investment income Taxation paid (552.8) (700.3) Dividends paid (822.4) (867.4) Net cash inflow from operating activities 1, 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 R2,417.5 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 2010 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 (346.1) (340.1) Proceeds on disposal of property, plant and equipment Proceeds on disposal of assets classified as held for sale Investment in subsidiary (369.9) (198.5) Disposal of subsidiary Other investing activities (163.8) 8.1 Net cash outflow from investing activities (1,130.7) (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) , , , , ,639.4 Cash flow from financing activities Net cash outflow from financing activities (160.7) 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 1, ,021.9 Cash and cash equivalents at the end of the year 1, ,025.1 Massmart Annual Report

44 Reports to Shareholders CHIEF FINANCIAL OFFICER S REVIEW Total capital expenditure (replacement and expansion) was R630.1 million, a slight decline on the prior year s total of R694.6 million. In 2009, the R174.3 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 2010, 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 211 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 211. 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 R1.3 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 177 and further detail on the sensitivity analysis can be found in note 39 on page Massmart Annual Report 2010

45 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 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 170. 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 170 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 156 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 2010 Massmart Annual Report

46 Ten-year Review Ten-year Review OPENING SPREAD PIC Ten-year review 44 Massmart Annual Report 2010

47 Ten-year Review TEN-YEAR REVIEW 44 Definitions and Formulas 47 Massmart Annual Sales and Corporate Activity Through the Years 48 Ten-year Review Massmart Annual Report 2010

48 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 12 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 10 on page 180 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

49 Ten-year Review MASSMART ANNUAL SALES AND CORPORATE ACTIVITY THROUGH THE YEARS Acquired 14 CCW stores on 1 June 1998 Massmart founded Makro was the founding entity of Massmart with 6 stores Acquired 20 Dion stores on 31 May 1993 R8.9bn 1999 R8.9bn 1990 R1bn 1991 R1.2bn 1992 R1.5bn 1993 R2.7bn 1994 R3.3bn 1995 R3.5bn 1996 R4.1bn 1997 R4.8bn 1998 R5.8bn Acquired 26 Game stores on 1 July 1998 Acquired 378 Shield members on 1 March Massmart Annual Report 2010

50 Ten-year Review Acquisition of 13 businesses in Masscash and Massbuild Acquired 6 Cambridge Food stores in December 2008 Acquired 3 Buildrite stores in June R47.5bn Acquired 3 De La Rey stores on 1 June 2005 Acquired 14 Servistar stores on 1 June 2005 Acquired 34 Federated Timbers stores on 1 June R34.8bn 2008 R39.8bn 2009 R43.1bn Massmart listed on 4 July 2000 on the JSE Limited 2006 R30.0bn 2002 R16.7bn 2003 R20.4bn 2004 R23.8bn 2005 R25.4bn BEE general staff transaction announced Disposal of Furnex on 28 February 2006 SHV s 31% shareholding in Massmart sold to local and international investors in January R10.4bn 2001 R11.6bn Acquired 5 Builders Warehouse stores on 28 February 2003 Acquired 22 Brown and Weirs stores on 1 July 2001 Acquired Furnex on 1 January 2002 In June 2002 Wooltru unbundled its 41% shareholding in Massmart Acquired 6 Jumbo stores on 1 April 2001 Massmart Annual Report

51 Ten-year Review INCOME STATEMENT IN RANDS as at 27 June 2010 Nine-year growth (%) * 2007 INCOME STATEMENT (Rm) Continuing operations: Sales , , , ,807.6 Cost of sales (38,879.3) (35,351.0) (31,781.7) (28,435.7) Gross profit , , , ,371.9 Other income Depreciation and amortisation costs (382.8) (343.1) (297.8) (240.9) Impairment of assets (3.7) (1.6) (4.7) (26.3) Employment costs (3,352.9) (2,965.8) (2,723.1) (2,449.8) Occupancy costs (1,326.7) (1,170.4) (952.3) (846.0) Foreign exchange (loss)/profit (164.3) (78.4) 62.5 (41.4) Other operating costs (1,574.2) (1,370.9) (1,427.3) (1,251.3) Operating profit , , , ,673.3 Net finance costs (46.7) (48.6) (59.7) (44.4) Exceptional items Profit before tax , , , ,628.9 Taxation (608.2) (620.4) (632.8) (554.8) Profit for the year from continuing operations , , , ,074.1 Discontinued operation: Profit/(loss) for the year Loss on disposal Profit for the year 1, , , ,074.1 Attributable to: Equity holders of the parent , , , ,049.9 Preference shareholders Minority interest Profit for the year , , , ,074.1 Trading profit before interest and taxation , , , ,795.3 EBITDA , , , ,940.5 Headline earnings , , , ,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) (1.6) 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 2010

52 Ten-year Review Sales (Rbn) 29, , , , , ,568.4 (24,650.0) (21,202.0) (20,183.2) (17,319.5) (14,112.1) (9,680.5) 5, , , , , , (202.9) (157.5) (133.5) (107.8) (106.2) (83.0) (5.4) (74.6) (49.5) (39.7) (9.1) (2,079.0) (1,656.7) (1,416.6) (1,168.5) (1,017.2) (778.8) (740.5) (644.0) (563.7) (408.8) (366.0) (277.5) (31.7) (28.0) 3.4 (8.7) (1,108.0) (891.4) (716.1) (671.0) (641.2) (533.8) , (32.2) (20.2) (7.2) (50.4) (14.1) (30.6) 1, (444.6) (307.5) (253.9) (215.2) (164.4) (63.0) Trading profit before interest and taxation (Rm) (82.1) (1.8) , , , , , , , , Headline earnings (Rm) (2.2) (1.2) , , , ,138.6 Massmart Annual Report

53 Ten-year Review STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS as at 27 June 2010 STATEMENT OF FINANCIAL POSITION (Rm) Nine-year growth (%) * 2007 Assets Non-current assets , , , ,448.2 Current assets , , , ,401.4 Inventory , , , ,027.3 Assets classified as held for sale Total assets , , , ,849.6 Equity and liabilities Total equity , , , ,264.8 Non-current liabilities , ,122.2 Current liabilities , , , ,462.6 Trade and other payables , , , ,755.7 Total equity and liabilities , , , ,849.6 STATEMENT OF CASH FLOWS (Rm) Operating cash before working capital movements , , , ,926.4 Working capital movements (73.2) (28.3) Cash generated from operations , , , ,898.1 Net interest paid (46.7) (48.6) (64.1) (44.4) Investment income Dividends received Taxation paid (552.8) (700.3) (668.1) (531.6) Dividends paid (822.4) (867.4) (709.9) (565.1) Net cash flow from operating activities 1, Investment to maintain operations (284.0) (354.5) (268.3) (152.9) Investment to expand operations (346.1) (340.1) (309.6) (317.9) Other (500.6) (2.8) (320.3) (220.0) Net cash flow from investing activities 6.4 (1,130.7) (697.4) (898.2) (690.8) Net cash flow from financing activities (160.7) (222.7) (288.4) Net increase/(decrease) in cash and cash equivalents (191.4) (166.1) Foreign exchange losses taken to FCTR (30.9) (27.3) 4.6 (1.5) Cash and cash equivalents for the period (186.8) (167.6) Cash and cash equivalents at the beginning of the period 1, , , ,376.3 Cash and cash equivalents at the end of the period 1, , , ,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 2010

54 Ten-year Review Total assets (Rbn) 3, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Cash generated from operations (Rm) 1, , , (63.6) , , , (32.7) (22.0) (5.5) (50.4) (14.1) (487.4) (337.5) (124.2) (77.5) (90.9) (46.4) (402.8) (416.4) (218.7) (166.6) (90.7) (48.0) (178.5) (256.1) (136.3) (83.6) (76.3) (94.6) (184.1) (157.6) (263.3) (216.6) (73.1) (32.3) (96.9) (696.8) (35.7) (208.8) (47.2) (518.9) (459.5) (1,110.5) (435.3) (509.0) (196.6) (645.8) (22.6) (39.8) 30.8 (233.9) (626.8) (4.2) (10.5) (621.4) ,026.2** (83.4) 1, , , , , , ,639.4 Return on capital employed (%) Massmart Annual Report

55 Ten-year Review STORES AND PRODUCTIVITY MEASURES IN RANDS as at 27 June 2010 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) (0.1) Employment costs as a % of sales (7.1) (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 (14.3) (13.8) (13.7) (14.0) 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 24,518 24,308 24,436 Trading space (m 2 ) ,179,466 1,087,459 1,047, ,277 Sales per store (R000) 153, , , ,895 Sales per FTE (R000) 1,785 1,759 1,603 1,422 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 2010

56 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) (0.1) (6.9) (6.5) (6.0) (5.7) (6.1) (6.7) (2.5) (2.5) (2.4) (2.0) (2.2) (2.4) (13.7) (13.1) (12.3) (11.9) (13.0) (14.6) ** ,412 20,277 17,565 16,763 14,882 13, , , , , , , , , , , ,881 95,640 1,337 1,421 1,354 1,216 1, Sales per m 2 (R000) Trading space (000m 2 ) ,048 1,087 1,179 Massmart Annual Report

57 Ten-year Review RETURNS, PROFITABILITY AND SHARE INFORMATION IN RANDS as at 27 June 2010 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 , , , Operating cash flow , Net asset value , , , ,113.5 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, , , ,694.4 Share price South African (cents): High 12,580 9,029 9,724 9,997 Low 7,275 5,650 5,910 4,185 Closing 12,200 8,000 6,149 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 2010

58 Ten-year Review Operating margin (%) Return on equity (%) , , , , , ,832.8 Market capitalisation (Rbn) 6,408 5,370 3,359 2,222 1,550 1,455 4,185 3,145 2,080 1, ,387 4,477 3,258 2,100 1, Massmart Annual Report

59 Ten-year Review INCOME STATEMENT, STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS IN US DOLLARS as at 27 June 2010 INCOME STATEMENT ($m) Nine-year growth (%) * 2007 Continuing operations: Sales , , , ,821.0 Cost of sales (5,109.0) (3,906.2) (4,347.7) (3,938.5) Gross profit , Other income and expenses (881.1) (643.9) (709.1) (650.8) Operating profit Finance costs (6.1) (5.4) (8.2) (6.1) Exceptional items Profit before tax Taxation (79.9) (68.6) (86.6) (76.8) Profit for the year from continuing operations Discontinued operation: Profit/(loss) for the year Loss on disposal Profit for the year Attributable to: Equity holders of the parent Preference shareholders Minority interest Profit for the year Headline earnings STATEMENT OF FINANCIAL POSITION ($m) Total equity Net cash/(borrowings) Total assets , , , ,506.9 Inventories Trade and other payables , STATEMENT OF CASH FLOWS ($m) Cash generated from operations Net cash flow from operating activities Net cash flow from investing activities 6.4 (148.6) (77.1) (122.9) (95.7) Exchange rates (Rand/US$) 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 2010

60 Ten-year Review Sales ($bn) 4, , , , , ,518.2 (3,839.6) (3,414.2) (2,950.8) (1,911.6) (1,387.6) (1,270.4) (620.8) (513.2) (413.5) (259.6) (206.3) (212.6) (5.0) (3.3) (1.1) (5.6) (1.4) (4.0) (69.3) (49.5) (37.1) (23.8) (16.2) (8.3) (13.2) (0.3) Total assets ($bn) , , , Cash generated from operations ($m) (71.6) (178.8) (63.6) (56.2) (19.3) (84.8) Massmart Annual Report

61 Ten-year Review PROFITABILITY AND SHARE PERFORMANCE IN US DOLLARS as at 27 June 2010 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 ($m) 3, , , ,457.6 Exchange rates (Rand/US$) 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: 1 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 17 Leases. 60 Massmart Annual Report 2010

62 Ten-year Review Return on equity (%) Return on capital employed (%) 1, , , Massmart Annual Report

63 Operational Review Operational Review 62 Massmart Annual Report 2010

64 Operational Review Makro Silver Lakes Massmart Annual Report

65 Operational Review 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 Massmart Annual Report 2010

66 Operational Review THE ECONOMY OVER THE YEAR TO JUNE 2010 This report provides a brief summary of the key economic trends and developments that formed the backdrop to the Group s 2010 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 2010 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 2010 financial year). The much-anticipated recovery in overall consumer spending was however, delayed and so only recorded positive growth in the first quarter of 2010 (the third quarter of the Group s 2010 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 2010 (now 600bps following a further 50bps drop in September 2010). South African consumer inflation, measured as Consumer Price Inflation (CPI), has been on a downward trajectory and was 4.2% at the June 2010 financial year-end, and was still lower in July 2010 (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 2010 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 2011 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 National inflation (CPI) is forecast to average 4.6% for the 2010 calendar year and 5.5% for Consequently, interest rates may only increase for the first time in the third quarter of 2011 suggesting that there may be steady and low interest rates for the Group s June 2011 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 -3.1% in 2009 (calendar year), to 2.5% in 2010 and 3.6% in National retail sales (% monthly real growth) June 2006 June 2007 June 2008 June 2009 June 2010 Massmart Annual Report

67 Operational Review DionWired Hyde Park 66 Massmart Annual Report 2010

68 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 10.9%, while growth in comparable store expenses was negative. This is a result of more than 18 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 2010 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, 2010 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 91 stores and opened five new DionWired stores taking the total number of DionWired stores to 11. f 26 stores acquired 1 July 1998 f Now 91 stores f Operating in SA, Botswana, Ghana, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Tanzania, Uganda, Zambia f General merchandise and FMCG f LSM 5 10 f 20 Dion stores acquired 31 May 1993 f Dion stores rebranded to Game stores f Launched greenfield DionWired concept stores in 2006 f Now 11 stores f Operating in SA f General merchandise f LSM 8 10 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 10) 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

69 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 10) 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 11 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 2010 financial year. Game benefited from the soccer mania that hit the country with the 2010 FIFA World Cup boosting sales. Incremental sales during the tournament were approximately R120 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 2010 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 11.4% of our sales, exceeding our short-term target of 10%. 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 2010

70 Operational Review FINANCIAL PERFORMANCE week 52 week 52 week 53 week Sales Rm 12, , , ,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, , ,766.8 Inventory days days Net capital expenditure 1 Rm Cash flow from operating activities Rm (6.2) Number of stores Trading area m 2 355, , ,285 Average trading area per store m 2 3,485 3,674 3,759 Number of employees 8,876 9,469 9,817 Sales per store R , , ,553 Sales per m 2 R Sales per employee R000 1,371 1,183 1,032 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 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 R12.2 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 15.2% was pleasing (10.9% comparable) and was at the upper-end of the market growth. African store total sales decreased by 5.1% in local currencies (and by 23.0% in Rands) Game DionWired Massmart Annual Report

71 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 15.0% 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 R213.6 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 2010 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 2010 and the 19,500m² 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 1% 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 2010 International benchmark Wal-Mart ex-food 8.0% 7.4%

72 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 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 2010 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 108 Corporate Accountability Massmart Annual Report

73 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 1 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 100% 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 R1.2 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 R1.2 million to 400 children around the country. Game and DionWired also raised R1.1 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 112 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 2010 Game entered 40 teams of employees, comprising 196 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 R1,000 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 11 and depending on their academic performance in Grade 12, we intend to provide them with bursaries to attend a tertiary institution of their choice. DionWired upgraded the learning environment of more than 100 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 R192,000 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 110 Corporate Accountability 72 Massmart Annual Report 2010

74 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 15% 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, 13 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

75 Operational Review Makro Silver Lakes 74 Massmart Annual Report 2010

76 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 R1 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 17.8% 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 2010 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 1.5 million active members and we communicate regularly with them through targeted promotional material. f Now 13 stores in SA f Operating in SA, Zimbabwe f Food/liquor/general merchandise f Liquor and general merchandise LSM 6 10 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 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

77 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 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 2010 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 (2010). FINANCIAL PERFORMANCE week 52 week 52 week 53 week 37 Sales (%) 26 Sales Rm 11, , , ,103.8 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 1, , ,043.6 Inventory days days Net capital expenditure 1 Rm Cash flow from operating activities Rm Number of stores Trading area m 2 118, , ,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 , , ,462 Sales per m 2 R Sales per employee R000 4,350 3,958 3,578 1 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 2010

78 Operational Review Sales for the year totalled R11.5 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 1.7% 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 R102.6 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 R15.7 million for various store refurbishments (2009: R34.1 million); R11.3 million on IT replacements and upgrades (2009: R19.9 million); and R16.2 million on the construction of the new Vanderbijlpark store of which only a small portion of the spend is included in In addition, R4.1 million was spent on an Eskom Demand Side Management project to install energy-efficient lighting in all stores. Store progress Makro Opening balance 13 No store movement during the current year Total stores in *Excluding two Zimbabwean stores, deconsolidated since A reduction in closing inventory of R1.8 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 R194.7 million in cash at year-end. TRADING PROFIT BEFORE TAX RETURN ON SALES Actual 2010 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

79 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 18 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 2010, 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 2010

80 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; 51% of professionally skilled staff; 16% 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 108 Corporate Accountability Massmart Annual Report

81 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 R1.2 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 112 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 100% 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 110 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 2010

82 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

83 Operational Review Builders Warehouse Kempton Park 82 Massmart Annual Report 2010

84 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 14 Servistar stores operating in the Eastern Cape and KwaZulu-Natal. Massbuild now operates 21 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 31 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 10 f 14 Servistar stores acquired in June 2005, rebranded to Builders Express f Now 21 stores f Operating in SA f Home improvement supplies/tools/ building materials f LSM 5 10 f 34 Federated Timbers stores acquired in June 2005, rebranded to Builders Trade Depot f Now 31 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

85 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 13 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 10 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

86 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 1 Rm Cash flow from operating activities Rm Number of stores Trading area m 2 384, , ,388 Average trading area per store m 2 5,061 5,036 5,065 Number of employees 6,409 6,074 6,625 Sales per store R000 80,495 78,938 81,809 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 17 Store opened 1 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 1 Ballito (KwaZulu-Natal) Store acquired 1 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 Builders Warehouse Builders Trade Depot Builders Express Massmart Annual Report

87 Operational Review MASSBUILD DIVISIONAL REVIEW The Division reported total sales of R6.4 billion, representing growth of 13.6%. Comparable sales increased by 3.4% and annual sales inflation was estimated at 1.8%. 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 14.2% above the prior year. In Builders Warehouse, total stock increased by 11.8% from R565.9 million to R632.9 million mainly as a result of sales growth and the two new stores. Capital expenditure of R145.9 million is consistent with the prior year (R149.7 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 2010 Medium-term 4.8% target International benchmark Home Depot/B&Q 7.0% to 9.0% 10.0% 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 2010

88 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 2010 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 17% to 12% over the past year in Builders Warehouse and from 31% 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 46.1% 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 108 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 16 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 112 Corporate Accountability Massmart Annual Report

89 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 10,000kWa/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 110 Corporate Accountability 19 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 2011, 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 13 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 2010 in Namibia, we signed a deal to purchase Pupkewitz Megabuild, a Windhoek-based business with 16 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 2010

90 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 100% 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

91 Operational Review Jumbo Crown Mines 90 Massmart Annual Report 2010

92 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 14 CCW stores acquired in June 1998 f 22 Brown and Weirs stores acquired in July 2001 f Two chains combined under CBW format from July 2001 f Now 91 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 2001 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 1 March 1992 f Now 456 members and 517 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

93 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 R1,700/ton to R1,100 by June 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 2010

94 Operational Review FINANCIAL PERFORMANCE week 52 week 52 week 53 week Sales Rm 17, , , ,610.4 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 1, , ,094.5 Inventory days days Net capital expenditure 1 Rm Cash flow from operating activities Rm Number of stores Trading area m 2 321, , ,007 Average trading area per store m 2 3,311 3,422 3,479 Number of employees 8,395 5,931 4,893 Sales per store R , , ,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 16 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

95 Operational Review MASSCASH DIVISIONAL REVIEW The Division reported total sales of R17.4 billion, representing growth of 14.5%. Comparable sales growth was 1.1% 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 R1.4 billion representing 30.9 days. Total capital expenditure of R98.3 million for the year was 18.6% lower than the prior year s R120.8 million. In addition, the total amount invested in acquisitions totalled R154.0 million. TRADING PROFIT BEFORE TAX RETURN ON SALES Actual 2010 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 2010

96 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 126 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 108 Corporate Accountability Massmart Annual Report

97 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 59.1% 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 16 more kitchens to schools throughout the country, adding to the 17 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 11 grandmothers who support their orphaned grandchildren as well as donating R12,000 to grandmothers in the Valley of 1,000 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 112 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 2010

98 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

99 Operational Review CHANNEL AND SHARED SERVICES REVIEW We believe that the value of the Massmart Group is greater than the sum of its parts. This philosophy underpins Massmart s approach to collaboration across the Divisions which is facilitated and implemented by our Channel and Shared Services functions. CHANNEL The Channel function provides a secure and structured place for our Divisions to share information and collaborate in a way that we believe will materially benefit the Group. This is done primarily by organising forums, in particular areas of competence and interest, which bring together the best and most senior skills in the Group in each functional area. These forums are chaired by members of the Group Executive Committee and consist of both trading and functional forums. Each forum is tasked with performing four key functions. The first, and most important, is identifying common opportunities across Divisions where the capability and resources of the Group can be leveraged to increase profits or reduce costs across some or all Divisions in a way that could not be achieved by any Division acting independently. This can take the form, for example, of sharing private label products, collaborating on product sourcing, supplier negotiations to reduce the cost per unit from shared vendors, or building shared supplier relationships. Channel Forums Massmart Holdings Divisions Shared Services Secondly, forums are also used to reach agreement on common standards that are important for Divisions to adhere to. In addition to this, forums assign and monitor Group representation on external standards and industry bodies and engage government in legislative processes relevant to our industry. Thirdly, forums perform a peer review function to improve performance. Massmart Divisions assess each other for adherence to agreed Group standards and operating norms, and ensure appropriate measures are adopted to mitigate against risks material to the Group. Lastly, forums function as a place to share internal and externally sourced learning. Divisional level data is gathered, analysed and benchmarked at Group level, then presented and debated at the various forums, and experiences across Divisions that will materially advantage the Group are shared. Processes piloted in one Division can be rolled out in another. External learning takes the form of presentations from conferences, visiting other local and international retail sites, gathering market share data meaningful in tracking Divisional category performance against competitors and monitoring competitor activity through supplier and market intelligence. Regular presentations to forums from outside experts keep Group and Divisional executives up to date with the latest developments in our industry and operating environment. Trading forums Our trading forums consist of the Food, Liquor, General Merchandise and Cellular Forums. During the year, Massmart s trading forums continued to consolidate meaningful commercial objectives such as operationalising the key legislative requirements arising from the Consumer Protection Act, Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA), Foodstuffs, Cosmetics and Disinfectant Act (FCD Act), Tobacco Act and Medicines Act. Internal product category reviews and joint strategic supplier reviews continued to be key focus areas. Following on the successes of the prior year, key strides were made in our Food Safety Management System piloted in Makro, including enhancements made to our product recall processes. Notable achievements of the trading forums this year included the vendor conferences held across the country to prepare our vendors for the enactment of the Consumer Protection Act. Trading forums continued to consolidate meaningful commercial objectives such as: f Joint strategic supplier reviews f Internal product category reviews f Collaboration in respect of environmentally sustainable practices Trading forums consist of: f Food f Liquor f General merchandise f Cellular 98 Massmart Annual Report 2010

100 Operational Review Functional forums Our functional forums are the Technology, Information and Process (TIP), Operations, Finance, and Human Resources Forums. These focus on the management of skills and the procurement of resources and services required to support key Group-wide activities. The HR Forum continued its focus on training and development and talent management. The Massmart Corporate University, a virtual institution, is the primary institution for the deployment and management of our development programmes (Executive Development Programme, Leadership Development Programme, Graduate Development Programme, Functional Skills Training). Functional forums focus on the management of skills and the procurement of resources and services required to support key Group-wide activities: f Technology, Information and Process (TIP) f Operations f Finance f Human Resources The TIP Forum steered the Group through a number of successful significant IT projects over the year and continues to implement COBIT which is an internationally accepted IT Governance Framework recommended by the King III Report on Corporate Governance. The Operations Forum focused primarily on collaboration in respect of environmentally sustainable practices. SHARED SERVICES The Shared Services teams provide services to the Divisions that can be provided more efficiently as a group than Divisions can source individually. These services are requested by the Channel forums and are ultimately accountable to these forums for their performance. These services must respond to divisional needs and be of higher value measured as quality, cost and benefit than can be sourced externally or generated inside the Division. A Shared Services team s relationship with the Divisions is one of a service provider that must strive for excellence and become the best among competitors. The Divisions are their customers and their reason for existing. The Shared Services teams provide services to the Divisions that can be provided more efficiently as a group than Divisions can source individually: f Supplier contract negotiation and administration f International commerce f Employee benefits f Shared Private Label management Shared Services currently includes: Supplier Liaison and Administration; International Commerce; Employee Benefits and Shared Private Label management. The Supplier Liaison and Administration team achieves savings by negotiating supplier contracts at Group level. The International Commerce team handles the treasury and logistics aspects of importing products directly to be sold across our Divisions. The Shared Private Label team manages various brands that are private or exclusive to Massmart and shared across trading Divisions. These brands have achieved category penetration ranging from 7% to 84% across the Group. Massmart Annual Report

101 Corporate Accountability Corporate Accountability 100 Massmart Annual Report 2010

102 Accountability Builders Warehouse Kempton Park Massmart Annual Report

103 Corporate Accountability CORPORATE ACCOUNTABILITY 100 Introduction 103 Sustainable Development Beliefs 104 Broad-based Black Economic Empowerment 106 Human Capital 108 Climate Change and Environment 110 Corporate Social Investment Massmart Annual Report 2010

104 Corporate Accountability INTRODUCTION During the past two financial years, Massmart disclosed its sustainability performance in increasing detail in separate sustainability reports packaged with the financial statements. This year, we have changed our approach in two ways: Based on the perspective that sustainability reporting covers financial and accountability factors, we have incorporated a corporate accountability section in the main body of Massmart s 2010 annual report. This section covers Broadbased Black Economic Empowerment (B-BBEE), Human Capital, Climate Change and Environment and Corporate Social Investment (CSI). At the same time, we have reduced the scope of accountability information available within the 2010 annual report, preferring instead to refer the interested reader to considerably more detailed information on the Massmart website. This additional reading can be accessed under the menu option 2010 Annual Report Additional Reading by following the link: Insight Massmart s core sustainability commitments We sensibly integrate sustainability practices with business objectives. We offer suppliers an efficient and socially relevant channel to their markets. We optimise value for customers by providing affordable access to quality safe merchandise that has been procured responsibly. We act in an accountable manner leveraging opportunities and managing risks arising from economic, environmental and social developments. We advocate the principles of responsible consumerism to customers and responsible business practice to suppliers. For additional reading in the report you can also refer to: f Sustainable Development perspective in Chief Executive Officer s Review page 28 f Group Sustainability Scorecard in Massmart at a Glance page 5 f Sustainability and Transformation Committee composition and role in Corporate Governance page 122 f Group Risk Landscape in Corporate Governance page 132 f Group Value Added Statement in Notes to the Annual Financial Statements page 223 Massmart Annual Report

105 Corporate Accountability SUSTAINABLE DEVELOPMENT BELIEFS Primary school recipients of a Game container kitchen (2009) Remarkable colouring pens made from recycled materials (2010) Owl energy saver Gardeners in a vegetable tunnel donated by Massmart Holdings (2009) BROAD-BASED BLACK ECONOMIC EMPOWERMENT Today s South Africans are citizens of a young democracy and everyone deserves a dignified and prosperous life. We know that meeting this expectation is not only morally right, but also commercially prudent. We have therefore aligned our efforts to the Department of Trade and Industry s B-BBEE Code of Good Practice to ensure that we contribute to a sustainable and equitable society. HUMAN CAPITAL Our employees are provided with the opportunity to earn competitive rewards and develop their talents in a very commercially orientated work environment where emphasis is placed on respect for individual rights. We have a demanding work ethic and our employees are cognisant of the level of performance required for their own and the Group s continued success. 104 Massmart Annual Report 2010

106 Corporate Accountability Micro loan beneficiary of Massmart WDB Rural Women s Fund (2006) Massmart graduate trainee (2009) Energy saving compact fluorescent light bulb (CFL) Beneficiaries in refurbished domestic science classroom (2010) CLIMATE CHANGE AND ENVIRONMENT Massmart acknowledges that the climate is changing and that part of this change can be attributed to human activities. We recognise that our operations and the products we sell have the potential to contribute to climate change and that we have a responsibility to minimise our own impacts, to adapt to the risks of climate change upon our business and to provide consumers with responsible merchandise choices that limit their impacts. CORPORATE SOCIAL INVESTMENT There are commentators who believe that it is enough for business to pay taxes, and that social upliftment is a distraction from business that should be the responsibility of the state. We disagree! It is clear to us that it requires the combined resources and expertise of both the private and public sector to overcome the social impoverishment caused by South Africa s apartheid legacy. Massmart Annual Report

107 Corporate Accountability BROAD-BASED BLACK ECONOMIC EMPOWERMENT COMMENTARY Massmart s objective has been to achieve a Broad-based Black Economic Empowerment (B-BBEE) score of 65%, equivalent to Level 4 B-BBEE contributor status, by June We are pleased that we surpassed this to achieve an Empowerdex-verified score of 66.1% in February 2010, 21 months earlier than anticipated. This led Massmart to be ranked the second most empowered listed retailer in the 2010 FM Top Empowerment Companies Survey, 3.5% lower than the most empowered retailer, which achieved a score of 69.6%. From a transformation perspective, Massmart achieved the highest Employment Equity score in the retail industry and the sixth highest score of the 100 listed companies who participated in the survey. The improvement in our scorecard performance is mainly the result of increased investment in skills development, improved black representation in management and professional positions and greater emphasis on gathering the preferential procurement credentials of our suppliers. Meanwhile, our Thuthukani Staff Empowerment Trust continues to disburse financial benefits to staff participants, who have collectively received R114.2 million in dividend payments from inception of the trust to 30 June Capital growth of the shares in the trust had increased from R49.98 per share to R (by 30 June 2010), representing total growth of R69.74 per share. Thuthukani participants reach an important milestone on 1 October 2010 when they will be able to vest the first 33.3% of the units that they have been allocated in the trust. We are currently implementing a further awareness programme to advise Thuthukani participants on the vesting process and the alternatives available to them. Insight 1. The B-BBEE scorecard, although issued in February 2010, is based on performance for the period July 2008 to June 2009 and is active for the period March 2010 to February Level 4 B-BBEE contributor status requires a scorecard score that is >65% but <75%. 3. FM Top Empowerment Companies Survey refers to an annual survey of the B-BBEE performance of the top 100 listed companies that is compiled by Empowerdex and published in the FM (Financial Mail) magazine. Going forward our objective is to maintain Level 4 B-BBEE contributor status. For additional reading refer to f Massmart B-BBEE philosophy (website video). A 30-second video interview in which the Massmart Group Corporate Affairs Executive describes Massmart s perspective on B-BBEE. f Massmart announces staff empowerment programme (website pdf). A two-page article distributed to staff at the inception of the Thuthukani Empowerment Trust that provides an easy to understand overview of the scheme. f B-BBEE scorecard February 2010 (website pdf). The scorecard issued by Empowerdex in February 2010 that quantifies Massmart s performance on all scorecard elements. 106 Massmart Annual Report 2010

108 Corporate Accountability B-BBEE SCORECARD PERFORMANCE INDICATORS Ownership (%) Management control (%) Graph legend ---- Comparative data % 8 7.8% Black permanent employees exercise voting rights through 7.96% of Massmart equity Employment equity (%) Skills development (%) % The 2010 score of 11.5% is the highest of all listed retailers % Preferential procurement (%) Enterprise development (%) % % Massmart received B-BBEE scorecards from approximately 1,700 suppliers during the period Notes 1. B-BBEE scores are calculated retrospectively, therefore the data reported is based on the scorecard compiled in February 2010 for the period ended June Socio-economic development (%) Massmart invested 1.5% PAT in socio-economic initiatives, 0.5% higher than the scorecard target. 5.0% 2. Comparative data represents the best performance in the retail sector as published in the FM Top Empowerment Companies Survey (%) indicates percentage score achieved on the B-BBEE scorecard. 4. An updated scorecard for the period ended June 2010 will be published on the Massmart website in November Massmart Annual Report

109 Corporate Accountability HUMAN CAPITAL COMMENTARY Massmart s emphasis remains on increasing permanent employees access to private medical benefits and early detection of priority illnesses. As a percentage of current permanent employee headcount, medical benefits coverage has increased by 3% over last year. This is lower than what is required to meet the Group target of medical benefits coverage for 60% of permanent employees by June The main reason is that recent acquisitions have increased our staff complement by 2,000 employees who don t have medical cover. Legally, we are prevented from enforcing the adoption of Group health benefits to these employees. On a like-for-like basis (excluding staff from new acquisitions), however, 10% more permanent employees now have access to medical benefits. Massmart is pleased that HIV/Aids prevalence has dropped by almost 1%, although we are unable to attribute the specific cause of the decline. One hypothesis is that we are reaping the positive results of five years of ongoing awareness efforts, but it s too early to attach significance to this statistic. Disturbingly, up to 30% of HIV-positive employees are not registered on our treatment programme. Recent changes, including providing human resources directors with better, more regular reporting data and increasing the intensity of follow-up with HIV-positive employees, place us in a better position to improve this. Insight 1. Sectoral Determination for the Wholesale and Retail Sector in Area A is promulgated annually by the Department of Labour and sets minimum wages and basic employment conditions for workers in the sector with different wage levels being set for urban, rural and intermediate geographic areas, of which level A is the highest prescribed minimum wage level. During the financial year, the Group experienced industrial action related to a re-engineering exercise at Massdiscounters and wage-related industrial action at Masscash. In this context, it is worth noting that the Group minimum average wage of R2, is greater than the highest minimum wage of R1, prescribed by the Sectoral Determination for the Wholesale and Retail Sector in Area A. For additional reading refer to f Massmart s Talent Management framework (website video). A 30-second video in which the Group Human Capital Executive identifies the Group s three primary talent management focus areas. f Massmart encourages early detection of priority illnesses (website pdf). A two-page article providing insight into in-store testing protocols that have been implemented to facilitate the early detection of illnesses such as diabetes and cardio-vascular disease. f Massmart aims to provide employees with greater access to private health benefits (website pdf). A two-page article that describes the various Group subsidised health options that have been introduced to provide staff with lower cost access to private healthcare benefits. f Building diversity is important at Massmart (website pdf). A two-page article providing race and gender diversity statistics and discussing transformation successes and failures in the Group. 108 Massmart Annual Report 2010

110 Corporate Accountability HUMAN CAPITAL PERFORMANCE INDICATORS Flexi-timers (%) Black management as % of all management and professionals (%) 16% Because flexi-timers are regarded as a vulnerable employee category, the comparative is based on lowest % in the retail industry Unionised staff (%) Massmart views % unionised staff as an indicator of commitment to freedom of association. Estimated employees with medical benefits (%) 66% Graph legend ---- Comparative data No data available for that year % Black representation amongst top management is 33%, senior management is 41%, professionals and middle management is 61% and junior and supervisory management is 85% % Estimated HIV prevalence (%) Estimated staff turnover (%) ,000 2,500 2,000 1,500 1, Estimated HIV prevalence is based on annual voluntary testing data. Average minimum wage (R) 2,040 2,139 2,555 11% Massmart s average minimum wage is amongst the highest in the retail industry. R1, ,000 1,500 1, , Estimated per capita training investment (R) 1, % 1,457 Notes 1. Comparative data represents the best available performance disclosed by South African retailers, except for: Employees with medical benefits sourced from 2009 South African General Household survey. HIV prevalence which represents published national prevalence rate. Average minimum wage sourced from Sectoral Determination for Wholesale and Retail Sector. Massmart Annual Report

111 Corporate Accountability CLIMATE CHANGE AND ENVIRONMENT COMMENTARY Massmart s goal to improve energy efficiency and reduce carbon emissions has been hampered by inaccurate data. To address this, we took three corrective steps: extending our pilot electricity-metering project to include more stores, appointing independent consultancy Global Carbon Exchange (GCX) to benchmark energy efficiency in our chains and focusing most of our emissions data-gathering efforts on scope 1 and 2 emissions (because we can exert greater control over these emissions). An immediate outcome is that we have included previously unaccounted for greenhouse gases in our scope 1 emissions reporting, namely refrigerant gases. More accurate metering of electricity consumption reveals that our energy efficiency initiatives are not always delivering the anticipated impact. Our objective to reduce energy consumption by 12% by June 2011 now appears unachievable, so we re reviewing this in the context of gathering more accurate consumption data and combining it with the results of the energy efficiency benchmarking exercise that is still in progress. We aim to confirm, or revise, the energy efficiency target by December 2010 and our findings will be published on the Massmart website. In addition to building our own environmental credentials, we recognise that advocacy to suppliers and customers offers significant opportunity to limit the harmful effects of consumerism on the environment. We therefore continue to focus on intensifying environmental advocacy efforts with these stakeholders. This includes surveying the environmental practices of suppliers and increasing the number of Eco-wise merchandise promotions to customers. We are also exploring a number of opportunities, such as partnering with environmental advocacy groups, to build on our existing advocacy efforts. Insight 1. Scope 1 emissions refer to direct carbon emissions occurring from sources that are owned or controlled by Massmart, specifically refrigerant gases, company vehicles and diesel generators. 2. Scope 2 emissions refer to indirect carbon emissions from the generation of purchased electricity consumed by Massmart. 3. Eco-wise merchandise refers to products that Massmart buyers have identified as having unique positive environmental attributes, for example energy efficient heaters or water efficient shower roses. For additional reading refer to f Massmart measures its energy efficiency (website pdf). A four-page description of the approach, challenges and variables involved in calculating Group energy consumption including the impact of different assumptions on energy intensity. f Massmart calculates its carbon footprint (website pdf). A four-page description of the approach, challenges and variables involved in calculating the scope 1 and 2 carbon emissions including the impact of different assumptions on carbon emissions intensity. It also includes an estimate of scope 3 emissions. f A three-page description of the environmental attributes including energy efficiency and water conservation interventions in the new Makro Vaal store which represents the environmental model for future Makro stores. f Builders Warehouse uses Eco-wise to make saving the planet, and saving money, easy (website pdf). A two-page article showcasing Builders Warehouse Eco-wise customer campaign promoting energy efficiency solutions for the home. f Builders Warehouse encourages recycling (website pdf). A two-page article describing Builders Warehouse s drive to get customers into the habit of recycling hard to dispose of waste. f Responsible customer e-waste disposal at Makro (website pdf). A two-page article describing Makro s store-based customer e-waste disposal facilities that have been implemented in partnership with Fujitsu Siemens. 110 Massmart Annual Report 2010

112 Corporate Accountability CLIMATE CHANGE AND ENVIRONMENT PERFORMANCE (ONLY INCLUDES SOUTH AFRICAN OPERATIONS) Estimated Group water consumption intensity (kl/m 2 ) Water consumption has been derived with reference to the cost of water consumed Estimated like-for-like purchased energy consumption intensity (kwh/(ta)m 2 ) The high comparative consumption data is attributable to the fact that retailers in the comparative sample have more intense refrigeration requirements than Massmart. Graph legend ---- Comparative data No data available for that year Estimated Group scope 1 emissions intensity (tonnes/rm) Refrigerant gases, company owned vehicles and diesel generator emissions are, from highest to lowest volume intensity, the main source of scope 1 emmissions. Estimated Group scope 1 emissions intensity (tonnes/(ta)m 2 ) Estimated scope 2 emissions intensity (tonnes/rm) Estimated scope 2 emissions intensity (sq.m.) The scope 2 Trading Area emissions intensity reported is based on 837,898m 2 of trading space and related store energy consumption Notes 1. Comparative data was calculated by GSX with reference to six Green House Gas (GHG) assessments across the South African operations of four South African retailers. 2. Massmart trend data is not available for scope 1 emissions since this information has historically been reported by calendar rather than financial year. 3. Trading Area (TA) covers any area in which customers are able to view, collect or pay for merchandise. It excludes space associated with storage, parking and support facilities. 4. Scope 2 Trading Area emissions intensity is calculated with reference to the stores originally included when we started tracking scope 2 emissions in All Massmart data presented in this section is estimated due to difficulties experienced in ensuring data accuracy. 6. Like-for-like refers to all stores that have traded for a full financial year and that will continue to trade for a further full financial year. Massmart Annual Report

113 Corporate Accountability CORPORATE SOCIAL INVESTMENT COMMENTARY Massmart invests a minimum of 1% profit after tax (PAT) in Corporate Social Investment (CSI) annually. During the year ended June 2010, Massmart invested R17.45 million (1.5% PAT). This is marginally lower than the 1.6% invested last financial year, but that included once-off initiatives such as a donation of 8,000 portable lanterns to the South African Police Services. Investment allocated to feeding projects was negatively affected by administrative delays involved in finalising a container kitchen contract with the Department of Education. During the period, we commissioned a review of the Group s CSI by an independent consultancy, Social Innovations. Their feedback was sobering and included the opinion that CSI is spread over too many projects, Massmart lacks an identifiable development position and the Group has insufficient capacity to monitor the impact of CSI projects. Social Innovations recommended that Massmart refine its CSI focus to improve learner capacity to learn by supplementing established government primary school nutrition programmes and increase learner capacity to access knowledge by supporting Grade 4 to 6 English literacy. To exercise greater control over project delivery, they also suggested that the Group enter into partnerships with Massmart accredited school nutrition and English literacy service providers who will be closely managed in terms of clearly defined service level agreements. Insight 1. The objective to invest 1% of PAT in CSI, of which 75% must benefit black people, is a guideline established by the B-BBEE Codes of Good Practice. 2. Government policy on education provides that learners be taught in their mother tongue until Grade 3, after which teaching instruction is in English. 3. The plan is to provide beneficiary schools with a support package comprising nutritional and English literacy support. Massmart has therefore undertaken to invest at least 85% of future CSI contributions in sustainable food production, hygienic food preparation and Grade 4 to 6 English literacy at primary schools that are benefiting from existing government-funded nutrition programmes. We will start this in the 2011 calendar year and make these changes in a way that is sensitive to the expectations of the current beneficiaries of Group CSI funds. The remaining 15% of Group CSI contributions will be invested in discretionary projects. For additional reading refer to f CSI Policy (website pdf). A six-page document describing Massmart s CSI objective and the principles governing CSI practice in the Group. f Massmart s approach to CSI is evolving (website pdf). A four-page article describing Massmart s re-focused approach to CSI following an assessment by Social Innovations, an independent consultancy. f Builders Warehouse encourages sustainable food production (website pdf). A two-page case study about Builders Warehouse sponsored vegetable tunnels that enable the sustainable production of fresh vegetables. f Game s Ama lunchbox promotes feeding with dignity at primary schools (website pdf). A two-page case study about Game s sponsorship of container kitchens that offer a hygienic space to prepare food at primary schools. f Massmart believes in improving literacy to improve learner performance (website pdf). A two-page article describing Massmart s approach to improving English literacy amongst Grade 4 learners to improve scholastic performance. 112 Massmart Annual Report 2010

114 Corporate Accountability CSI PERFORMANCE INDICATORS Total Group CSI spend including supplier and staff contributions (Rm) Total Group investment excluding supplier and staff contributions (Rm) We invested 1.5% of profit after taxation in CSI initiatives compared to a B-BBEE accrued guideline of 1% PAT. h g n No data available for that year. Total investment in feeding projects (Rm) Total investment in icon projects (Rm) We were disappointed by reduced investment in feeding. More financial resources will be allocated to this area starting in We intend phasing icon projects out and replacing these with investment in Grade 4 to 6 English Literacy study in t s 1. Comparative data for total investment in CSI is sourced from the B-BBEE Codes of Good Practice. 20 Total investment in discretionary projects (Rm) 2. Investment in feeding projects includes spend on container kitchens, vegetable tunnels, Non- Governmental Organisation (NGO) and government feeding schemes and Gauteng Foodbank contributions We are concerned about the disproportionate investment in discretionary CSI initiatives. New spending guidelines have been issued to remedy this. 3. Investment in icon projects includes spend on Game Stores tools-to-play early childhood development kits, Makro Excellence in Education school gift voucher awards and the Massmart bursary scheme. 4. Investment in discretionary projects includes donations to Starfish Foundation,Tomorrow Trust Game & Vodacom Wheelchair Fund, Business Against Crime and others. Massmart Annual Report

115 Corporate Governance Corporate Governance 114 Massmart Annual Report 2010

116 Governance Builders Express Robindale, Randburg Massmart Annual Report

117 Corporate Governance CORPORATE GOVERNANCE 114 Corporate Governance 117 Audit Committee 123 Remuneration of Directors and Executives 126 Risk 130 Compliance, Transparency and Accountability 136 Investor Relations 139 King III Question and Answer Massmart Annual Report 2010

118 Corporate Governance CORPORATE GOVERNANCE Massmart believes that the first steps towards good corporate governance must include embracing the requirements of the relevant governance framework and corporate best practice. More than this, Massmart believes that sustainable and effective corporate governance is best demonstrated through a consistent pattern of doing the right thing, through good times and bad. The primary corporate governance framework in South Africa is now the recently released King III Report on Corporate Governance, which forms the backbone to Massmart s own corporate governance framework; in addition Massmart applies high ethical standards which are considered essential for any governance framework to operate in. In addition to this corporate governance framework, the Group is committed to complying with all legislation, regulations and best practices relevant to our business, in every country where we conduct business. For the 2010 financial year, apart from the exceptions outlined immediately below, the Board confirms that the Group complied with the Code of Corporate Practices and Conduct as set out in the King III Report. EXCEPTIONS TO KING III f The King III Report states that the chairman of the board be an independent non-executive director. Mark Lamberti was appointed non-executive Chairman on 1 July 2007 and, as he was previously the CEO of Massmart, he could not be considered independent until June The Board is satisfied that Mark Lamberti should now be considered an independent director. Recognising however that some may differ with this view, Chris Seabrooke, the non-executive Deputy Chairman, maintains his role as the Group s Lead Independent Director. In addition, to ensure good governance, and as recommended by King III, the chairmanship of each of the four Board Committees is held by independent directors. f The King III Report requires that the salaries of the three most highly-paid employees who are not executive directors should be disclosed. Due to their specialised retail skills, the highly competitive South African retail environment and the employees value to Massmart, the Board does not wish to disclose this information for each of the individuals but has instead disclosed the total salaries of the three employees concerned on page 128. None of the employees earns a higher salary than either of the executive directors. f The Board does not believe that directors should earn attendance fees in addition to a base fee. Many directors add significant value to the Group outside of the formal Board and Committee meetings, sometimes greater than they might do within the confines of a formal meeting. f The Board does not intend to ask the shareholders for non-binding approval for the Group s remuneration policies. The rationale and basis for the Group s executive remuneration policy is carefully considered by the Remuneration and Nominations Committee and is documented in the annual reports. Shareholders with concerns at this policy should contact the Chairman of either the Board or the Committee. f The head of the Group s Internal Audit function, the Chief Audit Executive (CAE), does not report to the Audit Committee. Instead, the CAE reports administratively to the CFO but functionally to the Audit Committee. The Committee believes that the CFO respects and encourages the independence of the CAE and his department, and that the CAE, in turn, is able to maintain his independence despite his administrative reporting-line to the CFO. f The Board does not intend to institute a formal dispute resolution process as it believes that the existing processes within the Group operate satisfactorily and do not require a more formal and separate mechanism. f Contrary to the recommendations in the King III Report, the Board is unable to remove directors without shareholder approval, except where a director retires by rotation. The Board believes that all directors, but particularly non-executive directors, represent the Company s shareholders and so it should be the shareholder body that finally approves a director s appointment or dismissal from the Board. f The King III Report requires that the Company s sustainability report be audited by an independant external professional. Massmart s sustainability report has not been audited but verification of the key sustainability metrics on page 5 have been obtained through agreed upon procedures performed by Deloitte & Touche. A copy of the agreed upon procedures report is available at the registered offices of the Company. Massmart Annual Report

119 Corporate Governance CORPORATE GOVERNANCE THE BOARD The Board of Massmart is responsible for directing the Group towards the achievement of the Massmart vision and mission. The Board is therefore accountable for the development and execution of the Group s strategy, operating performance and financial results, as well as being the custodian of the Group s corporate governance. The Board appreciates that strategy, risk, performance and sustainability are inseparable. The Board is responsible for its own composition, the appointment of the Chairman and the Chief Executive Officer, and the constitution and composition of its Committees. The Board has a charter setting out its policies, roles and responsibilities in the execution of its mandate described above. Each Board Committee also has a charter, or terms of reference, that is formally signed off by the Board. Annually in November the Committees and Board review, and amend if necessary, the respective charters to ensure their relevance. The role of all directors is to bring independent judgement and experience to the Board s deliberations and decisions. With effect from July 2010, the Board comprises two executive directors and 11 independent non-executive directors. The Remuneration and Nominations Committee prepares and circulates a questionnaire aimed at gauging the independence status of each non-executive director. This is completed by each non-executive director and returned to the Committee, which then considers each director s independence. The Board comprises: f Two Executive Directors; and f 11 Independent Non-executive Directors. The Committee feels that the following aspects are important in assessing a non-executive director s independence: f Whether the director had been employed in an executive capacity in the Group within the last three years; f Whether the director had served on the Board for longer than nine years. In this case, the Committee considers whether that director s independence, judgement and contribution to the Board s deliberation could be compromised, or may appear to be compromised, by this length of service; f Whether the director was a representative of a major shareholder; and f Whether the proportion of that director s shareholding in Massmart (if any) or director s fees represented a material part (10% or more) of their wealth or income. In addition to the above, the Committee considers whether the director is independent in character and judgement and whether there are circumstances which are likely to affect, or could appear to affect, the director s judgement. Having considered the responses and circumstances of each non-executive, the Committee believes that with effect from June 2010 all non-executive directors can be considered independent. The Committee believes that no other non-executive director, or entities associated with or controlled by him/her, owns shares in Massmart which, relative to his/her personal wealth or income, are sufficiently material to affect his/her independence. The Company Secretary, Mr Ilan Zwarenstein, CA(SA), assists the Board in fulfilling its functions and is empowered by the Board to perform his duties. The Company Secretary, directly or indirectly: f Assists the Chairman, CEO and CFO with induction of new directors; f Assists the Board with director orientation, development and education; f Ensures that the Group complies with all legislation applicable/relevant to Massmart; f Monitors the legal and regulatory environment and communicates new legislation and any changes to existing legislation relevant to the Board and the Divisions; and f Provides the Board with a central source of guidance and assistance. Read more Biographical details of each Board member can be found on pages 15 to 17 Massmart at a Glance All directors retire by rotation every three years and, unless requested by the Board to serve a further term, retiring directors are not proposed for re-election by the shareholders. In addition, shareholders must ratify the initial appointment of each director at the first annual general meeting following that director s appointment. As a result of the requirement that all directors compulsorily retire after three years, at the 24 November 2010 annual general meeting the following directors retire by rotation but all offer themselves for re-election: Messrs Kuseni Dlamini, Mark Lamberti and Nigel Matthews and Mmes Lulu Gwagwa and Phumzile Langeni. 118 Massmart Annual Report 2010

120 Corporate Governance BOARD PROCESS AND EVALUATION The Board meets four times a year and on an ad hoc basis should a particular issue demand its attention. In addition, the Board meets annually to formally consider and approve the strategies of the Massmart Divisions and Group. The Board s authority is devolved sequentially through the Massmart Executive Committee, the Divisional Boards and the Divisional Executive Committees, as formally prescribed by the Massmart Governance Authorities (described below). In addition, the Board has delegated certain specific responsibilities to five Board Committees, described more fully below. These Committees assist the Board and directors in discharging their duties and responsibilities under King III and the Governance Authorities. Full transparency of the Committees deliberations is encouraged and the minutes of all Committee meetings are included in the formal Board papers at the ensuing Board meeting. All directors are welcome to attend any Board Committee or Divisional Board meetings. The Massmart Governance Authorities describe the specific levels of authority and required approvals for all major decisions at both Group and Divisional level. It clarifies which executive position, Committee or Board needs to be consulted prior to taking the decision, which body makes the decision and which bodies should thereafter be informed of the decision. The Board works to a formal agenda that covers strategy, structure, operating performance, growth initiatives, sustainability, investor relations, risk and governance, and any other key activities of the Group. An annual agenda structure ensures that other areas including IT and compliance are addressed. Formal Board papers are prepared for every discussion item on the meeting s agenda and are distributed timeously to Board members. Directors are encouraged to take independent advice, at the Company s cost, for the proper execution of their duties and responsibilities. During this financial year no director felt it necessary to seek such advice. They also have direct, unfettered access to the Group s external auditors, professional advisors and to the advice and services of the Company Secretary. Directors have unrestricted access to any executive, manager or employee in the Group. Annually in September, the Remuneration and Nominations Committee facilitates a comprehensive formal performance evaluation of the CEO, comprising a self-evaluation, a questionnaire evaluating the CEO by every non-executive director, and an appraisal of the CEO by each of his direct reports using a different questionnaire. The Board Chairman provides the summary and feedback of the above to the CEO, and he is encouraged to probe and debate any aspect of the evaluation with the Board. At the same time, all Board members complete a detailed Board self-assessment, covering the composition, duties, responsibilities, process and effectiveness of the Board. Similarly, all Board Committee members complete detailed self-assessments covering the same aspects of their committees. The results of these assessments are collated by the Company Secretary and sent in summarised form to the respective Board and Committee Chairpersons for a formal written response. The summarised results together with the Chairpersons written responses are included in the Board papers at the November meeting. Finally, all Board members formally assess the Chairman s performance and the Deputy Chairman provides the feedback. These assessments are approached in a constructive manner and provide valuable input that is used to enhance the effectiveness of the Chairman, the CEO, and the Board and its Committees. Massmart Annual Report

121 Corporate Governance CORPORATE GOVERNANCE BOARD AND COMMITTEE ATTENDANCE Status/Position Board AGM Audit Remuneration and Nominations Risk Strategy and Investment Sustainability and Transformation BOARD MEMBERS MJ Lamberti Non-executive 4/4 C 1/1 4/4 0/0 C CS Seabrooke Independent Non-executive 4/4 1/1 3/3 4/4 0/0 Independent MD Brand Non-executive 3/4 1/1 2/2 1/2 ZL Combi 1 Independent Non-executive 2/3 0/1 Independent KD Dlamini Non-executive 2/4 0/1 3/4 C Independent NN Gwagwa Non-executive 4/4 1/1 2/2 GRC Hayward Executive 4/4 1/1 2/2 0/0 JC Hodkinson Independent Non-executive 4/4 1/1 0/0 Independent P Langeni Non-executive 4/4 1/1 3/3 2/2 Independent IN Matthews Non-executive 4/4 1/1 3/3 C 4/4 2/2 C Independent P Maw Non-executive 4/4 1/1 2/3 2/2 0/0 Independent DNM Mokhobo Non-executive 4/4 1/1 3/4 GM Pattison 2 Executive 4/4 1/1 0/0 1/1 MJ Rubin Independent Non-executive 3/4 1/1 MANAGEMENT Chief Audit N Gray Executive 2/2 Corporate B Leroni Affairs Executive 2/2 P Maphoshe Human Capital Executive 1/2 CEO of K Vyvyan-Day Masswarehouse 2/2 EXTERNAL Independent Prof D de Jongh 3 member 1/2 C C Chairperson of committee. Resigned from the Board on 1 May Resigned from the Sustainability and Transformation Committee on 25 August Appointed member of the Sustainability and Transformation Committee on 1 July The Strategy and Investment Committee did not meet during the 2010 financial year. Read more Greater detail on each committee s terms of reference, activities and meetings held during the financial year are shown on page 121 Corporate Governance 120 Massmart Annual Report 2010

122 Corporate Governance BOARD COMMITTEES Composition Scheduled meetings Read more Responsibility Audit Committee Remuneration and Nominations Committee Risk Committee Strategy and Investment Committee Sustainability and Transformation Committee Nigel Matthews Chris Seabrooke Phumzile Langeni Peter Maw Kuseni Dlamini Mark Lamberti Chris Seabrooke Nigel Matthews Dawn Mokhobo Nigel Matthews Dods Brand Lulu Gwagwa Guy Hayward Peter Maw Norman Gray Kevin Vyvyan-Day Mark Lamberti Chris Seabrooke Guy Hayward Jim Hodkinson Peter Maw Grant Pattison Phumzile Langeni Dods Brand Grant Pattison Brian Leroni Pearl Maphoshe Prof Derek de Jongh Three times during the year. Four times during the year. Twice during the year. Did not meet during the year. Twice during the year. More information on the activities and responsibility of the Audit Committee can be found on page 123. Corporate Governance More information on the activities and responsibility of the Remuneration and Nominations Committee can be found on page 126. Corporate Governance More information on the activities and responsibility of the Risk Committee can be found on page 130. Corporate Governance f Overseeing the effectiveness of the Group s internal control systems. f Reviewing the scope and effectiveness of the external and Internal Audit functions. f Ensuring that adequate accounting records have been maintained. f Ensuring the appropriate accounting policies have been adopted and consistently applied. f Reviewing and reporting on compliance with the King III Report. f Testing that the Group s going-concern assertion remains appropriate. f Overseeing the quality and integrity of the annual financial statements. f Designing, monitoring and communicating the Group s remuneration policies. f Considering and approving executive remuneration including short- and long-term incentives. f The assessment, recruitment and nomination of new nonexecutive directors. f To oversee the Group s risk management programme as contemplated in King III. f To monitor issues that may materially affect Massmart s strategy, financial health or shareholder value. f To assist the Group to discharge its business sustainability responsibility with respect to the implementation of practices that are consistent with transformation and good corporate citizenship. EXECUTIVE COMMITTEE Composition Scheduled meetings Read more Responsibility Grant Pattison (CEO) Monthly Guy Hayward (CFO) Jan Potgieter (Massdiscounters Chief Executive) Kevin Vyvyan-Day (Masswarehouse Chief Executive) Llewellyn Walters (Massbuild Chief Executive) Robin Wright (Masscash Chief Executive) Joe Owens (New Formats Chief Executive) Jay Currie (Retail Director Masscash) Pearl Maphoshe (Group Human Capital Executive) Brian Leroni (Group Corporate Affairs Executive) Llewellyn Steeneveldt (Group Commercial Executive) Biographical details of each Executive Committee member can be found on pages 18 and 19. Massmart at a Glance f Deliberates and takes decisions or makes recommendations on all matters affecting Group strategy and operations, including risk management, and executive and senior management succession. Massmart Annual Report

123 Corporate Governance CORPORATE GOVERNANCE STRATEGY AND INVESTMENT COMMITTEE The Strategy and Investment Committee comprises the CEO, the CFO, and Messrs Mark Lamberti (Chairman), Chris Seabrooke, Peter Maw and Jim Hodkinson, but other experts, internal or external, may be invited as appropriate. The role of the Committee is to debate issues that may materially affect Massmart s strategy, financial health or shareholder value, and, where appropriate or required, to make firm recommendations on these issues to the Board. These issues may include: major acquisitions or disposals; major commitments and investments; material new share issues; possible significant changes or threats to the Group gearing levels; and new debt structure or related-risk exposures. The Committee meets on an as-required basis initiated by either a potential transaction greater than R400 million or when a material issue requires debate. SUSTAINABILITY AND TRANSFORMATION COMMITTEE The Sustainability Committee comprises Mmes Phumzile Langeni (Chairperson) and Pearl Maphoshe (Group Human Capital Executive), and Messrs Dods Brand, Brian Leroni (Group Corporate Affairs Executive) and an independent expert, Professor Derek de Jongh (Director: Centre for Responsible Leadership, The Facility of Economic and Management Sciences, University of Pretoria) who was appointed on 1 July Grant Pattison resigned from the committee on 25 August The role of the Committee is to assist the Group with its responsibility towards sustainability with respect to practices that are consistent with good corporate citizenship. The Committee met twice during the financial year with the objective of reviewing Massmart s Socially Responsible Investment Index, broad-based black economic empowerment, and sustainability reporting performance. Performance in each of these areas is measured with reference to the Johannesburg Stock Exchange s (JSE) Socially Responsible Investment Index criteria, the Department of Trade and Industry s (DTI) Broad-based Black Economic Empowerment (B-BBEE) scorecard and the Global Reporting Initiative III guidelines. The Committee is satisfied with Massmart s sustainability performance and is particularly encouraged that the Group continues to exceed its interim B-BBEE target by now achieving Level 4 contributor status a year earlier than planned. Further detail on the Group s sustainability practices can be found in the section titled Corporate Accountability on page 100. EXECUTIVE COMMITTEE The Massmart Executive Committee is the most senior executive decision-making body in the Group. The Committee is chaired by the Chief Executive Officer (Grant Pattison) and comprises the Chief Financial Officer (Guy Hayward), Group Human Capital Executive (Pearl Maphoshe), Retail Director Masscash (Jay Currie), Group Corporate Affairs Executive (Brian Leroni), the four divisional Chief Executives (Jan Potgieter, Kevin Vyvyan-Day, Llewellyn Walters and Robin Wright), the Chief Executive of the New Formats Division (Joe Owens) and the Group Commercial Executive (Llewellyn Steeneveldt). The Committee deliberates, takes decisions or makes recommendations on all matters of strategy and operations. Within the parameters described by the Board-approved Governance Authorities, the decisions or recommendations are sometimes referred to the Board or its relevant Committee for final approval, while in other cases the power to take decisions is delegated to Divisional Boards or Executive Committees. The Executive Committee has specific responsibility, inter alia, for: f Monitoring and measuring the structures, trends and performance of markets and competition; f Strategic planning; f Defining, configuring, financing and structuring the Group s portfolio of assets; f Shaping and approving the competitive strategies, operating plans and budgets of the Divisions and functional departments; f Measuring, monitoring and taking proactive corrective action on Divisional performance; f Ensuring adequate risk management, controls, governance, and compliance throughout the Group; and f Shaping and approving succession plans and senior executive management appointments. 122 Massmart Annual Report 2010

124 Corporate Governance AUDIT COMMITTEE During the financial year, the Audit Committee comprised Messrs Nigel Matthews (Chairman), Chris Seabrooke, Peter Maw and Ms Phumzile Langeni, all of whom are independent non-executive directors and who each have the requisite financial and commercial skills and experience to contribute to the Committee s deliberations. Read more More information on the Committee can be found on page 121 Corporate Governance The Chief Executive Officer, the Chief Financial Officer, senior financial executives of the Group and representatives from the external and internal auditors attend all meetings by invitation. The internal and external auditors have unfettered access to the Audit Committee and its members, and both present formal reports to the Committee. The Chairman of the Committee meets quarterly with the Chief Audit Executive, and at the start of every Committee meeting the external auditors have a private audience with the Committee. The Corporate Laws Amendment Act, 2007, imposes further duties and responsibilities upon the Audit Committee, including: f Nominating the proposed external auditor to the shareholders at the annual general meeting; f Determining the fees to be paid in respect of the external audit and the terms under which the audit is provided; f Pre-approving any contract with the external auditor to provide a non-audit service and determining the nature and extent of such non-audit services; f Dealing with complaints relating to the financial statements, accounting practices, audit of the financial statements, internal audit or any other related matter; and f Reporting on the Committee s activities in this annual report. In specific response to the requirements of this Act, King III and also in terms of its charter, the Committee can report as follows: f The Committee has reviewed the scope, quality, effectiveness, independence and objectivity of the external auditors and is satisfied with all of these areas. The audit firm Deloitte & Touche and audit partner Mr André Dennis will be proposed to the shareholders at the November 2010 annual general meeting to be the Group s auditor for the 2011 financial year. The Committee is satisfied that the internal financial controls of the Divisions and Group operated effectively throughout the 2010 financial year and can be relied upon. In addition, the Committee is satisfied with the Group s accounting policies and that these have been appropriately and consistently applied throughout the 2010 financial year. The Committee reviewed this integrated annual report and recommended it to the Board for approval. f The nature and extent of non-audit services provided by the external auditors is reviewed annually to ensure that fees for such services do not become so significant as to call into question their independence of Massmart. The nature and extent of any future non-audit services have been defined and pre-approved, and the total fee associated with those non-audit services may not exceed 50% of the total audit fee without approval of the Committee. During the 2010 financial year non-audit services represented 17.6% of the audit fee but this was condoned by the Committee. Included in this amount was a significant one-off staff development and training initiative awarded to Deloitte & Touche of R2.4 million. If it appears that this guideline will be exceeded on a consistent basis, non-audit services will be outsourced to alternative auditors. No reportable irregularities were identified and reported by the external auditors to the Committee. f The Massmart website ( has a link enabling the general public to lodge complaints with the Committee. Since establishing this functionality in 2009, no complaints have been received. f The Committee also performs the requirements of the Act relative to the Group s South African subsidiaries. Audit Committee responsibilities: f Overseeing the effectiveness of the Group s governance, risk and internal control systems. f Reviewing the scope and effectiveness of the external and Internal Audit functions. f Ensuring that adequate accounting records have been maintained. f Ensuring the appropriate accounting policies have been adopted and consistently applied. f Reviewing and reporting on compliance with the King III Report. f Testing that the Group s going-concern assertion remains appropriate. f Overseeing the quality and integrity of the annual financial statements. f Ensuring that Internal Audit reports functionally to the Audit Committee, is considered independent, applies King III and IIA standards, approves Internal Audit s plan and ensures that Internal Audit have sufficient resource and skill to effectively perform their function. f Reviewing the adequacy and effectiveness of combined assurance, compliance and IT. f Receiving and reviewing the assurance assertion of Internal Audit and presenting this to the Board. Massmart Annual Report

125 Corporate Governance AUDIT COMMITTEE Annually the Committee considers whether it is meeting its duties and responsibilities as set out in the Committee charter and in meeting the requirements of the Corporate Laws Amendment Act. The Audit Committee receives reports on Group companies financial performance, governance, and internal controls, adherence to accounting policies, compliance and areas of significant risk, amongst others. The Committee also receives written reports by both the external and internal auditors, which are accompanied by discussion with Committee members. After considering these reports, the Committee formally reports to the Board, twice each year, regarding the overall control framework and effectiveness of controls. Each of the four Divisions has a Financial Review Committee which meets twice a year before the finalisation and release of the Group s Interim and Preliminary financial results. These Committees effectively function as Divisional Audit Committees but not strictly in the manner required by the regulators or King III. The attendance at these meetings includes: the Divisional Chief Executive and Finance Director, key finance and accounting staff, members of Internal and External Audit, and Massmart Corporate Finance executives. Minutes from these meetings are included with the papers of the following Group Audit Committee meeting. Annually the Audit Committee reviews the Financial Review Committee minutes, external audit report and annual financial statements to comply with the Corporate Laws Amendment Act required of a holding company Audit Committee and its responsibilities in regard to all company subsidiaries. The Group s interim reports are always subject to independent review by the external auditors. The Committee s report in accordance with section 270A(1)(f) of the Companies Act, No. 61 of 1973, as amended, can be found in the Directors Report on page 156. SUITABILITY OF THE CHIEF FINANCIAL OFFICER As required by the JSE, the Committee and Board have considered the skills, qualifications and performance of the Chief Financial Officer, Guy Hayward, and are unanimously satisfied of the continuing suitability for the position. His biographical details can be found on page 15. Read more The detailed Audit Committee report can be found on page 156 Group Financial Statements EXTERNAL AUDIT During the financial year, Deloitte & Touche were the external auditors for all Group companies, with the exception of: f Greenwoods Chartered Accountants who audit De La Rey 1001 Building Materials (Pty) Limited and Thabiletrade 22 (Pty) Limited; and f Ernst & Young who audit the Zimbabwean entities of Mercantile Investment Company (1971) (Pvt) Limited and the Dealsave Trust. During the year, Deloitte & Touche provided certain non-audit services, including tax reviews and advice, and reviews of information technology systems and applications. Total fees incurred during the 2010 financial year to Deloitte & Touche were R17.0 million, of which R3.0 million related to non-audit services. As noted above, this higher than normal level of non-audit services was approved by the Committee. Fees to external auditors Rm % Audit services Non-audit services Total INTERNAL AUDIT The Audit Committee considers Massmart Internal Audit to be an independent, objective body providing assurance to the Group s governance, risk and control activities. Internal Audit comprises a dedicated team of 36 staff that, although managed from Massmart Corporate, is deployed Group-wide. The team is comprised of appropriately tertiary qualified and experienced personnel, including internal audit and retail/wholesale professionals, to ensure the delivery of a relevant and high-quality risk-based audit service. Pleasingly, 80% of the audit staff and 80% of audit management are African, Coloured or Indian. 124 Massmart Annual Report 2010

126 Corporate Governance The responsibilities of Internal Audit are defined and governed by a charter approved by the Audit Committee and Board. Massmart Internal Audit Services has the unequivocal support of the Board and Audit Committee and has access to any part of or person in Massmart. All employees are expected to co-operate positively with Massmart Internal Audit Services. Massmart Internal Audit reviews the significant business, strategic, governance, risk and controls across Massmart in order that an assessment is provided to the Audit Committee on the level of assurance that can be placed on governance, control and risk management across the Group through a written assurance assertion provided to the Audit Committee annually which is presented to the Board by the Audit Committee. To ensure independence, Massmart Internal Audit reports functionally to the Massmart Audit Committee. Massmart does not apply the King III recommendation that the Audit Committee is responsible for the appointment, remuneration, performance/ assessment and where necessary dismissal of the Chief Audit Executive. This process is conducted jointly by the Audit Committee and the CEO and CFO as this is deemed more effective. The Audit Committee approves the annual Internal Audit plan and the Internal Audit budgets. The CAE has unrestricted access to anyone in the organisation and has frequent and independent discussions and updates with the Audit Committee Chairman and Massmart executive directors. The CAE holds a senior executive position in the organisation and has an influential impact across the business strategically and operationally. The Board provides Massmart Internal Audit with the authority to attend any strategic session, Committee or Board meeting and to have unrestricted access to all information across the Group to assist with its determination of the types and levels of governance, control and risk that exist across Massmart. Internal Audit: f Massmart Internal Audit is an objective body providing assurance concerning the Group s governance, risk and control activities. f Internal Audit has the unequivocal support of the Board and Audit Committee. f Internal Audit is considered independent and has been subjected to a quality review. f The Internal Audit team formally reports any material findings to the Divisional Boards and the Audit Committee on a quarterly basis. f There is significant Internal Audit involvement in Information Technology (IT) throughout the Group to ensure satisfactory IT governance and assurance. The Internal Audit team formally reports any material findings and matters of significance to the Divisional Boards on a quarterly basis and to the Audit Committee when it meets. The reports highlight whether actual or potential risks to business are being appropriately managed and controlled. Progress in addressing previous unsatisfactory audit findings is monitored until Internal Audit reports the proper resolution of the problem area. Massmart Internal Audit applies a risk-based approach that aligns its audit methodology and audit universe to the internal and, where applicable, external risks facing Massmart. Every function and role across the Massmart Group is subject to Internal Audit review. The annual Internal Audit plan is determined through a continuous assessment and understanding of risks facing the Group. Where necessary, although infrequent, some audit tasks are outsourced to consultants with appropriate skills, for example, certain forensic work or highly specialised IT reviews. There is significant Internal Audit involvement in Information Technology (IT) throughout the Group in order to ensure satisfactory IT governance and assurance. All new major IT systems in the Group require specific Massmart Internal Audit sign-off prior to implementation and all IT projects beyond a specified Rand value are subject to Internal Audit review. The Internal Audit role is twofold: to assess the process and controls around large IT projects at significant phases of these projects; and to assess the control environment within existing IT systems and the Group s general computer control environment. Internal Audit adopted the COBIT methodology for technology auditing several years ago. Massmart Internal Audit and External Audit s scope and work-plans, and those of other assurance providers, are properly co-ordinated and when appropriate are relied upon in order to provide efficient and effective assurance to the Audit Committee and to reduce governance burden. Massmart Internal Audit has had a quality review and was found to generally conform (the standard required by the Internal Audit Institute and the highest standard possible). In the last quality assurance review of Massmart Internal Audit two years prior to King III, and with the above processes in place the reviewer (a Big Four Company) noted that the results of an international benchmarking exercise found that Massmart Internal Audit enjoys incomparable status with regard to the authority and sponsorship granted to it by the Audit Committee and management and the independence displayed in the execution of Internal Audit activities, as best practice was exceeded by some distance. Massmart Annual Report

127 Corporate Governance REMUNERATION OF DIRECTORS AND EXECUTIVES During the 2010 financial year the Remuneration and Nominations Committee comprised Messrs Kuseni Dlamini (Chairman), Chris Seabrooke, Mark Lamberti, Nigel Matthews and Ms Dawn Mokhobo. With the exception of Mark Lamberti, all Committee members are independent non-executive directors for the 2010 financial year. The CEO attends all Committee meetings by invitation but is not present when his own remuneration is discussed. Massmart, through the Remuneration and Nominations Committee, implements remuneration policies that enable it to recruit, retain and motivate the executive talent needed to achieve superior performance. The Committee, with periodic advice from external executive remuneration consultants, ensures the provision of executive remuneration packages that are competitive with reference to other major South African retail companies, as well as other companies similar to Massmart in their size, spread and complexity. Our executive remuneration policy has three components, being: f The fixed portion, specifically the monthly basic cash salary, and benefits including motor vehicles, retirement funding and medical aid; f The short-term or performance incentives, represented as multiples of basic monthly salary, and linked to the achievement of profit growth and/or personal performance. If achieved, these incentives are paid annually; and f Long-term equity incentives under the Massmart Holdings Limited Employee Share Trust. The Committee considers and recommends to the trustees of the Massmart Holdings Limited Employee Share Trust any proposed shares or options that are granted in terms of the Share Trust rules. Annually the Committee reviews the Group s employee benefit funds, specifically the in-house medical scheme and the provident and pension funds, considering their performance, financial stability and the general principles governing the benefit levels being applied. The Massmart remuneration policy strives for fixed remuneration at the median to upper quartile of comparable positions. At least every two years the Committee receives a report prepared by independent remuneration consultants on the recent trends in, and the current levels of, short- and long-term executive remuneration in South Africa. In May 2010 the Committee received such a report prepared by 21st Century Business & Pay Solutions, an independent remuneration consultancy. As a result of this report, the remuneration of several executives and senior managers were adjusted. With regard to short-term or performance incentives, Massmart places particular emphasis on generous annual incentives for high performance for both executive directors and executive management. This policy, communicated to and understood by the Group s executives, codifies a range of performance incentives linked to annual headline earnings per share growth for the Group in excess of average CPI (as reported by StatsSA) plus 5%, or growth in profit before tax for each Division, as appropriate. Executives can earn an increasing multiple of their monthly basic salary depending upon the earnings growth exceeding CPI plus 5% or higher % increments. With effect from 2006, an element of the annual incentive bonus was linked to corporate accountability performance, specifically the achievement of B-BBEE transformation targets approved by the Remuneration and Nominations Committee. This incentive can amount to an additional one to three months salary. The Committee also has the discretion to reward superior individual performance. Long-term equity incentive plans ensure the alignment of executive reward with shareholders interests, in particular the sustained creation of shareholder value. New issues of annual allocations of shares or options are only allowed when Massmart s growth in headline earnings per share in the prior year exceeds average CPI plus 5%, consequently there was no annual issue during the 2010 financial year. The amount allocated is based upon a factor of the executive s total prior year remuneration including incentive bonus. Read more More information on the Committee can be found on page 121 Corporate Governance Non-executive directors receive fees in the top quartile for their role as directors and for their roles on Board Committees. Non-executive directors fees paid in the current financial year are detailed below: Chairman of the Board R675,000 R725,000 Deputy Chairman R490,000 R520,000 Directors R200,000 R215,000 Committee Chairmen R200,000 R210,000 Committee members R94,000 R100,000 Audit Committee (additional to above). For the additional meetings and responsibilities arising from the Corporate Laws Amendment Act relative to subsidiaries R25,000 R25,000 The fees paid to the trustees of the Massmart Holdings Limited Employee Share Trust are R40,000 each and R50,000 for the Chairman. The Committee believes that participants in the employee share scheme should, on average, hold unvested shares or options representing value equivalent to approximately three times their annual remuneration. With effect from 2002, only members of the Executive Committee can elect to receive scheme shares, whilst all other participants receive options. 126 Massmart Annual Report 2010

128 Corporate Governance DIRECTORS EMOLUMENTS Gains on Otherwise Fringe exercise in benefit of of share Bonuses connection interest- options Services as and with the free and directors of perfor- Retirement affairs of loans on shares Massmart Salary mance- and Massmart used to purchased Holdings and related Other related Holdings finance by Limited allowances payments 2 benefits benefits Limited Sub-total shares 3 directors Total R000 R000 R000 R000 R000 R000 R000 R000 R000 R000 For the year ended June 2010 Executive directors Pattison, GM 3, ,659 4,513 9,172 Hayward, GRC 2, ,777 3,733 7,510 5,438 1, ,436 8,246 16,682 Non-executive directors Lamberti, MJ Seabrooke, CS Brand, MD Combi, ZL Dlamini, KD Gwagwa, NN Hodkinson, JC Langeni, P Matthews, IN Maw, P Mokhobo, DNM Rubin, MJ , ,201 5,201 Total 5,161 5,438 1, ,637 8,246 21,883 1 Resigned 1 May In order to match incentive awards with the performance to which they relate, bonuses above reflect the amounts accrued in respect of each year and not amounts paid in that year. 3 Held in terms of the rules of the Company s share scheme. For the year ended June 2009 Executive directors Pattison, GM 2,875 1, ,857 6,344 2, ,152 Hayward, GRC 2,240 1, ,112 3,405 7,517 5,115 2, ,969 9,749 2,951 21,669 Non-executive directors Lamberti, MJ Seabrooke, CS Brand, MD Combi, ZL , ,050 Dlamini, KD , ,073 Gwagwa, NN , ,967 Hodkinson, JC Langeni, P , ,112 Matthews, IN Maw, P Mokhobo, DNM , ,037 Rubin, MJ , ,529 8,392 13,921 Total 5,404 5,115 2, ,498 9,749 11,343 35,590 1 With these proceeds he acquired 33,210 Massmart shares. 2 In order to match incentive awards with the performance to which they relate, bonuses above reflect the amounts accrued in respect of each year and not amounts paid in that year. 3 Held in terms of the rules of the Company s share scheme. 4 Individual recipient of 25% of fees remaining fees paid to company. 5 Gain on shares sold to non-executive directors at par value. Further detail can be found on page 128. Massmart Annual Report

129 Corporate Governance REMUNERATION OF DIRECTORS AND EXECUTIVES The comments on this page provide further background and context to the figures disclosed in this note, Directors emoluments, and Interests of directors in the Company s Share Scheme. These notes can also be found in the Group financial statements, note 35 on page 205 and note 36 on page 207. GM PATTISON Grant received a 5% increase to his salary and allowances for the 2010 financial year, from R2.88 million to R3.02 million. For the 2010 financial year Grant did not receive any bonus in terms of the Group s Short-term Executive Incentive Scheme which rewards the Group s executive directors based on annual growth in headline earnings per share (HEPS). The Remuneration and Nominations Committee awarded him a qualitative bonus of four months in recognition of his exceptional efforts strategically and operationally in a difficult economic and operating environment to minimise profit declines and enhance the Group s base for future growth. This bonus totalled R0.98 million. Grant s total cash remuneration for the year of R3.99 million is 6% lower than that for Grant did not sell any Massmart shares or options during the 2010 financial year. Through the Share Scheme, Grant has 1,562,298 Massmart shares and options. The average length of time that he has held these shares is 4.5 years and the average strike price is R50.02 per share. A family trust of which Grant is a beneficiary also owns 445,010 Massmart shares directly. GRC HAYWARD Guy received an 8% increase to his salary and allowances for the 2010 financial year, from R2.24 million to R2.42 million. For the 2010 financial year Guy did not receive any bonus in terms of the Group s Short-term Executive Incentive Scheme which rewards the Group s executive directors based on annual growth in HEPS. The Remuneration and Nominations Committee awarded him a qualitative bonus of four months in recognition of his exceptional efforts strategically and operationally in a difficult economic and operating environment to minimise profit declines and enhance the Group s base for future growth. This bonus totalled R0.81 million. Guy s total cash remuneration for the year of R3.23 million is 4% lower than that for Guy did not sell any Massmart shares or options during the 2010 financial year. Through the Share Scheme, Guy still has 1,032,898 Massmart shares and options. The average length of time that he has held these is 4.7 years and the average strike price is R48.75 per share. Guy also owns 22,000 Massmart shares directly. TOP THREE EXECUTIVES SALARIES King III recommends that the salaries of the top three executives, excluding executive directors, should be disclosed. Due to their specialised retail skills, the highly competitive South African retail environment and the employees value to Massmart, the Board does not wish to disclose this information for each of the individuals but has instead disclosed the total salaries of the three employees concerned. None of the employees earns a higher salary than either of the executive directors. In the 2010 financial year, the top three executives combined salaries (comprising basic salary, motor vehicles, medical aid and retirement benefits) were R8.8 million (2009: R8.3 million). NON-EXECUTIVE DIRECTORS FEES The Board s policy is to pay non-executive directors fees that are competitive but not in the top quartile. As noted at the beginning of this Corporate Governance section, attendance fees are not paid. Directors fees were not increased for the 2010 financial year. The following fees, and fee increases, for the 2011 financial year will be proposed to the November 2010 annual general meeting: f Chairman R725,000 f Deputy chairman R520,000 f Non-executive directors R215,000 f Committee chairpersons R210,000 f Committee members R100,000 SALE OF SHARES TO BLACK NON-EXECUTIVE DIRECTORS IN 2008 Shareholders at the November 2008 annual general meeting approved the sale of Massmart treasury shares to the Group s five black non-executive directors. Accordingly, each director purchased 20,000 Massmart shares for a nominal value of 1 cent each. The market price of the Massmart shares at the time of the transaction was R83.63 and so each director received deferred value of approximately R1.7 million. The salient points relating to these shares were covered in detail in the resolutions for the November 2008 annual general meeting. Points to note here are that the shares attract ordinary dividends and have voting rights, and that they may only be sold in two 50% tranches from November 2011 and November 2013, respectively. 128 Massmart Annual Report 2010

130 Corporate Governance INTERESTS OF DIRECTORS IN THE COMPANY S SHARE SCHEME Details of directors shares and share options per director: Number of Gain on Subscription Market shares/ sale/ price price share exercise Expiry Relevant date R R options R000 date Pattison, GM Balance at the beginning of the previous year 1,931,386 Shares traded* 13 November (400,000) Options exercised 27 May (55,219) 2,951 New shares/options granted 27 May , May 2015 Balance at the beginning of the year 1,562,298 No shares were traded, exercised or granted in the current period. Balance at the end of the year 1,562,298 Comprising: 27 August , August May ,919 1 April , March May , May May , May May , May May , May 2015 *These shares were transferred to The Pattison Family Trust. Hayward, GRC Balance at the beginning of the previous year 817,697 New shares/options granted 27 May , May 2015 Balance at the beginning of the year 1,032,898 No shares were traded, exercised or granted in the current period. Balance at the end of the year 1,032,898 Comprising: 10 March , November , November August , August May ,881 1 April , March May , May May , May April ,641 1 April May , May May , May 2015 Massmart Annual Report

131 Corporate Governance RISK The Risk Committee comprises Messrs Nigel Matthews (Chairman), Dods Brand, Peter Maw, Guy Hayward, Kevin Vyvyan-Day (Chief Executive of Masswarehouse) and Norman Gray (Chief Audit Executive), and Ms Lulu Gwagwa. Nigel Matthews chairs both the Risk and Audit Committees to ensure the appropriate exchange of key issues between the two Committees and as recommended by King III. The Board recognises its responsibility to report a balanced and accurate assessment of the Group s financial results and position, its business, operations and prospects. Aspects of how this is achieved are covered in the section below. INTERNAL CONTROL FRAMEWORK Massmart maintains clear principles and procedures designed to achieve Corporate accountability and control across the Group. These are codified in the Massmart Governance Authorities that describes the specific levels of authority and the required approvals necessary for all major decisions at both Group and Divisional level. Through this framework, operational and financial responsibility is formally and clearly delegated to the Divisional Boards. This is designed to maintain an appropriate control environment within the constraints of Board-approved strategies and budgets, while providing the necessary local autonomy for day-to-day operations. Read more More information on the Committee can be found on page 121 Corporate Governance Audit Committee Massdiscounters Test compliance Board of Directors Responsible for risk/ return of the business Risk Committee Executive Committee Strategic Risk Operational Risk Masswarehouse Massbuild Masscash Internal Audit Test compliance Insight Risk model The Board is responsible for the risk management programme that attempts to balance the risks and rewards in achieving the Group s objectives. On behalf of the Board, the Risk Committee oversees the Group s risk management programme, which has a natural overlap with aspects of the Audit Committee s mandate. Responsibility for risk management and loss prevention rests however, with the Group and Divisional Executive Committees. RISK AND THE RISK COMMITTEE The Board considers risk management to be a key business discipline designed to balance risk and reward, and to protect the Group against risks and uncertainties that could threaten the achievement of our business objectives. The Board s risk strategy has been established through debate with the executive directors where the Group s risk tolerance has been considered and balanced against the drive towards the achievement of its strategies and objectives. 130 Massmart Annual Report 2010

132 Corporate Governance The Risk Committee is responsible to the Board for overseeing the Group s risk management programme. The day-to-day responsibility for risk management, including maintaining an appropriate loss prevention and internal control framework, remains with the executives of the Group and of each Division. The Committee s primary role is one of oversight and therefore it reviews and assesses the dynamic interventions, within the Group s available resources and skills, required in response to business-specific, industry-wide and general risks. The Committee tables a Group risk register, aggregated from those prepared by the Divisions and the Group Executive Committee, to the Board annually in August. In addition to the two Committee meetings, an interim report is prepared annually in February by the executives on the Committee and is circulated to the Committee. This report comments on the status of the risks identified in the current Group risk register, notes any risk incidents that may have occurred since the previous Committee meeting and comments on the internal and external risk environment. The Committee considers there to be two categories of Group risk which can broadly be described as Operational risks and Strategic/Environmental risks: Operational risks by their nature can be immediately addressed or mitigated by local management actions. These risks which include in-store health, safety and security, compliance, fire prevention and detection, IT systems and food safety, amongst others are therefore the direct responsibility of each Divisional Executive Committee where a Loss Prevention or Risk Officer has line-responsibility for overseeing these risks. Strategic/Environmental risks, in contrast, tend to be longer-term or more material in nature and can, in most cases, only be monitored, managed and partially mitigated through longer-term strategic or tactical business responses. These risks, which, for example, include executive talent retention and succession, transformation and supply chain, are the primary focus of the Group s Risk Management process. The Group risk register summarises the major risks facing the Group, taking into account the likelihood of occurrence, the potential impact and any mitigating factors or compensating controls. Together with the Audit Committee, the Risk Committee oversees the maintaining of a sound system of governance, risk management and control with regard to operations, safeguarding assets, reliability of management reporting, and compliance with laws and regulations. LITIGATION AND LEGAL In the normal course of business, Massmart is subject to various legal proceedings, actions and claims. These matters are subject to risks and uncertainties that cannot be reliably predicted. The Board does not believe that there are any material pending or threatened legal actions. INFORMATION TECHNOLOGY Protecting Massmart s electronic assets is increasingly complex as networks, systems and electronic data expand and, in some cases, are shared with third parties and business partnerships. Depending on the internet for communication brings additional risk. Ensuring proper system security, data integrity and business continuity is the responsibility of the Board, but is given effect by the Audit Committee, the Risk Committee, the Massmart Technology Information and Process Forum (TIP) and Massmart s formally contracted information technology business partners and providers and is independently reviewed by the external and internal auditors. Massmart s risk landscape, split into strategic and operational risk, can be summarised as follows: Strategic risk Business model f Non-adherence to business model or poor strategic execution f Insufficient progress with transformation Human capital f Talent retention and succession Economic f Economic volatility Governance/Regulatory f Expected standards of sustainability conduct Operational risk Operating environment f Major store fire f Supply chain f In-store health and safety f Reliance on IT systems Geo-political/Economic f Complexity of the Group s African operations Competitive f Competitor attack on our major merchandise categories Financial (covered in the Group Financial Statements on page 211) f Market risk (comprising interest rate risk, currency risk and other price risk) f Liquidity risk f Credit risk FINANCIAL RISK AND APPRAISAL Financial targets agreed in Group budgets and strategy processes are predicated on assumptions about the future that are uncertain and may prove incorrect or inaccurate. The monitoring and management of this risk is the responsibility of the Executive Committee. Monthly performance is measured and compared to the budget and prior year, and corrective or remedial action taken as appropriate. Despite extensive financial, accounting and management controls and procedures, including reviews by internal and external auditors, there are risks arising from the Group s cash management and treasury operations, direct and indirect taxation, and employee or third-party fraud or economic crime. In addition to financial reviews, Massmart has implemented voluntary processes that enable independent reviews of its corporate accountability performances. These include a biannual ethics review by the South African Institute of Ethics and an annual Socially Responsible Investment (SRI) Index review that is co-ordinated by the JSE. Read more More detail on financial risk can be found in note 39 on page 211 Group Financial Statements Massmart Annual Report

133 Corporate Governance GROUP RISK LANDSCAPE Risk landscape Risk Definition Business model/strategic execution Non-adherence to business model or poor strategic execution Through non-adherence with, or poor implementation and execution of, our business model and/or strategy, the Group s longer-term financial performance and competitive positioning could be severely compromised. The resultant financial performance may be sub-optimal on either an absolute or on a relative basis. Business model/ Strategic execution Insufficient progress with transformation There is the possibility of adverse or undue reputational exposure due to the Divisions or the Group not fulfilling, or underdelivering, towards B-BBEE requirements. In the broader national context, inadequate transformation at all levels by Massmart and other South African businesses will curb the country s longer-term growth potential and maintain the current, unacceptable and unsustainable, levels of social and economic inequality. This issue includes insufficient black representation at executive level at the Group and Divisions. Human capital Talent retention and succession This covers four broad issues being: the national scarcity of retail-specific skills; the challenge to develop and retain sufficient business and leadership skills internally to ensure our longer-term competitiveness; a possible over-dependence on key leaders in the Group; and the need for an actively managed leadership succession pipeline. Economic Economic volatility This concern focuses on three potential impacts, the first being the financial impact on the business and the second being the possible adverse effect on consumer expenditure of dramatic changes in key economic variables including inflation, interest and exchange rates. The third concerns adverse systemic socio-economic impact of the HIV/Aids pandemic. With approximately 30% of the Group s merchandise being imported, directly and indirectly, any sudden changes in the exchange rate will eventually affect the stock valuation. Foreign currency fluctuations in those African countries where Game operates stores can also affect the level of sales and earnings reported by those stores in South African currency, as well as resulting in potentially adverse translation differences affecting earnings. Increases in interest rates will make South African corporate funding more expensive, with an adverse impact on profitability. Higher cost inflation may affect Group profitability where these cost increases cannot be controlled or any additional productivity required is not forthcoming. Lower inflation rates may make long-term property leases with higher fixed escalation rates appear expensive and potentially affect profitability. Governance/ Regulatory Expected standards of sustainability conduct South African consumer behaviour appears to be more affected by sudden and large changes in economic variables, including exchange rates and local interest and inflation rates, than by gradual changes in these variables. It follows that a sudden deterioration in one or several of these economic variables may dampen levels of consumer expenditure, thereby reducing Group sales growth and potentially Group or Divisional profitability too. There is a growing potential threat of significant reputational risk associated with the failure to meet stakeholders increased expectations around sustainability in its many forms. These expectations may be shaped by a variety of standards of conduct as encapsulated in codes such as, but not limited to, Global Reporting Initiative, Global Compact, JSE Socially Responsible Investment (SRI) Index, Broad-based Black Economic Empowerment Codes of Good Practice, Marine Stewardship Council (MSC), Forestry Stewardship Council (FSC) and ISO certification. Increasingly, the Group needs to comply with some or all of these standards. 132 Massmart Annual Report 2010

134 Corporate Governance STRATEGIC RISK Probability Potential impact Risk mitigation LOW LOW HIGH HIGH Financial impact Business impact Financial impact Business impact Financial impact Business impact Financial impact Business impact HIGH HIGH MED HIGH MED HIGH MED MED The Group insists on strategic clarity at the Divisions and Massmart Corporate. The strategies of all Divisions and the Group are formally documented and are reviewed annually at Divisional level, at Group Executive Committee level and then with the Board. A Division s strategies dictate management s operational tactics and priorities. The annual budget process is an output of these reviews. The Board-approved B-BBEE strategy covering the elements of the Code of Good Practice, has been implemented Group-wide and we continue to make good progress as measured by the improvement in the annual external B-BBEE rating and currently have a Level 4 status. Transformation is a major agenda item at all Divisional and Group Board meetings and a senior executive at Massmart has overall responsibility for delivering the strategy. A B-BBEE staff share issue amounting to 10% of the pre-dilution shares of Massmart was implemented in 2006 and all permanent Massmart employees, not already participants in the current share trust, became beneficiaries at that time. In 2008, the Group s five black non-executive directors each purchased 20,000 heavily discounted Massmart shares. For several years an annual transformation incentive has been implemented for Divisional executives. This is a major Group focus area. The Executive Committee actively monitors the progress, development and likely succession plans for the Top 200 employees, as well as monitoring a further 200 employees. In addition, there are in-house education programmes prepared and presented in conjunction with local and international business schools that focus on developing our middle and junior executives. Annual fire-side chats are held with each executive in the Group, which are attended by that person s superior and a third executive. The Group s remuneration policy, incorporating short- and longer-term incentives, is designed to reward significant outperformance and provides an opportunity for staff to accumulate wealth and which can also act as a retention mechanism. All direct foreign exchange import liabilities are covered forward, providing certainty about the expected landed cost of merchandise and also providing a four- to six-month buffer against changing the cost of imported inventory should there be any sudden deterioration in the exchange rate. The value of inventory in the supply chain between manufacturer and retailer is generally actively managed lower by all participants. This reduces the extent of any imported inventory that is over- or under-valued following a sudden change in the exchange rate. Interest rates on the Group s medium-term debt have been fixed to provide certainty as to the future cost of this funding, and this will keep the Group partially immune to any adverse increases in corporate borrowing rates. Where possible, property lease escalation rates are negotiated as low as possible, taking market conditions into account, and certain property leases are inflation-linked, within a cap (maximum rate) and collar (minimum rate). Salary and wage increases are necessarily negotiated in the context of the South African socio-economic environment. Where a negotiated increase may be higher than is suitable, productivity measures may be introduced to reduce the net cost of the higher wages. The Group continually explores means of keeping the net assets of Game s African operations to a minimum, thereby potentially reducing the translation effect of any currency movement. This includes repatriating cash profits as frequently as possible and settling cross-border liabilities timeously. LOW Financial impact Business impact MED MED The Group has implemented transparent stakeholder interactions with special interest groups, which inform our view on stakeholder expectations and the management thereof. There is ongoing identification, monitoring and adoption of relevant principles and standards of sustainability that are consistent with Massmart s core values and industry norms. Massmart is in the JSE SRI Index and it subscribes to MSC and FSC, inter alia. Massmart Annual Report

135 Corporate Governance GROUP RISK LANDSCAPE Risk landscape Risk Definition Operational Major store fire Since 1994 Makro has had three stores totally destroyed by fire. The most recent fire, in 2004, allegedly caused by a sub-contractor working on the roof, occurred despite significant and costly fire detection and prevention measures implemented following the previous Makro store fire in Depending upon the cause of any future potential fire, Makro would be able to secure adequate catastrophe insurance cover but at a very significant premium. Compounding this risk is the relatively high insurable values associated with inventory contained in the Group s larger warehouse formats in CBW, Makro and Builders Warehouse and now the RDCs in Massdiscounters. Operational Supply chain Supply chain describes all the business processes around the movement of inventory in the Group, and is not restricted to logistics but extends into IT systems and business processes around those systems. An efficient and effective supply chain should ensure the lowest-cost movement, and holding, of inventory and the optimisation of in-store inventory levels for given levels of demand. Operational Operational Geo-political/ Economic In-store health and safety Reliance on IT systems Complexity of the Group s African operations An ineffective or inefficient supply chain may result in sub-optimal inventory management, with duplication of costs and over- or under-stocking affecting holding costs or rates of sales. The Group s large warehouse format means that large and sometimes heavy quantities of inventory are moved, stored and stacked sometimes at great heights in our stores. Despite compliance with all relevant legislation, there remains the risk of injury or death to customers or employees should bulky items collapse, with the associated significant reputational risk. With millions of transactions daily, the Group is dependent upon reliable, secure, effective and efficient IT systems, including the management and storage of data and information. Major IT implementations or initiatives can distract management, be costly, destabilise other IT platforms and the business, and/or perform sub-optimally post-implementation. The Group may overly rely on one or more service providers. Reliable connectivity with key transactional intermediaries including banks is critical. Finally, at a strategic level, there exists the potential for misalignment between business strategy and IT capability, which can result in reduced operational effectiveness. This refers to the multiple levels of risk, and the associated complexity, of doing business in 14 countries across Africa, each with different regulatory, fiscal and customs environments. Political risk can become an issue. African currencies can be illiquid, making them vulnerable to any withdrawal of hard currencies. Bureaucracy and/or currency illiquidity can delay cash repatriations. Competitive Competitor attack on our major merchandise categories This refers to the potential adverse impact of a sustained attack by a major competitor (local or international) on one or more of the Group s major merchandise categories or formats. 134 Massmart Annual Report 2010

136 Corporate Governance OPERATIONAL RISK Probability Potential impact Risk mitigation LOW Financial impact Business impact HIGH HIGH All Divisions work closely with external risk assessors, insurance brokers and our major insurers in order to ensure that our stores and regional distribution centres have the highest possible level of fire detection and prevention. LOW Financial impact Business impact HIGH MED Massdiscounters, Makro and Builders Warehouse have implemented IT software to automate the forecasting and replenishment (F&R) of inventory. Massdiscounters has about 65% of their sales by value being automatically replenished. This is about 70% in Builders Warehouse and 15% in Makro. Massdiscounters now operates two substantial RDCs in Cape Town and Johannesburg, respectively. These have been very effective in addressing supply chain concerns and have improved inventory shrinkage levels and in-stock service levels in the stores. LOW Financial impact Business impact LOW HIGH Risk officers in each Division are responsible for monitoring and improving compliance. There is a high executive awareness level. There has been formal communication with suppliers and logistics providers around specified stacking protocols. We continually use Massmart Internal Audit and third party service providers to review in-store health and safety procedures. Warning signs in higher risk areas are on display. LOW Financial impact Business impact HIGH MED All the Group s IT development, hardware and software, must be specifically approved and then monitored by the Group s Technology, Information and Processes Forum (TIP), representing all the Divisions IT executives, Massmart Internal Audit and, where appropriate, the external service providers. Divisional Boards must sign off all IT developments. Massmart Internal Audit has significant IT expertise and independently assesses all IT developments and is part of the go-live decision on any project. External auditors review the IT general control environment in the major Divisions on an agreed rotation basis. MED Financial impact MED Careful pre-selection of countries for new stores, with a thorough evaluation of customs, tax, exchange control and business legislation. Regular repatriation of cash. Business impact MED Although there is a natural economic hedge in place with our South African operation supplying the African store, for accounting purposes IFRS has broken this hedge, resulting in increased volatility of reported foreign currency movements. Dedicated executives across several functions monitor and manage the African operations. Develop relationships with key government and regulatory authorities in those countries. MED Financial impact MED Maintain a relevant and competitive product offering that offers affordable value to our customers. Invest in brand awareness and loyalty. Business impact MED Manage low-cost efficient operations. Ensure suppliers believe that our stores and associated supply chain offer an ideal route to market. Optimise our store locations, and ensure regular store refurbishments and format renewal. Massmart Annual Report

137 Corporate Governance COMPLIANCE, TRANSPARENCY AND ACCOUNTABILITY ANNUAL GENERAL MEETING Attendance by all directors at Massmart s annual general meeting is strongly encouraged while attendance for Board Committee Chairpersons is compulsory. At the November 2009 Massmart annual general meeting the Chairpersons of the Remuneration and Nominations, Audit and Risk Committees were in attendance, as were the Board Chairman, CEO and CFO. In total, 10 non-executive directors attended the annual general meeting. The notice for any general meeting of shareholders includes an explanation of the reason for, and the effects of, any proposed special resolutions. The Company s transfer secretaries attend every general meeting of shareholders to assist with the recording of shareholders attendance and to tally the votes. The Chairman confirms with the meeting that votes will be counted by way of poll, ie all votes are counted, rather than by way of a show of hands. Insight Annual General Meeting 08h30 Wednesday 24 November 2010 Massmart House 16 Peltier Drive Sunninghill Ext 6 Sandton SHARE BUYBACK PROGRAMME Annually the Group seeks, and obtains, the approval of the shareholders in general meeting to purchase Massmart shares. This authority valid until the following year s annual general meeting and subject to the Listings Requirements of the JSE allows the Group to purchase its own shares up to a maximum of 15% of the issued shares, at a price not greater than 10% above the preceding five-day weighted average. Shareholders have been asked to renew this authority at the forthcoming November 2010 annual general meeting. During the year to June 2010 no Massmart shares were purchased on the open market by a Massmart subsidiary. The amount and timing of any future purchases will be determined by the Board and are dependent on the Board s view on the intrinsic value of Massmart shares, the ruling market price from time to time, the Group s cash position and future cash requirements, and prevailing market conditions. The Massmart Employee Share Trust acquires shares from time to time on the JSE open-market to mitigate the dilution caused by the Company issuing new shares when options are exercised by participants. During this financial year, the Massmart Employee Share Trust purchased 1.2 million shares for R137.2 million which were utilised to meet vesting share options. SHARE DEALINGS No director, executive or employee may deal, directly or indirectly, in Massmart shares where that person may be aware of unpublished price-sensitive information. There are strict closed periods during which all directors, executives and employees are not allowed to deal in Massmart shares. The periods begin one month prior to the end of each reporting date (these reporting dates being December and June) and end on the public release of the Group results. A closed period also applies from the date when Massmart issues a cautionary announcement. In addition, all directors, executives and employees, and their associates as defined by the JSE, are not allowed to deal in Massmart shares in the final hour of trading on the JSE. All share dealings by a director, executive or employee must be authorised by either the Chief Executive Officer or Chief Financial Officer. Any dealings by the Chief Executive Officer are authorised by the Chairman, and dealings by the Chief Financial Officer are authorised by the Chief Executive Officer. 136 Massmart Annual Report 2010

138 Corporate Governance CORPORATE ETHICS Massmart is committed to achieving the highest standards of ethical behaviour and continued its strong emphasis on promoting awareness of, and compliance with, Massmart s Code of Ethical Practice. Massmart maintains an independently run Ethics Line by Deloitte Tip Offs Anonymous to which any third party, member of staff or supplier may report a suspected unethical practice. All calls are investigated by Risk Officers within the Group, most of whom are certified Ethics Officers. Ethics investigations are undertaken when deemed necessary by Massmart Internal Audit including the use of certified Ethics Officers. Call and trends are monitored and acted upon by the Group Ethics Committee and call statistics are presented to the Audit Committee annually. Total calls and reports for the year under review were 13% higher than the previous year (see table alongside). Deloitte Tip-offs Anonymous has been certified by the External Whistle-blowing Hotline Services Provider Standard E Massmart regularly communicates its Code of Ethical Practice to suppliers and service providers, and attempts to ensure that they comply with our ethical standards. This is achieved in various ways: suppliers and service providers are invited to make use of the independently managed ethics reporting line; and Massmart s formal trading agreements detail ethical practices that suppliers are expected to uphold (some examples: that suppliers are expected to abide by the laws and regulations of the country; that all products and services comply with legal and safety standards; and that Massmart will not tolerate the use of child labour practices or the use of illegal labour). Massmart applies the same code of ethics and values at all subsidiaries, including non-south African stores or businesses that it operates from. The CEO of Massmart regularly communicates with suppliers and reinforces Massmart s commitment to high standards of ethical conduct and its expectations of the same from suppliers. Massmart maintains a close relationship with the Ethics Institute of South Africa and recently sponsored a survey of ethics effectiveness in itself and numerous other JSE companies through the Ethics Institute. The appointment of Ethics Officers in all Divisions and the formulation and regular meeting of the Group Ethics Forum have ensured the continued focus on the consistent application of ethics practice and training in the organisation. Insight Contact the Massmart Ethics Line FreeCall SMS please call me to (R1 each) FreeFax massmart@ethics-line.com Do what is right, fair, honest and legal! Massmart Ethics Line Total calls and reports July 100 August 93 September 114 October 127 November 130 December 74 January 79 February 123 March 121 April 93 May 101 June 88 Total 1,243 Anonymous calls 12.7% Increase in total calls over last year 36.3% Breakdown of total calls (%) Crime HR Other % Massmart Annual Report

139 Corporate Governance COMPLIANCE, TRANSPARENCY AND ACCOUNTABILITY COMPLIANCE Monitoring and achieving legal and regulatory compliance across the Group has always been a fundamental tenet of our business model. King III however, requires that the compliance process should be more formal with clear responsibilities and reporting. To this end, the Finance Directors in each Division are now the Compliance Officers (and Risk Officers) and have been formally tasked with ensuring that their respective Divisions monitor and comply with all regulations and legislation. Compliance across the Group is exercised as follows: f The environment is monitored, formally and informally, via several sources including specifically-appointed service providers that review all proposed or impending legislation and regulations, as well as non-executive directors, and contacts with government bodies, supplier bodies, and consumer groups. f Depending upon where the response to the impending legislation can most efficiently and effectively be addressed, the task would fall to one of the trading Forums (Food, Liquor, General Merchandise, Cellular) or functional Forums (TIP, Finance) or even the Group ExCo. The members of these forums are also tasked with keeping their respective Divisions apprised of intentions to support the role of the Divisional Compliance Officers. f Ongoing compliance is monitored and tested through various means including Internal Audit, external audit and third-party service providers. Reports from these entities are presented to both the Risk and Audit Committees. The Group Compliance Officer is an in-house legal resource at Massmart Corporate who is a qualified lawyer and reports to the Company Secretary, and ultimately to the CFO. The impending legislation that may have a potentially material impact on the Group includes: f Consumer Protection Act (CPA); f Regulation of Interception of Communications and Provision of Communication- Related Information Act (RICA); f Payment Card Industry Data Security Standard (PCI); f Protection of Personal Information Act (PPI Act); and f Occupational Health and Safety Act (OHASA). 138 Massmart Annual Report 2010

140 Corporate Governance INVESTOR RELATIONS We strive to provide useful and frequent disclosure to our shareholders, regardless of how hard this may be in periods of difficulty or underperformance. Massmart reports formally to shareholders twice a year (in February and August) when its half-year and full-year results, together with a thorough executive overview, are announced and issued to shareholders and the media. On both occasions the Chief Executive Officer, Chief Financial Officer and certain Group executives give presentations to institutional investors, analysts and the media. MASSMART FINANCIAL CALENDAR Analyst presentation and preliminary announcement Final dividend declared Cape Town institutional investor roadshow Johannesburg institutional investor roadshow Final dividend paid United States institutional investor roadshow United Kingdom institutional investor roadshow Publication of Annual Report Annual General Meeting Financial half-year Analyst presentation and interim preliminary announcement Interim dividend declared Cape Town institutional investor roadshow Johannesburg institutional investor roadshow Interim dividend paid Financial year-end Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Early in January and July, shortly after the conclusion of the half-year and full-year trading periods, on release of the Annual Report and at the Group s annual general meeting in November, Massmart releases sales updates reporting on the Group s year-to-date sales performance. In addition, annually in May, the Group CEO and CFO host a day-long visit by institutional analysts and investors to Massmart stores. A sales update is released along with this visit. During the year, apart from closed periods, the Chief Executive Officer and Chief Financial Officer together meet regularly with institutional shareholders and, in addition, are available for meetings or conference calls with analysts and any existing or prospective Massmart shareholder. Profits are distributed to our shareholders at interim and year-end by way of a cash dividend. The dividend is calculated based on a dividend cover of 1.7 on headline earnings unless circumstances dictate otherwise. Despite the slightly lower headline earnings and this policy, the Board has decided to maintain this year s dividend at the same level as last year. A further dividend is distributed to our Thuthukani shareholders, arising from the Massmart black economic empowerment transaction which came into effect in October The Thuthukani dividend is now 100% of the ordinary dividend. Insight SENS SENS is a system provided by the JSE, which publishes company announcements and price-sensitive information. The key purpose of SENS is to ensure that this information is accessible to the investing community interested in trading on the JSE, as soon as it is vetted by the JSE Listings Division. Massmart Annual Report

141 Corporate Governance INVESTOR RELATIONS Dividend payment vs dividend cover Payment (cents) Dividend cover (times) Foreign shareholding % UK, Europe and other 43 US 29 South Africa 28 Read more More detail on our shares and shareholder information can be found on page 6 Massmart at a Glance Company Secretary I Zwarenstein, CA(SA) Contact details Registered office Massmart House 16 Peltier Drive Sunninghill Ext 6 Sandton 2191 South Africa Postal address Private Bag X4 Sunninghill 2157 South Africa Telephone number + 27 (0) Facsimile number + 27 (0) Indicators Company registration number 1940/014066/06 (incorporated in South Africa) JSE share code MSM ISIN ZAE Design partners Publisher annual report Ince.motiv Photographer Kevin Rudham Corporate partners Transfer secretaries Computershare Investor Services (Pty) Limited 70 Marshall Street Johannesburg 2001 Principal bankers Nedbank Group Limited ABSA Bank Limited The Standard Bank of South Africa Limited First National Bank (A division of FirstRand Bank Limited) Investec Bank Limited Auditors Deloitte & Touche Corporate law advisors Edward Nathan Sonnenbergs Cliffe Dekker Hofmeyr Lead sponsor Deutsche Securities 140 Massmart Annual Report 2010

142 Corporate Governance KING III QUESTION AND ANSWER 1. ETHICAL LEADERSHIP AND CORPORATE CITIZENSHIP 1.1 The board should provide effective leadership based on an ethical foundation The Board is responsible for directing the Group towards the achievement of the Massmart vision and mission. It is therefore accountable for the development and execution of the Group s strategy, operating performance, financial results, and values as well as being the custodian of the Group s corporate governance. The Board believes that the Massmart Group must act ethically and in a sustainable manner in the longer-term interests of all key stakeholders and of the natural environment in which the Group operates. These stakeholders are contemplated in the Massmart Vision and include customers, suppliers, employees, investors and the community. Massmart insists that all its business partners, specifically directors, employees and suppliers, do business ethically and will not retain business partners that do not maintain the same standard of ethics as Massmart. 1.2 The board should ensure that the company is and is seen to be a responsible corporate citizen The Board considers the impact of the Group s operations on the societies within which it operates by pro-active measurement of the Group s impact on the environment (such as understanding our carbon footprint and energy consumption) and has active Corporate Social Responsibility programmes and policies based on pre-defined levels of expenditure. 1.3 The board should ensure that the company s ethics are managed effectively Since 2004, Massmart has had a Code of Ethical Practice in its desire to achieve the highest standards of ethical behaviour. This Code has been communicated widely throughout the Group and there are formally appointed and trained Ethics Officers at Group and Divisional level. The Group is an active member of the SA Institute of Ethics. Annually, our suppliers are reminded by a letter from the CEO that any concerns in respect of ethical behaviour can be reported directly to him or to the Ethics Hotline. The Group uses an independently operated Ethics Hotline to which any customer, employee or supplier may report alleged unethical behaviour. Posters communicating our ethical standards and the details of this Hotline are visible in almost every area of the Group s stores, offices and warehouses. Included on page 137 is a summary of the number and nature of the ethics calls received by this independent operator over the past year. 2. BOARDS AND DIRECTORS 2.1 The board should act as the focal point for and custodian of corporate governance The Board has a charter setting out its roles and responsibilities, and key aspects of this are disclosed in the Annual Report. The Board has four quarterly Board meetings, an annual strategy day and will meet on an ad hoc basis if a situation demands it. Full details of the past year s Board and Committee meetings, and directors attendances thereat, can be found on page The board should appreciate that strategy, risk, performance and sustainability are inseparable Annually the Group s Divisional executives formally present their three-year strategies to the Board, both in writing and through presentation. These strategies must be aligned with the Board-approved Vision and Mission for the Group and also address positive or negative effects of the Group on stakeholders, and all dimensions of the Vision must be addressed in formal Divisional strategies. The first year of the strategy period represents the following year s budget Refer to principles elsewhere in King III that are already listed in this Question and Answer review The board and its directors should act in the best interests of the company Directors are encouraged to attend any Board or executive meeting within the Group s Divisions in an effort to better understand the business, its leadership and their skills and competence. At each Board meeting directors are required to confirm in writing any changes to their interests that have been previously disclosed in detail to the Board. Directors are encouraged to take independent advice, at the Company s cost, for the proper execution of their duties and responsibilities. No directors availed themselves of this during the 2010 financial year The board should consider business rescue proceedings or other turnaround mechanisms as soon as the company is financially distressed as defined in the Act The Board has developed various reporting metrics that are included in the quarterly Board meetings papers. Included in these metrics are liquidity and solvency ratios, cash flow analysis, details of bank facilities and reports on working capital performance. Happily, at no time has the Board had to consider business rescue proceedings for the Group or any division within the Group. Massmart Annual Report

143 Corporate Governance KING III QUESTION AND ANSWER 2.16 The board should elect a chairman of the board who is an independent non-executive director. The CEO of the company should not also fulfil the role of chairman of the board Mark Lamberti was appointed as Massmart s non-executive Chairman on 1 July 2007 and, as he was previously the Massmart CEO, he could not be considered independent until June Given this three-year milestone, the Board is satisfied that Mark Lamberti should now be considered an independent director. Recognising however, that some may differ with this view, Chris Seabrooke, the non-executive Deputy Chairman, maintains his role as the Group s Lead Independent Director. In addition, to ensure good governance, and as recommended by King III, the Chairmanship of each of the five Board Committees is held by independent directors. Annually the Chairman s performance is formally assessed and the feedback is collated by the Deputy Chairman and discussed with the Chairman. The Board is responsible for its own composition, the appointment of the Chairman and the Chief Executive Officer (CEO), and for executive succession planning. Succession planning for the Chairman, non-executive directors and CEO is delegated to the Remuneration and Nominations Committee which considers these issues annually The board should appoint the chief executive officer and establish a framework for the delegation of authority The Board is responsible for the appointment of the CEO. The framework for the delegation of authority is actioned through the Massmart Governance Authorities. These Governance Authorities describe the specific levels of authority and required approvals for all major decisions at both Group and Divisional level. It clarifies which executive position, Committee or Board needs to be consulted prior to taking the decision, which body makes the decision and which bodies should thereafter be informed of the decision. These authorities are evaluated and updated annually, where necessary, by the Board. The Board s authority and control is devolved sequentially through the Board sub-committees, Massmart Executive Committee, the Divisional Boards and the Divisional Executive Committees, as formally prescribed by the Governance Authorities The board should comprise a balance of power, with a majority of non-executive directors. The majority of non-executive directors should be independent The Board comprises two executive directors, being the CEO and CFO, and 11 independent non-executive directors. The Board assesses its effectiveness annually, taking various factors into account, including the requisite skills and experience required to direct the Group, as well as the Board s size, diversity and demographics. All directors retire by rotation every three years. Unless requested by the Board to serve a further term, retiring directors are not proposed for re-election by the shareholders. In considering whether to propose a director for re-election, the Board takes into account various factors, including skills mix, diversity and succession planning. This year the following directors retire by rotation: Messrs Kuseni Dlamini, Mark Lamberti and Nigel Matthews and Mmes Lulu Gwagwa and Phumzile Langeni. Newly appointed directors are required to resign and to offer themselves for re-election at the first AGM following their initial appointment Directors should be appointed through a formal process The Remuneration and Nominations Committee assists the Board with the assessment, recruitment and nomination of new directors, but the Board must approve these appointments and Board members are invited to interview any potential appointees. The Committee thoroughly assesses potential new directors before appointment. Use may be made of third-party executive search agencies to provide such assurances The induction of and ongoing training and development of directors should be conducted through formal processes The Company Secretary is tasked with assisting the Board with induction of new directors and director orientation, development and education. This induction includes receiving copies of prior Board papers and the most recent Group strategy document, store visits with Group executives, and meetings with key executives, if necessary. Directors are encouraged to remain abreast of major governance and regulatory developments and where applicable, the Board will receive formal presentations and notes on key topics. The Company Secretary assists with ongoing director development and education, using materials from the Group s legal advisors and external auditors where necessary The board should be assisted by a competent, suitably qualified and experienced company secretary The Company Secretary, Mr Ilan Zwarenstein, is a qualified chartered accountant and was previously an audit partner at Grant Thornton. He is formally empowered by the Board to fulfil his duties and to assist the Board in fulfilling its functions. Together with the Board and Committee Chairpersons, as appropriate, he ensures that: meetings are scheduled well in advance, meeting agendas are agreed beforehand and the appropriate papers are circulated timeously. 142 Massmart Annual Report 2010

144 Corporate Governance 2.22 The evaluation of the board, its committees and the individual directors should be performed every year Annually all Board and Committee members complete detailed self-assessments covering the composition, duties, responsibilities, processes and effectiveness of the Committees. The results of these assessments are collated by the Company Secretary and sent in summarised form to the respective Committee Chairpersons for a formal written response. The summarised results together with the Chairpersons written responses are then included in the Board papers for review and discussion at the November Board meeting. Annually, the Board Chairman, Deputy Chairman and CEO assess the effort and contribution of each individual director, and where necessary provide verbal feedback to that director. Due to the personal nature of the findings of these individual reviews, they are not included in the Annual Report The board should delegate certain functions to well-structured committees but without abdicating its own responsibilities Each Board Committee s charter or term of reference specifically documents that Committee s scope, duties and responsibilities. Annually in November, each Committee s charter or term of reference is reviewed by the Committee and Board for relevance and completeness, and amended where necessary. Details regarding the duties and responsibilities of each Committee, and its composition, can be found on page 121. The Board established an Audit Committee and a Remuneration and Nominations Committee in There are also Risk, Sustainability, and Strategy and Investment Committees. All committees comprise a majority of independent non-executive directors and are chaired by independent non-executive directors. Directors are encouraged to take independent professional advice, at Massmart s expense, in respect of the proper execution of their duties and responsibilities both as Board and Committee members A governance framework should be agreed between the group and its subsidiary boards [this principle relates to listed subsidiaries only] 2.25 Companies should remunerate directors and executives fairly and responsibly The Remuneration and Nominations Committee implements remuneration policies that enable it to recruit, retain and motivate the executive talent needed to achieve superior business performance in the short and longer term. Included here are policies on employee benefit funds, service contracts (if any), and retention and severance payments. These policies strive for fixed remuneration at the median- to upper-quartile of comparable positions, but place particular emphasis on generous annual incentives for high growth and performance in order to motivate the executives. Finally, longerterm wealth creation aligned with the creation of shareholder value through the Group s market valuation is underpinned by the Group s employee share incentive plan. Excluding some emigration in 2008, there has been very low executive turnover which suggests that the Group s remuneration policies are appropriate and effective. Non-executive directors fees are reviewed and established by the Committee. Directors attendance fees are not paid Companies should disclose the remuneration of each individual director and certain senior executives Details of individual directors remuneration are provided on pages 127 to 129 of this report, and explanations are provided for executive directors remuneration. In addition, details of executive remuneration policies are provided on page 126. Due to their specialised retail skills, the highly competitive South African retail environment and the specific employees value to Massmart, the Board has chosen not to disclose the remuneration of the most highly paid executives who are not directors. Instead this information is disclosed in aggregate for the three executives concerned (see page 128). None of these executives earns a higher salary than either of the executive directors Shareholders should approve the company s remuneration policy The Board does not intend to ask the shareholders for non-binding approval for the Group s remuneration policies. The rationale and basis for the Group s executive remuneration policy is carefully considered by the Remuneration and Nominations Committee and is documented in the annual reports. Shareholders with concerns regarding this policy should contact the Chairman of either the Board or the Committee. Non-executive directors fees are however, tabled for approval at each annual general meeting. Massmart Annual Report

145 Corporate Governance KING III QUESTION AND ANSWER 3. AUDIT COMMITTEES 3.1 The board should ensure that the company has an effective and independent audit committee The Audit Committee s charter was established by the Board and is annually reviewed and amended, if necessary, by both the Committee and the Board. The Committee s composition, duties and responsibilities are incorporated within the charter. The Committee meets at least three times a year and each meeting commences with an audience between only the Committee and the external auditors. The Committee Chairman meets quarterly with the Chief Audit Executive (CAE), Management is not present at these meetings. 3.2 Audit committee members should be suitably skilled and experienced independent non-executive directors The Committee comprises four independent non-executive directors, each of whom have the requisite financial and commercial skills and experience to contribute to the Committee s deliberations. The Board elects the Audit Committee members, assisted as is necessary by the Remuneration and Nominations Committee. The Committee Chairman also chairs the Risk Committee given the overlap between those two bodies. Committee members regularly receive technical updates from the external auditors and legal advisors. With the prior approval of the Chairman, any Committee member may seek external professional advice, at the Company s expense, on any issue. 3.3 The audit committee should be chaired by an independent non-executive director Nigel Matthews, an independent non-executive director, is Chairman of the Committee. He attends the Company s annual general meeting (directors attendance at the AGM is shown on page 120). 3.4 The audit committee should oversee integrated reporting The Audit Committee reviews the interim and preliminary financial results and associated announcements, and recommends these to the Board for approval. The Committee also reviews the integrated report which includes detailed reviews by each of the CEO, CFO and the four Divisional CEOs as well as a thorough review of sustainability issues. The Committee has approved the use of an external assurance provider with regard to material sustainability issues but this will only be effective for the 2011 financial year. For the last five years Massmart Internal Audit has provided this assurance. 3.5 The audit committee should ensure that a combined assurance model is applied to provide a co-ordinated approach to all assurance activities Through formal reports included in Committee papers and the attendance of all key executives involved with assurance, the Audit Committee is provided with a thorough review of the Group s assurance activities. These reports include the principles of combined assurance through reports from management, Internal and external audit and these also note reliance that has been placed upon other assurance providers. Attendees at most Committee meetings would include: the CEO, CFO, CAE, external audit representatives, and two members of the Risk Committee (being also members of the Audit Committee). 3.6 The audit committee should satisfy itself of the expertise, resources and experience of the company s finance function Annually the Committee considers the suitability of the CFO and the Group s finance function, and its opinion is noted on page The audit committee should be responsible for overseeing of internal audit The Committee is responsible for overseeing the Internal Audit function, through a functional reporting relationship to the Audit Committee and specifically the Audit Committee Chairperson. For practical purposes and to maintain an excellent working relationship with management, the CAE reports administratively to the CFO. The Audit Committee, CAE, CFO and CEO believe that there is no conflict as a result of this reporting relationship. The scope, findings and opinions of Internal Audit are not interfered with and the CAE and the Audit Committee are satisfied with this. Although not used to date, the CAE has unfettered access to any non-executive director or the Chairman where issues of independence could be raised if necessary. Annually, the Committee approves the Internal Audit work plan, staffing, resources and operating budget, and thereafter monitors progress with the audit work plan and results which are reported upon at each Audit Committee meeting. A few years ago the Committee engaged an external professional to conduct a quality review of the Internal Audit function. The review s findings were extremely positive. The Audit Committee, CEO, CFO and the CAE agree that the performance assessment of the CAE is appropriately managed with input where necessary from the Audit Committee. The appointment or dismissal of the CAE would be mutually agreed to between the Audit Committee, the CEO and CFO. 144 Massmart Annual Report 2010

146 Corporate Governance 3.8 The audit committee should be an integral component of the risk management process As noted in 3.5 above, given the width and depth of the information presented to the Committee, the Committee is an integral component of the Group s risk management process. As regards IT systems, on a cyclical basis the key general, security and application controls on the Group s major IT systems are reviewed by experts employed by the external or internal auditors. Massmart Internal Audit is intimately involved in assessing the IT control environment and the Group adopted the COBIT governance approach to IT several years ago. Senior Internal Audit personnel attend the Group s TIP Forum (see page 124) where all major IT developments and projects are signed-off. Massmart Audit is involved in auditing every significant IT project based in the Group. 3.9 The audit committee is responsible for recommending the appointment of the external auditor and overseeing the external audit process The Audit Committee is responsible for recommending appointment of the proposed external auditor to the shareholders at the AGM. Annually, the external auditor s engagement letter and audit fees, recommended by the CFO, are approved by the Committee. The external auditors regularly confirm their independence, which opinion is considered by the Committee. The Committee has defined the nature and extent of non-audit services that may be provided by the external auditors, and has limited the total fees that may be paid for those services to less than 50% of the total normal audit fee The audit committee should report to the board and shareholders on how it has discharged its duties The Audit Committee Chairman reports regularly to the Board both in writing and verbally; and annually, prior to the release of the Group s preliminary results, the lead partner of the external auditors addresses the Board. The Committee s report to shareholders is shown on page 156 and includes details on the role of the Committee, members attendances at meetings, and confirmation of the control environment. 4. THE GOVERNANCE OF RISK 4.1 The board should be responsible for the governance of risk The Board has mandated the Risk Committee, through its charter, to oversee the design, maintenance and reporting of a sound system of risk management and control with regard to all key aspects of the business and is reported on page 130. This Committee necessarily works closely with the Audit Committee. 4.2 The board should determine the levels of risk tolerance The Board does not explicitly determine levels of risk tolerance and/or risk appetite for the Group. Instead, these would effectively be reviewed, and assessed by the Board, on an ongoing basis through regular reports and financial analysis and evaluation by the CEO and CFO, as well as the Audit and Risk Committees. Risk is an agenda item at the Board meeting and this is also cascaded through the Executive Committee and Divisional Boards. 4.3 The risk committee or audit committee should assist the board in carrying out its risk responsibilities The Risk Committee directly and the Audit Committee indirectly oversees the Group s risk management programme. There are four independent non-executive directors on the Committee, as well as two Group executives and the CAE. The Committee meets annually in July to consider the Group s risk landscape and annually in November to consider the Group s insurance arrangements together with the Group s insurance brokers. Annually in February an interim Group risk report is prepared by the CFO for the Committee. 4.4 The board should delegate to management the responsibility to design, implement and monitor the risk management plan Management is responsible for the design, implementation and monitoring of the risk management plan. As part of this, risk is an agenda item on all Divisional executive meetings and the quarterly Divisional Board meetings. The Group Risk Officer is the CFO and each Divisional Finance Director is the Risk Officer for that Division. 4.5 The board should ensure that risk assessments are performed on a continual basis Risks across the Group are monitored and reported to the Board directly through the Audit and Risk Committees, and indirectly through the reports of the CEO and CFO. Annually, the Risk Committee tables the Group Risk Report and Risk Register for review and confirmation by the Board. Massmart Annual Report

147 Corporate Governance KING III QUESTION AND ANSWER 4.6 The board should ensure that frameworks and methodologies are implemented to increase the probability of anticipating unpredictable risks The Board is comfortable that the Group s risk management framework and processes are adequate but is aware that the nature and essence of risk being both uncertain and unpredictable means that in isolated cases this process may, with hindsight, appear to have been inadequate. 4.7 The board should ensure that management considers and implements appropriate risk responses Responded to in 4.5 and 4.6 above. 4.8 The board should ensure continual risk monitoring by management Responded to in 4.5 and 4.6 above. 4.9 The board should receive assurance regarding the effectiveness of the risk management process Responded to in 4.5 and 4.6 above The board should ensure that there are processes in place enabling complete, timely, relevant, accurate and accessible risk disclosure to stakeholders Massmart s risk management process, and the ten key Group risks identified by that process, is disclosed in the integrated report. 5. THE GOVERNANCE OF INFORMATION TECHNOLOGY 5.1 The board should be responsible for information technology (IT) governance The Board has delegated IT governance to management. Governance over significant IT risks is formally overseen by the Technology, Information and Process (TIP) Forum, which forum is chaired by a member of the Group Executive Committee and attendees include all Divisional IT Directors and the CAE who attends to provide independent governance, advice or input. Annually, the Chairman of the Group s TIP Forum gives a presentation to the Board of the major Group and Divisional IT initiatives, key service providers and risk areas. The external auditor reviews key computer controls and reports its findings to the Audit Committee, as does Internal Audit which uses the COBIT governance assessment methodology. 5.2 IT should be aligned with the performance and sustainability objectives of the company Each Division has an IT strategy that is aligned to its strategic and business objectives. 5.3 The board should delegate to management the responsibility for the implementation of an IT governance framework Management is responsible for the design, implementation and operation of the structures and processes required for IT governance. There is no Group Chief Information Officer but management has established the TIP Forum (see 5.1) which very effectively executes the IT governance mandate and these are reviewed by external and internal audit (also discussed in 5.1 above). 5.4 The board should monitor and evaluate significant IT investments and expenditure The TIP Forum is responsible for approving all major IT developments and projects, including the financial investment and return. Those IT services that are outsourced relating mainly to networks, desk-top support and off-site data storage are regularly reviewed by both Internal and external audit. The Divisional Boards approve project expenditure within their governance limits and only after recommendation by the TIP Forum for significant projects. 5.5 IT should form an integral part of the company s risk management Management and the Board are fully alert to the vulnerability of the Group s operations to the proper functioning of all key IT equipment and processes. Formal disaster-recovery programmes are therefore in place for all Divisions and for all major IT functionalities. These programmes form part of a broader business continuity planning (BCP) framework that has considerably matured in the past year. 5.6 The board should ensure that information assets are managed effectively Management and the Board are cognisant that the storage, management, manipulation and confidentiality of IT data is crucial. The TIP Forum is mandated to monitor and address these issues continually, effected by each Divisional IT leader and assurance is assessed by internal and external audit. 146 Massmart Annual Report 2010

148 Corporate Governance 5.7 A risk committee and audit committee should assist the board in carrying out its IT responsibilities Both the Risk and Audit Committee play essential roles in assisting the Board with its IT responsibilities. As noted elsewhere (see 3.8), both Committees receive regular and thorough exposure to the key control issues associated with this topic. 6. COMPLIANCE WITH LAWS, RULES, CODES AND STANDARDS 6.1 The board should ensure that the company complies with applicable laws and considers adherence to nonbinding rules, codes and standards The Group is committed to complying with all legislation, regulations and best practices relevant to our business, in every country where we conduct business. This is monitored through both prevention and detection approaches. Through regular interactions with corporate lawyers and key decision-makers in government and civil service, the Group attempts to keep abreast of all intended or promulgated legislation. The Group s Internal Audit team assesses significant legal risks and the level of compliance as part of its regular procedures. The Group utilises experts in non-south African countries to perform evaluations on relevant applicable legislation and compliance effectiveness. Most issues concerning compliance would be reported to the Audit Committee which would bring the more material issues to the Board s attention. Material breaches would also be reported by either the CEO or CFO. 6.2 The board and each individual director should have a working understanding of the effect of the applicable laws, rules, codes and standards on the company and its business Directors are encouraged to remain abreast of major governance and regulatory developments and where applicable, the Board will receive formal presentations and notes on key topics. New proposed legislation that may have onerous consequences for the Group will specifically be brought to the Board s attention through the executives and/or external professionals. 6.3 Compliance risk should form an integral part of the company s risk management process As part of the recently created Compliance function, the Divisional Finance Directors act as Compliance Officers for their Divisions, and so any material compliance issues would be reported through either the Audit Committee or Risk Committee channels, as appropriate. 6.4 The board should delegate to management the implementation of an effective compliance framework and processes The Board has delegated the implementation of an effective compliance framework and process to management. Not wishing to impose a potentially bureaucratic process on the workings of the Group, management followed a similar approach to the implementation of the Risk Management framework by incorporating the Compliance role within existing reporting and management structures. As noted elsewhere, the Group Compliance Officer is the CFO and the Divisional Finance Directors are the compliance Officers for their respective Divisions. 7. INTERNAL AUDIT 7.1 The board should ensure that there is an effective risk-based internal audit Massmart has a very effective Internal Audit department which performs invaluable work in providing assurance on all key aspects of the Group s risks, employees, operations and assets. The Internal Audit department applies a risk-based approach that aligns its audit methodology to the internal and external risks facing Massmart. Through formally documented risk assessments, thorough audit field work and high quality personnel, Internal Audit is able to provide a reliable opinion on the level of assurance that can be placed on the management of the Group s risk governance and control processes and provides the Audit Committee and Board with an annual risk assurance assertion. The responsibilities of Internal Audit are defined and governed by a charter reviewed annually by the Audit Committee. The CAE regularly meets with the Audit Committee Chairman and Massmart executives to discuss risks and challenges across the Group s operations and external environment. The Internal Audit department complies fully with the International Standards for the Professional Practice of Internal Auditing as promulgated by the Institute of Internal Auditors and has previously been independently reviewed. 7.2 Internal audit should follow a risk-based approach to its plan The Audit Committee and Board believe that Massmart Internal Audit is a very effective and independent, objective body providing assurance to all the key dimensions of the Group s risk, governance and control. The external auditors place reliance on many aspects of the department s audit coverage and Internal Audit place reliance on other assurance providers work once satisfied that their methods can be relied upon. Massmart Annual Report

149 Corporate Governance KING III QUESTION AND ANSWER 7.3 Internal audit should provide a written assessment of the effectiveness of the company s system of internal controls and risk management Internal Audit provides an annual assurance assertion to the Audit Committee and Board, which includes internal control, internal financial control, governance, risk management and IT. 7.4 The audit committee should be responsible for overseeing internal audit To ensure independence, the CAE reports functionally to the Audit Committee and, only from an administrative perspective, to the CFO who encourages Internal Audit s independence and does not interfere with audit scope or opinion. The hiring and dismissal of the CAE is subject to final approval by the Audit Committee. The evaluation of the performance of the CAE includes the Audit Committee s input too. The Internal Audit department has the unequivocal support of the Board and Audit Committee and has unrestricted access to any part of, or person or committee, in Massmart. Internal Audit s annual audit plan and resource needs are pre-approved by the Audit Committee. The CAE presents formal reports to the Audit Committee and attends all meetings by invitation. In addition, the Audit Committee Chairman and CEO, separately, meet quarterly with the CAE. 7.5 Internal audit should be strategically positioned to achieve its objectives Internal Audit reports functionally to the Audit Committee and the CAE holds a senior executive position of influence within the organisation. Despite the Internal Audit department reporting to the CFO, the Board and Audit Committee are both satisfied that this crucial team functions in a wholly objective and independent manner. The CAE has many years operational, IT, Supply Chain and audit experience in Retail and leads a multi-functional team of appropriately qualified employees. The CAE has a standing invitation to attend the Group and/or Divisional Executive Committee meetings, Board meetings or strategy sessions. 8. GOVERNING STAKEHOLDER RELATIONSHIPS 8.1 The board should appreciate that stakeholders perceptions affect a company s reputation The Board and management carefully monitor and measure Massmart s reputation and the perceptions of key stakeholder groupings. These key groupings are: customers, employees, suppliers, investors and the community. 8.2 The board should delegate to management to pro-actively deal with stakeholder relationships The key stakeholder groupings, being: customers, employees, suppliers, investors and the community, are monitored, measured and reported upon in different ways. Some would be formal and structured, for example, customer intercept surveys, webbased employee surveys, or written supplier surveys, whilst others may rely on regular interactions with representatives from the various stakeholder groupings. The Group s policies as regards key stakeholder groupings are spelt out in the Sustainability section. In addition, the key results and findings of interactions with these groupings are disclosed. Shareholders are welcome at Massmart s AGM but, in common with many other South African companies, attendance outside of Corporate sector representatives is almost non-existent. 8.3 The board should strive to achieve the appropriate balance between its various stakeholder groupings, in the best interests of the company The Board is alert to the inherent conflict between the demands of the different stakeholder groupings, but believes that it is possible to achieve a position of sustainable compromise that balances the demands of all stakeholders. As noted above however, this requires regular monitoring and measurement to ensure its sustainability. 8.4 Companies should ensure the equitable treatment of shareholders The Board is careful to treat all Massmart ordinary shareholders equitably. The CEO and CFO meet periodically with major institutional shareholders at their request but this does not preclude any other shareholder requesting a meeting with the CEO or CFO. 8.5 Transparent and effective communication with stakeholders is essential for building and maintaining their trust and confidence Subject to the rules and regulations of the JSE, all announcements and disclosures are distributed widely through the electronic media and posted to all shareholders unless they have elected not to receive these communications. The CEO and CFO endeavour to communicate in clear and uncomplicated language the strategies, operations and financial results of the Group. 148 Massmart Annual Report 2010

150 Corporate Governance The Board is not aware of any material requests under the Promotion of Access to Information Act that were either complied with or denied. In addition, our website includes a link to the Audit Committee should this be required. To date nothing has been brought to the Committee s attention through this mechanism. 8.6 The board should ensure that disputes are resolved as effectively, efficiently and expeditiously as possible The Board does not have a formal dispute resolution programme. Should any situation arise that may require formal dispute resolution the Board would consider alternatives which, failing intervention by either the Board Chairman or CEO, may include use of independent legal counsel or arbitration. 9. INTEGRATED REPORTING AND DISCLOSURE 9.1 The board should ensure the integrity of the company s integrated report The Board and the Audit Committee is careful to ensure that the Group s integrated report includes all key issues, is easy to read and understand, and addresses the legitimate concerns of key stakeholder groupings. The success of this approach has been recognised externally. The Massmart Annual Report has been rated Excellent for the last five years in the annual Ernst & Young Corporate Reporting awards in South Africa. In addition, our 2006, 2007, 2008, and 2009 annual reports came 3rd, 4th, 9th and 4th in all categories in those respective years. 9.2 Sustainability reporting and disclosure should be integrated with the company s financial reporting The Massmart Board focuses closely on full and effective disclosure of all aspects of its strategies, operations and financial performance, and ensures that all key successes and failures are usefully reported and commented upon. 9.3 Sustainability reporting and disclosure should be independently assured The Sustainability Committee has specific oversight on those sustainability areas covered in the integrated report but the entire report would be reviewed by the Audit Committee and recommended to the Board for approval. Massmart Annual Report

151 Group Financial Statements Group Financial Statements 150 Massmart Annual Report 2010

152 Statements Builders Warehouse Kempton Park Massmart Annual Report

153 Group Financial Statements GROUP FINANCIAL STATEMENTS 150 Approval of the Annual Financial Statements 153 Directors Report 154 Income Statement 157 Statement of Comprehensive Income 158 Statement of Financial Position 159 Statement of Cash Flows 160 Statement of Changes in Equity 161 Notes to the Annual Financial Statements Massmart Annual Report 2010

154 Group Financial Statements APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS The annual financial statements were approved by the Board of Directors on 6 October 2010 and signed on its behalf by: GM Pattison Chief Executive Officer GRC Hayward Chief Financial Officer COMPANY SECRETARY CERTIFICATE I, Ilan Zwarenstein, the Company Secretary of Massmart Holdings Limited, certify that to the best of my knowledge and belief, all returns required of a public company have, in respect of the year under review, been lodged with the Registrar of Companies and that all such returns are true, correct and up to date. Ilan Zwarenstein Company Secretary ANNUAL COMPLIANCE CERTIFICATE FOR ISSUERS WITH A PRIMARY LISTING ON THE JSE I, the undersigned, Guy Robert Charles Hayward, being duly authorised hereto, certify to the JSE Limited (the JSE) that Massmart Holdings Limited and its directors have, during the 12 months ended 31 December 2009, complied with all Listings Requirements and every disclosure requirement for continued listing on the JSE imposed by the JSE during that period. GRC Hayward Duly authorised hereto, for and on behalf of the Directors of the Company INDEPENDENT AUDITOR S REPORT To the members of Massmart Holdings Limited We have audited the Group annual financial statements and annual financial statements of Massmart Holdings Limited, which comprise the consolidated and separate statement of financial position as at 27 June 2010, and the consolidated and separate income statements, the consolidated and separate statements of comprehensive income, changes in equity and cash flows for the period then ended, and a summary of significant accounting policies and other explanatory notes and the directors report, as set out on pages 154 to 237. Directors responsibility for the financial statements The Company s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these financial statements present fairly, in all material respects, the consolidated and separate financial position of Massmart Holdings Limited as at 27 June 2010, and its consolidated and separate financial performance and consolidated and separate cash flows for the period then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. Deloitte & Touche Registered Auditors Per AJ Dennis Partner 6 October 2010 Buildings 1 and 2, Deloitte Place The Woodlands Office Park Woodlands Drive Sandton National Executive: GG Gelink Chief Executive, AE Swiegers Chief Operating Officer, GM Pinnock Audit, DL Kennedy Tax & Legal and Risk Advisory, L Geeringh Consulting, L Bam Corporate Finance, CR Beukman Finance, TJ Brown Clients & Markets, NT Mtoba Chairman of the Board, M Comber Deputy Chairman of the Board. A full list of partners and directors is available on request. B-BBEE rating: Level 3 contributor/aa (certified by Empowerdex) Member of Deloitte Touche Tohmatsu Massmart Annual Report

155 Group Financial Statements DIRECTORS REPORT DIRECTORS RESPONSIBILITIES The Directors acknowledge responsibility for the preparation of the annual financial statements, which, in their opinion, fairly present the results and cash flows for the financial year and the state of affairs of Massmart Holdings Limited and its subsidiaries at the end of the financial year. The external auditors are responsible for reporting on the fair presentation of these financial statements. The Company and its subsidiaries have maintained adequate accounting records and an effective system of internal controls to ensure the integrity of the underlying information. Appropriate accounting policies, supported by sound and prudent managerial judgments and estimates, have been consistently applied. The Audit Committee of the Board reviews the financial information presented and ensures that there has been adherence to International Financial Reporting Standards. Internal and external auditors of Group companies have unrestricted access to the Committee. GROUP FINANCIAL RESULTS The financial results of the Group are set out in the income statement, statement of comprehensive income, the statement of cash flows and the statement of changes in equity. The financial position of the Group is set out in the statement of financial position. DIVIDEND Massmart s dividend policy is to declare and pay an interim and final cash dividend representing a 1.7 times dividend cover, unless circumstances dictate otherwise. Despite the slightly lower headline earnings and this policy, the Board has decided to maintain this year s dividend at the same level as the past two years. The resulting dividend cover is 1.5 (2009: 1.6). With regard to the final distribution to shareholders, the Directors resolved to distribute to shareholders registered in the books of the Company on 17 September 2010, a final cash dividend of 134 cents (2009: 134 cents) per share, bringing the total dividend for the year to 386 cents (2009: 386 cents) per share. A Thuthukani dividend equivalent to 100% of the Massmart ordinary dividend per share (134 cents) was paid to the Massmart Thuthukani Empowerment Trust on 20 September Alongside please find the movement in ordinary and preference shares for the period under review. DIRECTORATE AND SECRETARY The current directorate of the Company is shown on pages 15 to 17. With effect from 1 May 2010, following his appointment as chairman of a major supplier, Mr ZL KK Combi resigned from the Board of Directors after seven years of service. The Company thanks him for his contribution to the Group and wishes him well. Massmart address The Company s registered office and postal address are as follows: Registered office Massmart House 16 Peltier Drive Sunninghill Ext 6 Sandton 2191 South Africa Postal address Private Bag X4 Sunninghill 2157 South Africa Shares in issue Ordinary shares Opening balance June ,193,512 Converted preference shares* 109,127 Closing balance June ,302,639 Converted preference shares* 192,865 Closing balance June ,495,504 Preference shares* Closing balance June ,847,185 Converted to ordinary shares 109,127 Closing balance June ,738,058 New shares issued 2,000,000 Converted to ordinary shares 192,865 Closing balance June ,545,193 * The preference shares relate to Massmart s Thuthukani Empowerment Trust and Black Scarce Skills Trust. The Company Secretary provides a central source of guidance and advice to the Board, and within the Company, on matters of ethics and good governance. The Company Secretary is Mr Ilan Zwarenstein, CA(SA), whose business and postal addresses are the same as that of the Company. In accordance with the provisions of the Company s Articles of Association, KD Dlamini, NN Gwagwa, MJ Lamberti, P Langeni and IN Matthews will retire at the annual general meeting. Being eligible, KD Dlamini, NN Gwagwa, MJ Lamberti, P Langeni and IN Matthews offer themselves for re-election. 154 Massmart Annual Report 2010

156 Group Financial Statements INTERESTS OF DIRECTORS IN THE COMPANY S SHARES At 27 June 2010, Directors owned ordinary shares in the Company, or options over ordinary shares in the Company, directly or indirectly, aggregated as to beneficial and non-beneficial ownership, as follows: Shares Options Shares Options Non- Non- Non- Non- Beneficial beneficial Beneficial beneficial Beneficial beneficial Beneficial beneficial Non-executive directors MJ Lamberti 500, ,000 CS Seabrooke 30, ,000 MD Brand 17,500 ZL Combi 20,000 KD Dlamini 20,000 20,000 NN Gwagwa 20,000 20,000 JC Hodkinson 8,000 8,000 P Langeni 20,000 20,000 IN Matthews P Maw DNM Mokhobo 20,000 20,000 MJ Rubin 29,500 29,500 Executive directors GM Pattison 1,457, ,000 1,457, ,000 GRC Hayward 804, , , ,000 At the date of this report, the Directors holdings were as follows: Shares Options Non- Non- Beneficial beneficial Beneficial beneficial Non-executive directors MJ Lamberti 500,000 CS Seabrooke MD Brand KD Dlamini 20,000 NN Gwagwa 20,000 JC Hodkinson 8,000 P Langeni 20,000 IN Matthews P Maw DNM Mokhobo 20,000 MJ Rubin 29,500 Executive directors GM Pattison 1,421, ,000 GRC Hayward 804,898 75,000 Details of shares issued and options granted by the Company in terms of the rules of the Massmart Share Incentive Scheme are dealt with on pages 200 to 203. SUBSIDIARIES As at the date hereof, the following companies are principal subsidiaries of the Company: f Massbuild (Proprietary) Limited (previously Builders Trade Depot) 2004/035206/07 f Masscash Holdings (Proprietary) Limited 1997/014716/07 f Massmart International Holdings Limited (incorporated in Mauritius) C1/GBL f Massmart Management & Finance Company (Proprietary) Limited 1992/004084/07 f Masstores (Proprietary) Limited 1991/006805/07 Details of the Company s interests in material subsidiaries are set out in note 37 on page 208. Total net profit after tax for all subsidiaries for the 2010 financial year amounted to R1,291.8 million (2009: R1,282.0 million). Massmart Annual Report

157 Group Financial Statements DIRECTORS REPORT BORROWING POWERS In terms of the Articles of Association, the Group has unlimited borrowing powers. At 27 June 2010, borrowings were R708.7 million (2009: R388.0 million). GOING CONCERN The Directors are of the opinion that the business will be a going concern in the year ahead. In reaching this opinion, the Directors considered the following factors: f strong positive cash flows from trading f no recurring operating losses f well-controlled working capital and good quality inventory f approved short- and long-term financing, with sufficient additional short-term borrowing capacity if required f key executive management in place f there have been no material changes that may affect the Group in any of our customer, product or geographic markets; and f budgets to June 2011 reflect a continuation of the above positive issues. LITIGATION There are no current, pending or threatened legal or arbitration proceedings that may have, or have had in the previous 12 months, a material effect on the Group s financial position. AUDIT COMMITTEE REPORT The Audit Committee met three times during the year and the internal and external auditors presented formal reports to the Committee and attended meetings by invitation. In accordance with section 270A(1)(f) of the Companies Act, No. 61 of 1973, as amended, the Committee reports as follows: f The scope, independence and objectivity of the external auditors was reviewed. f The audit firm Deloitte & Touche, and audit partner André Dennis, are, in the Committee s opinion, independent of the Company, and have been proposed to the shareholders for approval to be the Group s auditor for the 2011 financial year. f On an ongoing basis, the Committee reviews and approves the fees proposed by the external auditors. f The appointment of the external auditor complies with the Companies Act, as amended, and with all other legislation relating to the appointment of external auditors. f The nature and extent of non-audit services provided by the external auditors has been reviewed to ensure that the fees for such services do not become so significant as to call into question their independence. f The nature and extent of future non-audit services have been defined and pre-approved. f As at the date of this report, no complaints have been received relating to accounting practices and internal audit of the Company or to the content or auditing of the Company s financial statements, or to any related matter. SUBSEQUENT EVENTS On 27 September 2010, 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 R148 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 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. On behalf of the Board Ilan Zwarenstein Company Secretary 6 October Massmart Annual Report 2010

158 Group Financial Statements INCOME STATEMENT for the year ended 27 June Notes Rm Rm Revenue 4 47, ,231.8 Sales 47, ,128.7 Cost of sales (38,879.3) (35,351.0) Gross profit 8, ,777.7 Other income Depreciation and amortisation (382.8) (343.1) Impairment of assets 5 (3.7) (1.6) Employment costs (3,352.9) (2,965.8) Occupancy costs (1,326.7) (1,170.4) Foreign exchange loss 7 (164.3) (78.4) Other operating costs (1,574.2) (1,370.9) Operating profit 6 1, ,950.6 Finance costs 9 (92.6) (112.8) Finance income Net finance costs (46.7) (48.6) Profit before taxation 1, ,902.0 Taxation 10 (608.2) (620.4) Profit for the year 1, ,281.6 Profit attributable to: Owners of the parent 1, ,210.9 Preference shareholders Non-controlling interests Profit for the year 1, ,281.6 Earnings per share (cents) Basic EPS Diluted basic EPS Dividend/distribution per share (cents) Interim Final Total Headline earnings 12 1, ,207.1 Headline EPS (cents) Diluted headline EPS (cents) Gross profit waterfall (Rm) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Gross profit Other income Depreciation and amortisation Impairment of assets Employment costs Occupancy costs Other operating costs Net finance costs Taxation Profit for the year Massmart Annual Report

159 Group Financial Statements STATEMENT OF COMPREHENSIVE INCOME for the year ended 27 June Rm Rm Profit for the year 1, ,281.6 Foreign currency translation reserve (30.9) (27.3) Cash flow hedges 11.8 (11.7) Other comprehensive income for the year, net of tax (19.1) (39.0) Total comprehensive income for the year 1, ,242.6 Total comprehensive income attributable to: Owners of the parent 1, ,171.9 Preference shareholders Non-controlling interests Total comprehensive income for the year 1, , Massmart Annual Report 2010

160 Group Financial Statements STATEMENT OF FINANCIAL POSITION as at 27 June Notes Rm Rm Assets Non-current assets 4, ,397.5 Property, plant and equipment 13 2, ,696.6 Goodwill 14 1, ,588.2 Other intangibles Investments Other financial assets Deferred taxation Current assets 9, ,129.4 Inventories 19 5, ,893.2 Trade, other receivables and prepayments 20 2, ,851.1 Taxation Cash and bank balances , ,055.8 Total assets 14, ,526.9 Equity and liabilities Equity attributable to equity holders of the parent 3, ,054.7 Share capital Share premium Other reserves Retained profit 2, ,604.6 Minority interest Total equity 3, ,096.7 Non-current liabilities Non-current liabilities: Interest-bearing Interest-free Non-current provisions Deferred taxation Current liabilities 9, ,571.9 Trade and other payables 26 9, ,670.3 Provisions Taxation Other current liabilities Bank overdrafts Total equity and liabilities 14, ,526.9 Massmart Annual Report

161 Group Financial Statements STATEMENT OF CASH FLOWS for the year ended 27 June Notes Rm Rm Cash flow from operating activities Operating cash before working capital movements , ,398.2 Working capital movements Cash generated from operations 2, ,462.0 Interest received Interest paid (92.6) (112.8) Investment income Dividends received Taxation paid 38.3 (552.8) (700.3) Dividends paid (822.4) (867.4) Net cash inflow from operating activities 1, Cash flow from investing activities Investment to maintain operations 38.4 (284.0) (354.5) Investment to expand operations 38.5 (346.1) (340.1) Proceeds on disposal of property, plant and equipment Proceeds on disposal of assets classified as held for sale Investment in subsidiaries 38.8 (369.9) (198.5) Disposal of subsidiary Other investing activities including minority interests acquired (163.8) 8.1 Net cash outflow from investing activities (1,130.7) (697.4) Cash flow from financing activities Increase/(decrease) in non-current liabilities (167.7) Increase in current liabilities Net acquisition of treasury shares (97.5) (82.2) Net cash inflow/(outflow) from financing activities (160.7) Net increase 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 1, ,021.9 Cash and cash equivalents at the end of the year , ,025.1 Cash flow waterfall 3,000 2,500 2,000 1,500 1, 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 160 Massmart Annual Report 2010

162 Group Financial Statements STATEMENT OF CHANGES IN EQUITY for the year ended 27 June 2010 Equity Share- attributable based to equity Share Share Other payment Retained holders of Minority capital premium reserves* reserve* profit the parent interests Total Rm Rm Rm Rm Rm Rm Rm Rm Balance as at June , , ,766.5 Total comprehensive income (39.6) 1, , ,242.6 Dividends declared (note 11) (867.4) (867.4) (867.4) Net changes in minority interests (2.2) (2.2) Distribution to minorities (19.2) (19.2) Financial liability raised on a business acquisition (120.0) (120.0) (120.0) Share-based payment expense Share trust loss (90.6) (90.6) (90.6) Treasury shares (acquired)/ realised (2.3) Balance as at June (60.6) , , ,096.7 Total comprehensive income (19.1) 1, , ,192.7 Dividends declared (note 11) (822.4) (822.4) (822.4) Net changes in minority interests (0.8) (0.8) Distribution to minorities (41.6) (41.6) Cost of acquiring minority interests (212.8) (212.8) (212.8) Minorities relating to acquisitions Release of financial liability raised on a business acquisition Share-based payment expense Share trust loss (97.5) (97.5) (97.5) Treasury shares (acquired)/ realised (7.4) Balance as at June (44.1) , , ,591.8 * These reserves have been combined in the balance sheet as other reserves. Massmart Annual Report

163 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June ACCOUNTING POLICIES Basis of accounting The financial statements have been prepared on the historical cost basis except for the revaluation of certain non-current assets and financial instruments to fair value. The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and in a manner required by the Companies Act of South Africa. The principal accounting policies adopted are set out below. These policies have been consistently applied for the period under review. Basis of consolidation The Group annual financial statements incorporate the annual financial statements of the Company (Massmart Holdings Limited) and the entities it controls. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The operating results of the subsidiaries are consolidated from the date on which effective control is transferred to the Group and up to the effective date of disposal. Separate disclosure is made of minority interests where the Group s investment is less than 100%. Minority interests consist of the amount of those interests at the date of the original business combination and the minority s share of changes in equity since the date of the combination. Losses applicable to the minority s interest in the subsidiary s equity are allocated against the interest of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Insight During the financial year the Group adopted the revised IAS 27 Consolidated and Separate Financial Statements. More detail on the resulting changes are contained in the technical review on page 170 All inter-company transactions and balances, income and expenses are eliminated in full on consolidation. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held-for-sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. The interest of minority shareholders in the acquiree is initially measured at the minority s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Segmental information The Group is organised into four divisions for operational and management purposes. Massmart reports its primary business segment information on this basis and on a secondary basis by significant geographical region based on location of assets. Comparative figures When an accounting policy is altered, comparative figures are restated if required by the applicable accounting statement and where material. During the last financial year, the accounting policy for borrowing costs was amended. The change had no impact on the financial results of the Group and hence no restatements were required in the Group s financials. Interests in associates An associate is an enterprise over which the Group has significant influence, but that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Read more More detail on acquisitions within the financial year can be found in note 3 on page 174 Group Financial Statements Insight During the financial year the Group adopted the revised IFRS 3 Business Combinations. More detail on the resulting changes are contained in the technical review on page 170 Read more More detail on segmental reporting can be found in note 40 on page 221 Group Financial Statements Insight During the financial year the Group adopted IFRS 8 Operating Segments. More detail on the resulting changes are contained in the technical review on page Massmart Annual Report 2010

164 Group Financial Statements The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held-for-sale, in which case it is accounted for under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The carrying amount of such interests is reduced to recognise any decline, other than a temporary decline, in the value of individual investments. The carrying amount reflects the Group s share of net assets of the associate and includes any goodwill on acquisition, less any impairment in the value of individual investments. Read more More detail on the associate company can be found in note 16 on page 186 Group Financial Statements Any excess of the cost of acquisition over the Group s share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any deficiency of the cost of acquisition below the Group s share of the fair values of the identifiable net assets of the associate at the date of acquisition (ie discount on acquisition) is credited to profit or loss in the period of acquisition. Where a Group enterprise transacts with an associate of the Massmart Group, unrealised profits and losses are eliminated to the extent of the Group s interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the asset transferred. Goodwill Goodwill arising on consolidation of a subsidiary represents the excess of the cost of acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary or jointly controlled entity at the date of acquisition. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (ie discount on acquisition) is credited to profit or loss in the period of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Read more More detail on goodwill and the Group s cash-generating units can be found in note 14 on page 184 Group Financial Statements Insight During the financial year the Group adopted the revised IFRS 3 Business Combinations. More detail on the resulting changes are contained in the technical review on page 170 On disposal of a subsidiary or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group s policy for goodwill arising on the acquisition of an associate is described under Interests in associates above. Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets previous carrying amount and fair value less costs to sell. Property, plant and equipment Freehold land is shown at cost and is not depreciated. Property, plant and equipment is shown at cost less accumulated depreciation, and reduced by any accumulated impairment losses. Insight There were no assets classified as held for sale in the two periods under review. Read more More detail on property, plant and equipment can be found in note 13 on page 182 Group Financial Statements Massmart Annual Report

165 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June 2010 Property cost includes professional fees. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Where expenditure incurred on property, plant and equipment will lead to future economic benefits accruing to the Group, these costs are capitalised. Repairs and maintenance are expensed as and when incurred. Depreciation is charged so as to write off the cost of assets, other than land, over their estimated useful lives, using the straight-line method, on the following bases: f Buildings 50 years f Fixtures, fittings, plant, equipment and motor vehicles 4 to 15 years f Computer hardware 3 to 8 years f Leasehold improvements Shorter of lease period or useful life Useful life and residual value is reviewed annually and the prospective depreciation is adjusted accordingly. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. Intangible assets Trademarks are measured initially at purchased cost. Intangible assets are shown at cost less accumulated amortisation, and reduced by any accumulated impairment losses. Amortisation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method, on the following bases: f Trademarks f Computer software 10 years 3 to 8 years Read more More detail on intangible assets can be found in note 15 on page 185 Group Financial Statements Useful life is reviewed annually and the prospective depreciation is adjusted accordingly. Impairment of tangible and intangible assets excluding goodwill At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount for an individual asset, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Read more More detail on impairment can be found in: f Note 5 Impairment of assets 175 f Note 13 Property, plant and equipment 182 f Note 15 Other intangibles 185 Group Financial Statements If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of an asset (cash-generating unit) is increased to the revised estimate of its recoverable amount. This is done so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset 164 Massmart Annual Report 2010

166 Group Financial Statements (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Revenue recognition Revenue of the Group comprises net sales, royalties and franchise fees, investment income, finance charges, property rentals, management and administration fees, commissions and fees, dividends and excludes value-added tax. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales-related taxes. Read more More detail on revenue can be found in note 4 on page 175 Group Financial Statements Sales of goods are recognised when goods are delivered and title has passed. Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable. Dividend income from investments is recognised when the shareholders rights to receive payment have been established. Other revenue is recognised on the accrual basis in accordance with the substance of the relevant agreements and measured at fair value of the consideration receivable. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are capitalised at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor, net of finance charges, is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to profit or loss. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Foreign currencies The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (ie its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in the functional currency of the Group, and the presentation currency for the consolidated financial statements. Transactions in currencies other than the Group reporting currency (South African Rands) are initially recorded at the rates of exchange prevailing on the dates of the transactions. In order to hedge its exposure to certain foreign exchange risks, the Group has a policy of covering forward all its foreign exchange liability transactions of a trading nature (see below for details of the Group s accounting policies in respect of such derivative financial instruments). At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement and retranslation of monetary items are included in profit and loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit and loss for the period. However, where fair value adjustments of non-monetary items are Read more More detail on finance leases can be found in: f Note 9 Net finance costs 179 f Note 17 Other financial assets 188 f Note 24 Non-current liabilities 197 More detail on operating leases can be found in: f Note 6 Operating profit 176 f Note 24 Non-current liabilities 197 f Note 26 Trade and other payables 199 f Note 32 Operating lease commitments 204 Group Financial Statements Read more More detail on foreign currencies can be found in: f Note 6 Operating profit 176 f Note 7 Foreign exchange gains and losses 177 f Note 22 Other reserves 193 Group Financial Statements Massmart Annual Report

167 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June 2010 recognised directly in equity, exchange differences arising on the retranslation of these non-monetary items are also recognised directly in equity. On consolidation, the assets and liabilities of the Group s overseas operations (including comparatives) are translated at exchange rates prevailing on the reporting date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. The financial statements (including comparatives) of foreign subsidiaries and associates that report in the currency of a hyperinflationary economy are restated in terms of the measuring unit current at the reporting date before they are translated into South African Rands. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Government grants Government grants for staff training costs are recognised in profit or loss over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Income is not recognised until there is reasonable assurance that the grants will be received. Retirement benefit costs Payments to defined contribution plans are charged as an expense as they fall due. There are no defined retirement benefit plans in the Group. Post-retirement healthcare benefit Post-retirement healthcare benefits are provided by certain Group companies to qualifying employees and pensioners. The healthcare benefit costs are determined through annual actuarial valuations by independent consulting actuaries using the projected unit credit method. Such gains or losses are recognised over the expected remaining working lives of the participating members. Adjustments are made annually through profit or loss for provisions held for members who have already retired. Actuarial gains and losses are recognised in full in the period in which they occur. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax charge payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Read more More detail on retirement benefit costs can be found in note 30 on page 203 Group Financial Statements Read more More detail on post-retirement medical aid can be found in note 25 on page 198 Group Financial Statements Read more More detail on taxation can be found in: f Note 10 Taxation 180 f Note 18 Deferred taxation 189 Group Financial Statements Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. In general, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities, which affects neither the tax profit nor the accounting profit at the time of the transaction. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 166 Massmart Annual Report 2010

168 Group Financial Statements The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Secondary Taxation on Companies (STC) is payable on net dividends paid and is recognised as a tax charge in profit or loss in the year it is incurred. Any tax on capital gains is deferred if the proceeds of the sale of the assets are invested in similar assets, but the tax will ultimately become payable on sale of that similar asset. Inventories Inventories, which consist of merchandise, are valued at the lower of cost and net realisable value. Cost is calculated on the weighted-average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Financial instruments Financial assets and financial liabilities are recognised on the Group s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets are classified into the following specified categories: f Fair value through profit or loss (FVTPL) These are held at fair value and any adjustments to fair value are taken to the income statement. Listed investments are carried at market value by reference to stock exchange quoted selling prices. f Loans and receivables These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. f Held-to-maturity investments These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. f Available-for-sale investments These are held at fair value and any adjustment to fair value is taken to equity. Read more More detail on inventories can be found in note 19 on page 190 Group Financial Statements Read more More detail on financial instruments can be found in note 39 on page 211 Group Financial Statements The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method This is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest basis for debt instruments other than those financial assets designated as at fair value through profit or loss. Loans and receivables Trade receivables, loans and other receivables are measured initially at fair value, and are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the asset is impaired. Cash and cash equivalents Cash and cash equivalents are measured at fair value. For purposes of the statement of cash flows, cash and cash equivalents comprise cash on hand, deposits held on call with banks and investments in money-market instruments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value, net of bank overdrafts. Massmart Annual Report

169 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June 2010 Investments Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs. At subsequent reporting dates, debt securities that the Group has the express intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Read more More detail on investments can be found in note 16 on page 186 Group Financial Statements Impairment losses are reversed in subsequent periods when an increase in the investment s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. Investments other than held-to-maturity debt securities are classified as either investments held-for-trading or as available-for-sale, and are subsequently measured at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. Unrealised gains and losses on available-for-sale investments are recognised directly in equity until the disposal or impairment of the relevant investment, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as availablefor-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. Listed investments are carried at market value, which is calculated by reference to stock exchange quoted selling prices at the close of business on the reporting date. Financial liabilities and equity Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Debt instruments issued, which carry a right to convert to equity that is dependent on the outcome of uncertainties beyond the control of both the Group and the holder, are classified as liabilities except where conversion is certain. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Financial liabilities, other than derivative instruments, are recognised at amortised cost, comprising original debt less principal payments and amortisations. Financial liabilities include finance lease obligations, interest-bearing bank loans and overdrafts, and trade and other payables. The accounting policy for finance lease obligations is outlined on page 165. Bank borrowings Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group s accounting policy for borrowing costs (see below). Trade payables Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. 168 Massmart Annual Report 2010

170 Group Financial Statements Equity instruments Equity instruments are recorded as the proceeds received, net of direct issue costs. Derivative financial instruments and hedge accounting The Group s activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rates. The Group uses foreign exchange forward contracts to hedge its exposure to foreign currency fluctuations relating to certain firm trading commitments. The use of financial derivatives is governed by the Group s policies approved by the Board, which provide written principles on the use of financial derivatives consistent with the Group s risk management strategy. The Group does not trade in derivative financial instruments for speculative purposes. Derivative financial instruments are initially measured at fair value on the contract date, and are re-measured to fair value at subsequent reporting dates. The effective portion of the changes in fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. If the hedged firm commitment or forecast transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. Amounts deferred in equity are recognised in profit or loss in the same period in which the hedged firm commitment affects profit or loss. Changes in the fair value of derivative financial instruments that do not qualify as cash flow hedges are recognised in profit or loss as they arise. The hedge is de-designated as a cash flow hedge at the Shipped on Board date, and discontinued when the hedging instrument is sold, expired, terminated, exercised, or no longer qualifies for hedge accounting. At the time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecast transaction is recognised in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that the Group will be required to settle that obligation. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the reporting date, and are discounted to present value where the effect is material. Share-based payments The Group issues equity-settled share-based payments to employees who are beneficiaries of the various Group share schemes. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group s estimate of shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions. Fair value is measured by use of a Binomial model. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of nontransferability, exercise restrictions, and behavioural considerations. Borrowing costs All borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. All other borrowing costs are recognised as an expense in the period in which they are incurred. Read more More detail on provisions can be found in note 25 and note 27 on pages 198, 199 Group Financial Statements Read more More detail on share-based payments can be found in note 22 on page 193 Group Financial Statements Insight During the financial year the Group adopted the revised IAS 23 Borrowing Costs. More detail on the resulting changes are contained in the technical review on page 170 Massmart Annual Report

171 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June TECHNICAL REVIEW International Financial Reporting Standards (IFRS) Massmart first adopted International Financial Reporting Standards (IFRS) with effect from 1 July Subsequent amendments have been made to the standards, resulting in revised issue and version dates. All these amendments have been complied with in line with the transitional provisions of that standard. There has been no impact on the business, financial or practical of any amendments becoming effective in the past financial year. The Group is exposed to the following suite of standards: Standard IFRSs IFRS 1 IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IFRS 8 IAS 1 IAS 2 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 14 IAS 16 IAS 17 IAS 18 IAS 19 IAS 20 IAS 21 IAS 23 IAS 24 IAS 26 IAS 27 IAS 28 IAS 29 IAS 31 IAS 32 IAS 33 IAS 34 IAS 36 IAS 37 IAS 38 IAS 39 IAS 40 IAS 41 AC 500 AC 501 AC 502 AC 503 Standard s name Improvements to International Financial Reporting Standards First-time Adoption of International Financial Reporting Standards Share-based Payment Business Combinations Insurance Contracts Non-current Assets Held for Sale and Discontinued Operations Exploration for and Evaluation of Mineral Resources Financial Instruments: Disclosures Operating Segments Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors Events after the Reporting Period Construction Contracts Income Taxes Segment Reporting Property, Plant and Equipment Leases Revenue Employee Benefits Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Accounting and Reporting by Retirement Benefit Plans Consolidated and Separate Financial Statements Investments in Associates Financial Reporting in Hyperinflationary Economies Interests in Joint Ventures Financial Instruments: Presentation Earnings per Share Interim Financial Reporting Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instruments: Recognition and Measurement Investment Property Agriculture Preface to South African Statements and Interpretations of Statements of Generally Accepted Accounting Practice Accounting for Secondary Tax on Companies (STC) Substantively Enacted Tax Rates And Tax Laws Accounting For Black Economic Empowerment (BEE) Transactions The Improvements to International Reporting Standards is a relatively new standard issued by the International Accounting Standards Board (IASB). This standard is due to be issued annually and is the IASB s project that provides them with a vehicle for making non-urgent but necessary amendments to IFRSs. Some amendments involve consequential amendments to other IFRSs. Massmart has adopted the standard issued in August There were no financial or practical implications on the business. A new standard was issued in May 2009 that becomes effective for Massmart s 2011 financial year-end. IFRS 8 Operating Segments, was issued on 30 November 2006, to replace IAS 14 Segment Reporting. The effective date of this standard is our 2010 financial year. Although early adoption was permitted, the Group chose not to do so. The standard requires the Group to adopt the management approach to reporting segment information, effectively using its internal management reporting system to collect the data. While this is a change in approach from IAS 14 Segment Reporting, there was no financial or disclosure impact on the Group from adopting this standard. In 2006, the IASB agreed to a moratorium under which there would be no new or amended standards effective before 1 January This was done in order to have a stable platform for a four-year period. The effective date of the revised suite of standards is our 2010 financial year. We chose not to early adopt any of these standards. 170 Massmart Annual Report 2010

172 Group Financial Statements This table provides a brief analysis of the differences between the old and new standards that changed in our 2010 financial year and the relating impact on the business: Standard Standard s name Material differences between the old and new standard IFRS 3 Business Combinations f Transaction costs must be expensed. Previously we capitalised these costs. f Share options given to a seller must be included in the purchase consideration. These costs were previously excluded from the purchase consideration. f Any contingent consideration must be valued at acquisition date. Where there is a subsequent change, the difference must be recognised in the income statement. Previously we adjusted goodwill. f Goodwill can be provided for minorities, we have elected not to do this. f In step acquisitions, previous non-controlling equity interests held are deemed to be disposed at fair value, which is then included in the purchase price to determine goodwill. Previously the existing investment was not deemed to be disposed of and only the additional acquisition was accounted for in determining goodwill. These changes will all have a financial impact on future acquisitions. There is no retrospective application, so no adjustment was required to the financial statements. IFRS 8 Operating Segments f Segment identification and information is determined and presented through the eyes of management. Previously this was not how we determined our segments or segment information. However, the end result is the same. f Segment information needs to reconcile to IFRS. This has always reconciled. These changes had no financial or disclosure impact on the business. IAS 1 Presentation of Financial This standard brought many changes all disclosure related. Statements f It introduced the concept of total comprehensive income which briefl y is the change in equity other than changes resulting from transactions with owners in their capacity as owners. f Total comprehensive income is housed in two statements; the income statement and the statement of comprehensive income. f Statement of comprehensive income could be one statement, or an income statement and a separate statement of items recognised in other comprehensive income. We elected to disclose the data in two statements. f The balance sheet has been renamed statement of financial position. f The cash flow statement has been renamed statement of cash flows. These changes had no financial impact on the business. IAS 23 Borrowing Costs f All borrowing costs need to be capitalised where they are qualifying assets. Previously our accounting policy was to expense these costs. This change will have a financial impact on future qualifying assets where borrowing costs are incurred. There is no retrospective application, so no adjustment was required to the financial statements. IAS 27 Consolidated and Separate f There is no restriction on allocating losses of a subsidiary to the minorities. Financial Statements Previously we did not do this. This change will have a financial impact on future minority allocations in loss making subsidiaries. There is no retrospective application, so no adjustment was required to the financial statements. There were various other smaller amendments made to the standards which we feel are not material and thus have not listed them individually. IFRS 9 Financial Instruments was issued in November 2009, effective for year-ends beginning on or after 1 January 2013, which would mean the Group s 2014 financial year. Early adoption is permitted, but the Group has elected not to do so. IFRS 9 is currently unfinished and due to be completed by the end of the 2010 calendar year. At this point it will replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. In its current format, there is no financial impact on the Group s results. However, the biggest theoretical change for the Group is the change from the four classifications of financial assets (being: fair value through profit or loss, loans and receivables, held-to-maturity and available-for-sale) to two classifications (being: assets measured at fair value through profit or loss and those measured at amortised cost). The standard does allow the entity to elect that certain equity investments be measured at fair value with value changes reported in other comprehensive income. The current format does not address financial liabilities. The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces its complexity. The IASB recently issued an exposure draft containing various proposals to improve the financial reporting of lease contracts. The accounting treatment under existing requirements depends on the classification of a lease. Classification as an operating lease Massmart Annual Report

173 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June 2010 results in the lessee not recording any assets or liabilities in the statement of financial position under IFRS. This results in many investors having to adjust the financial statements (using disclosures and other available information) to estimate the effects of lessees operating leases for the purpose of investment analysis. The proposals would result in a consistent approach to lease accounting for both lessees and lessors a right-of-use approach. Among other changes, this approach would result in the liability for payments arising under the lease contract and the right to use the underlying asset being included in the lessee s statement of financial position, thus providing more complete and useful information to investors and other users of financial statements. As part of the transition, we would remove the lease liability that currently sits in the statement of financial position resulting from Circular 07/2005 Operating Leases that required us to smooth operating leases. We anticipate the exposure draft becoming a standard in approximately three years. We are currently unable to estimate accurately the financial impact on the Group, although it will be material, as the change proposed has raised some concerns in the financial community. Once these issues have been clarified, we will indicate the financial impact on the Group s results. Interpretations of Statements of Generally Accepted Accounting Practice The International Financial Reporting Interpretations Committee (IFRIC) is a committee of the International Accounting Standards Board (IASB) that assists the IASB in establishing and improving standards of financial accounting and reporting for the benefit of users, preparers and auditors of financial statements. The role of the IFRIC is to provide timely guidance on newly identified financial reporting issues not specifically addressed in International Financial Reporting Standards (IFRSs) or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop. It thus promotes the rigorous and uniform application of IFRSs. The following IFRICs were issued or re-issued since the start of the financial year, or earlier but became effective for the current financial year. There is no impact on the Group from any of these IFRIC s, and they have only been included for completeness. IFRIC Name IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 Members Shares in Co-operative Entities and Similar Instruments IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 9 Re-assessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of Net Investment in a Foreign Operation IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 18 Transfer of Assets from Customers IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments An IFRIC becomes inoperative and is withdrawn when an IFRS or other authoritative document issued by the IASB that overrides or confirms a previously issued IFRIC becomes effective. 172 Massmart Annual Report 2010

174 Group Financial Statements Circulars A circular is issued by the Johannesburg Stock Exchange Limited (JSE) or the South African Institute of Chartered Accountants (SAICA) where guidance or clarification is required on an identified financial reporting issue on a South African platform (as opposed to an IFRIC, discussed above, that operates on an international platform). This assistance is required to establish and improve standards of financial accounting and reporting for the benefit of users, preparers and auditors of financial statements. It thus attempts to promote the rigorous and uniform application of the standards. The following circulars were issued since the start of the 2010 financial year. One of these has no impact on the Group, and has been included for completeness. The impact of each circular has been indicated in the right hand column. Circular Name Date issued Impact on the Group Circular 2/2009 Statement of Generally Accepted Accounting September 2009 This circular has no impact on the Practice; International Financial Reporting Standard Group. for Small and Medium-sized Entities Circular 3/2009 Headline Earnings September 2009 This circular had an impact on the Group. See below for a detailed explanation. Where a circular impacts the Group, the results of the Group have been adjusted retrospectively, as if the Group had always accounted for the circular correctly. Circular 8/2007 Headline Earnings was issued in July 2007 by SAICA at the request of the JSE and became effective for the Group in the 2008 financial year-end. This circular was far more rules based than its predecessor, Circular 2/2007 Headline Earnings. The impact of the circular was disclosed in the 2009 annual report. Circular 3/2009 Headline Earnings, is only different to Circular 8/2007 Headline Earnings in that the terms of reference to the financial statements have been amended to reflect the changes made to IAS 1 Presentation of Financial Statements. Detail can be found in the second table of this note that illustrates the changes between the new and old standards that become effective in the year under review. Summary The Group s accounting policies are governed by IFRS and the AC 500 series as issued by the Accounting Practices Board and listed above. Guidance has been obtained from IFRICs and circulars effective on 6 October 2010, also listed above. Due to the nature and volatility of Exposure Drafts (EDs), no review has been provided except for the lease exposure draft specifically discussed above. 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. Massmart Annual Report

175 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June ACQUISITION OF SUBSIDIARIES 3.1 Subsidiaries acquired Control Purchasing Principal Date of acquired division activity acquisition (%) 2010 Mica Norwood Massbuild Home improvement/hardware 15 September Mica South Coast Mall Massbuild Home improvement/hardware 15 September Mica Umhlanga Massbuild Home improvement/hardware 15 September Kangela Massbuild Home improvement/hardware 29 June Emsengeni Massbuild Home improvement/hardware 7 June Emsengeni Masscash Wholesale Cash and Carry 7 June Kawena Distributors Masscash Wholesale Cash and Carry 29 June Finro Masscash Wholesale Cash and Carry 5 October DF Scott Masscash Wholesale Cash and Carry 27 July Mikeva Masscash Wholesale Cash and Carry 20 July Piet Retief Liquors Masscash Wholesale Cash and Carry 1 October Manzini Masscash Wholesale Cash and Carry 10 May Trident Makopane Masscash Wholesale Cash and Carry 2 March Sunshine Masscash Retail Cash and Carry 29 June Astor Masscash Retail Cash and Carry 1 January MC Meat Distributors Masscash Distribution centre 1 December Cambridge Properties Corporate Property 31 March % of Cambridge Food was acquired in the June 2009 financial year, a further 49% was acquired on 31 March Top Spot Masscash Retail Cash and Carry 25 August Cambridge Food Masscash Retail Cash and Carry 1 December Saverite Romatswa Masscash Retail Cash and Carry 12 May Saverite Ghanzi Masscash Retail Cash and Carry 19 May Buildrite Queenstown Massbuild Home improvement/hardware 8 June Buildrite East London Massbuild Home improvement/hardware 17 June Buildrite King William s Town Massbuild Home improvement/hardware 22 June Analysis of assets and liabilities acquired f The net asset value of the businesses acquired during the year was R188.9 million (2009: R34.8 million) on the date of acquisition. 3.3 Net cash outflow on acquisition Rm Rm Total purchase price (379.3) (241.1) Less: Cash and cash equivalents of subsidiary Cash impact of acquisition, net of cash and cash equivalents acquired (369.9) (240.1) Less: Seller s loan settlement in one business 41.6 Net cash position for the Group (369.9) (198.5) f The net cash outflow as reflected above can be found in note 38.8 on page Goodwill arising on acquisition f Goodwill arose in the business combinations because the cost of the combination included a control premium. In addition, the consideration paid for the combination effectively included amounts in relation to the benefit of the expected synergies, revenue growth and future market development. These benefits are not recognised separately from goodwill as the future economic benefits arising from them cannot be reliably measured. f Goodwill was recognised in the current year on all the acquisitions listed above. f Goodwill was recognised in the prior year on the following acquisitions; Top Spot, Cambridge Food and Buildrite. f Goodwill raised on the acquisitions reflected above of R305.8 million (2009: R205.3 million) is recognised in note 14 on page Massmart Annual Report 2010

176 Group Financial Statements 4. REVENUE Rm Rm Sales 47, ,128.7 Change in fair value of financial assets carried at fair value through profit or loss Instalment-sale finance charges Dividends from unlisted investments Less: Interest paid on a related liability (50.7) Royalties and franchise fees Management and administration fees Property rentals Commissions and fees Other IMPAIRMENT OF ASSETS 47, , Notes Rm Rm Tangible assets Goodwill Intangible assets f The impairment of assets in the current year relates to the impairment of fixed assets in Game due to a fire in the Benoni store, the impairment of goodwill in a generator business in the Massbuild division and the impairment of computer software in Builders Warehouse due to an IT upgrade. f The impairment of assets in the prior year related to computer software in Masscash whereby additional system software was rendered obsolete. Massmart Annual Report

177 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June OPERATING PROFIT Rm Rm Credits to operating profit include: Foreign exchange profit Profit on disposal of tangible and intangible assets Profit on disposal of assets classified as held for sale 7.0 Charges to operating profit include: Depreciation and amortisation (owned assets): Buildings Fixtures, fittings, plant and equipment Computer hardware Leasehold improvements Motor vehicles Computer software Trademarks Depreciation and amortisation (leased assets): Buildings Fixtures, fittings, plant and equipment Computer equipment Motor vehicles Foreign exchange loss Share-based payment expense: Massmart Holdings Limited Employee Share Trust Massmart Thuthukani Empowerment Trust Massmart Black Scarce Skills Trust Operating lease charges: Land and buildings Plant and equipment Computer equipment Motor vehicles Loss on disposal of tangible and intangible assets Fees payable: Administrative and outsourcing services Consulting Auditors remuneration: Current year fee Prior year underprovision 1.8 Tax advice and reviews Consulting and business reviews Contract assignments Other Massmart Annual Report 2010

178 Group Financial Statements 7. FOREIGN EXCHANGE GAINS AND LOSSES Rm Rm Foreign exchange loss arising from loans to African operations* (83.1) (116.9) Foreign exchange (loss)/gain arising from ineffective hedges (49.0) 4.2 Foreign exchange (loss)/gain arising from an investment in offshore trading structure (6.8) 14.9 Foreign exchange (loss)/gain arising from the translation of foreign creditors (25.4) 19.4 (164.3) (78.4) * Includes foreign exchange gain/(loss) arising from the translation of other small monetary loan balances as described in the explanation below. The Group was exposed to the following currencies for the period under review and their year-end exchange rates were: Spot rate Spot rate Spot rate Country Currency June 2008 June 2009 June 2010 United States US Dollar United Kingdom Pound Sterling European Union Euro Botswana Pula Malawi Malawian Kwacha Mauritius Rupee Mozambique New Metical Namibia Namibian Dollar Nigeria Naira Tanzania Tanzanian Shilling Uganda Uganda Shilling Zambia Zambian Kwacha Ghana New Cedi Source: Oanda Currency converter Foreign exchange gain/(loss) arising from loans to African operations In Massdiscounters, a loan is initially provided to African operations as start up capital and then maintained as a working capital loan. This loan attracts foreign exchange gains/(losses) when it is translated into the functional currency of that entity at year-end. Where the operation holds other monetary balances not in its functional currency, that balance will also attract foreign exchange gains/(losses) when translated at year-end. These balances are not material and have been ignored in the explanation below. The graph below indicates the appreciation (rise in line) or depreciation (fall in line) of each currency to the Rand in the past year: African currencies spot rate relative to the Rand (based to June 2009) June 2009 September 2009 December 2009 March 2010 June 2010 Pula New Cedi Malawian Kwacha Rupee New Metical Namibian Dollar Naira Tanzanian Shilling Uganda Shilling Zambian Kwacha Massmart Annual Report

179 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June FOREIGN EXCHANGE GAINS AND LOSSES continued Where there is a depreciation of the African currency (alternatively, a strengthening in the Rand) the resulting impact is a foreign exchange loss on the loan. From the graph, it is evident that almost all the African currencies depreciated against the Rand by the end of the current year (the Uganda Shilling and Zambian Kwacha strengthened against the Rand during the year but then closed weaker), which explains the translation exchange loss in the income statement. This pattern is consistent with the prior year. The African operations trade in their local currency, which for reporting purposes is also their functional currency. The foreign exchange gain/(loss) that arises when translating the foreign operation into Rands (the Group s presentation currency) is accounted for in the FCTR on the balance sheet. Further details on these translations can be found in note 22 on page 193. Foreign exchange gain/(loss) arising from ineffective hedges The Group uses foreign exchange forward contracts to hedge its exposure to foreign currency fluctuations relating to certain firm trading commitments. IAS 39 Financial Instruments: Recognition and Measurement defines the accounting treatment for cash flow hedges, which is also contained in our accounting policies. Extract from the Massmart accounting policies in note 1 on page 169: The effective portion of the changes in fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. If the hedged firm commitment or forecast transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. Amounts deferred in equity are recognised in profit or loss in the same period in which the hedged firm commitment affects profit or loss. This foreign exchange gain arises from the ineffective hedges being recognised in profit or loss. The determination of an ineffective hedge is where the contract price moves outside of the range of 80% to 125% in relation to the underlying spot rate. Foreign exchange gain/(loss) arising from an investment in offshore trading structure The Group s offshore trading structure is a US Dollar denominated investment. The graph below shows that the Rand closed relatively stronger on the US Dollar in the current year, which gave rise to a foreign exchange loss on this investment. In the prior year, the Rand closed relatively flat on the US Dollar, yet there was a foreign exchange gain arising from this investment. This was because during the year the Group realised a portion of their investment when the Rand was relatively weak against the US Dollar with the result being a foreign exchange gain for the Group. US Dollar spot rate relative to the Rand June 2008 December 2008 June 2009 December 2009 June 2010 Foreign exchange gain/(loss) arising from the translation of foreign creditors Foreign creditors resulting from foreign stock purchases are translated into functional currency at year-end and the exchange difference is accounted for in profit or loss. As the bulk of foreign creditors are recorded in US Dollars, this exchange difference can be explained by the movement in the Rand against the US Dollar. However, as payments are made to creditors throughout the year that attract different rates of exchange, the entire exchange gain/loss cannot be linked to the closing Rand/US Dollar movement. 178 Massmart Annual Report 2010

180 Group Financial Statements 8. HYPERINFLATION In the 2007 financial year, the decision was made to prospectively deconsolidate the results of the Zimbabwean Makro operations. In terms of IAS 27 Consolidated and Separate Financial Statements, control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. It is evident from the current social, political and economic developments within Zimbabwe that control does not exist. This has been evidenced through the forcing of retailers to sell goods at predetermined prices and the inability of the Massmart Group to repatriate monies. It is Massmart s view that, throughout the 2010 financial year, it did not have control over the Zimbabwean operations and as such the results remain deconsolidated. This will be assessed on a yearly basis. On deconsolidation in 2007, the investment in Makro Zimbabwe was reflected as an available-for-sale financial asset. The fair value of this asset was determined to be zero and the adjustment taken to equity as a reserve. For the period under review the fair value was again assessed as zero and as a result there has been no fair value movement. Details can be found in note 16 on page NET FINANCE COSTS Rm Rm Finance costs Interest on bank overdrafts and loans Interest on obligations under finance leases Finance income Income from investments, receivables and bank accounts f Details on the loans and finance leases can be found in note 24 on page Massmart Annual Report

181 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June TAXATION Current year Rm Rm South African normal taxation Current taxation Deferred taxation Foreign taxation Current taxation Deferred taxation (18.2) (10.5) Secondary Taxation on Companies Taxation effect of participation in export partnerships Prior year (over)/under provision: South African normal taxation Current taxation (16.7) 11.1 Deferred taxation (0.1) (6.5) Foreign taxation Current taxation (4.8) (1.5) Deferred taxation (impairment of deferred taxation assets) 0.6 (0.5) (21.0) 2.6 Taxation as reflected in the Income Statement f Two companies in the Group participate in Trencor export partnerships. As the companies are liable for the tax effect of the participation, the amount is classified as a taxation charge. Details on the export partnership can be found in note 16 on page 186. % % The rate of taxation is reconciled as follows: Standard corporate taxation rate Exempt income (1.9) Disallowable expenditure Foreign income (0.2) 0.1 Prior year under-provision (including impairment) (1.2) 0.1 Secondary taxation on companies Other (1.3) (0.5) Effective rate Massmart Annual Report 2010

182 Group Financial Statements 11. DIVIDENDS PAID TO SHAREHOLDERS Rm Rm Final cash dividend No 19 (2009: No 17) Interim cash dividend No 20 (2009: No 18) Final Thuthukani preference share dividend No 6 (2009: No 4) Interim Thuthukani preference share dividend No 7 (2009: No 5) Total dividends paid f No 17 of cents declared on 20 August 2008 and paid on 15 September 2008 (R325.0 million). f No 18 of cents declared on 25 February 2009 and paid on 23 March 2009 (R504.3 million). f No 19 of cents declared on 26 August 2009 and paid on 21 September 2009 (R268.4 million). f No 20 of cents declared on 24 February 2010 and paid on 23 March 2010 (R507.4 million). f No 21 of cents declared on 25 August 2010 and paid on 20 September 2010 (R270.0 million).* f No 4 of 81.5 cents declared on 20 August 2008 and paid on 15 September 2008 to the Massmart Thuthukani Empowerment Trust (R11.8 million). f No 5 of cents declared on 25 February 2009 and paid on 23 March 2009 to the Massmart Thuthukani Empowerment Trust (R26.3 million). f No 6 of cents declared on 26 August 2009 and paid on 21 September 2009 to the Massmart Thuthukani Empowerment Trust (R13.5 million). f No 7 of cents declared on 24 February 2010 and paid on 23 March 2010 to the Massmart Thuthukani Empowerment Trust (R33.1 million). f No 8 of cents declared on 25 August 2010 and paid on 20 September 2010 to the Massmart Thuthukani Empowerment Trust (R23.6 million).* * This amount is provisional as the shares in issue can only be finalised on the last day to register which is after the date of this annual report. 12. EARNINGS PER SHARE Ordinary shares No of shares No of shares In issue 201,495, ,302,639 Weighted average 200,750, ,533,472 Diluted weighted average 209,816, ,053,668 Attributable and headline earnings per share The calculation of attributable and headline earnings per share is based on the weighted average number of ordinary shares. The calculation is reconciled as follows: Pre- Post- Pre- Posttaxation taxation Cents/ taxation taxation Cents/ Rm Rm share Rm Rm share Profit attributable to the equity holders of the parent 1, , Adjustments after minorities: Loss on disposal of tangible assets Loss on disposal of business Profit on sale of assets classified as held for sale (7.0) (6.0) (3.0) Impairment of assets Headline earnings 1, , Foreign exchange loss Headline earnings before foreign exchange movements 1, , Massmart Annual Report

183 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June EARNINGS PER SHARE continued Rm Rm Cents/share Cents/share Diluted attributable and diluted headline earnings per share The calculation of diluted attributable and diluted headline earnings per share is based on the weighted average number of ordinary shares. The calculation is reconciled as follows: Profit attributable to the equity holders of the parent 1, , Adjustment for impact of issuing ordinary shares (24.3) (13.5) Diluted attributable earnings 1, , Headline earnings 1, , Adjustment for impact of issuing ordinary shares (24.5) (13.4) Diluted headline earnings 1, , Weighted average shares outstanding No of shares No of shares Weighted average shares outstanding for basic and headline earnings per share 200,750, ,533,472 Potentially dilutive ordinary shares resulting from outstanding options 9,065,917 4,520,196 Weighted average shares outstanding for diluted and diluted headline earnings per share 209,816, ,053,668 f Both the Thuthukani A preference shares and the Black Scarce Skills B preference shares are currently dilutive and have a small effect on diluted basic and diluted headline earnings per share. 13. PROPERTY, PLANT AND EQUIPMENT Cost/carrying Accumulated Net book value depreciation value Rm Rm Rm 2010 Owned assets Freehold land and buildings Fixtures, fittings, plant and equipment 2, , ,098.9 Computer hardware Leasehold improvements Motor vehicles , , ,979.4 Capitalised leased assets Freehold land and buildings Fixtures, fittings, plant and equipment Computer hardware Motor vehicles Total 3, , , Owned assets Freehold land and buildings Fixtures, fittings, plant and equipment 1, Computer hardware Leasehold improvements Motor vehicles , , ,615.3 Capitalised leased assets Freehold land and buildings Fixtures, fittings, plant and equipment Computer hardware Motor vehicles Total 3, , ,696.6 f A register of land and buildings as required by the Companies Act of South Africa is available for inspection by members at the registered offices of the companies in the Group. f Certain capitalised leased property, plant and equipment is encumbered as per note 24 on page Massmart Annual Report 2010

184 Group Financial Statements 13. PROPERTY, PLANT AND EQUIPMENT continued Reconciliation of property, plant and equipment: Opening Additions Closing net through Foreign Re- net book acqui- De- exchange classifi- Im- book value Additions sitions Disposals preciation loss cations pairment value Rm Rm Rm Rm Rm Rm Rm Rm Rm 2010 Owned assets Freehold land and buildings (5.5) (0.2) Fixtures, fittings, plant and equipment (3.4) (212.2) (4.3) (1.4) 1,098.9 Computer hardware (0.1) (51.7) (0.4) Leasehold improvements (3.8) (30.2) (14.4) Motor vehicles (1.4) (15.2) (0.7) , (8.7) (314.8) (20.0) (1.4) 1,979.4 Capitalised leased assets Freehold land and buildings 40.3 (2.0) 38.3 Fixtures, fittings, plant and equipment 10.7 (2.8) 7.9 Computer hardware (4.5) 12.6 Motor vehicles (1.3) (11.8) (1.3) (21.1) 75.8 Total 1, (10.0) (335.9) (20.0) (1.4) 2, Owned assets Freehold land and buildings (0.5) (5.2) (0.1) (0.2) Fixtures, fittings, plant and equipment (3.1) (183.7) (6.8) (0.3) Computer hardware (0.2) (49.6) (0.5) Leasehold improvements (0.7) (28.8) (12.3) Motor vehicles (3.2) (11.9) (0.4) , (7.7) (279.2) (20.1) 1,615.3 Capitalised leased assets Freehold land and buildings 42.2 (1.9) 40.3 Fixtures, fittings, plant and equipment (2.1) 10.7 Computer hardware 8.9 (2.0) 6.9 Motor vehicles (2.6) (12.7) (2.6) (18.7) 81.3 Total 1, (10.3) (297.9) (20.1) 1,696.6 f The Group has reviewed the residual values and useful lives of the assets. No material adjustment resulted from such review in the current period. f The following useful lives are used in the calculation of depreciation: Buildings 50 years Fixtures, fittings, plant and equipment 4 to 15 years Motor vehicles 4 to 10 years Computer hardware 3 to 8 years Leasehold improvements Shorter of lease period or useful life f There is no investment property in the Group and all assets are held at historical cost. Massmart Annual Report

185 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June GOODWILL Rm Rm Reconciliation of goodwill: Balance at the beginning of the year 1, ,362.3 Additions through minority buyouts 21.8 Additions through acquisitions Impairment (0.7) Disposals (16.0) Exchange differences (2.3) (1.2) Balance at the end of the year 1, ,588.2 Goodwill acquired in a business combination is allocated, at acquisition, to the cashgenerating units (CGUs) that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of significant goodwill had been allocated as follows: Masscash Holdings (Pty) Ltd Builders Warehouse (a division of Masstores (Pty) Ltd) Builders Trade Depot (Pty) Ltd f The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. f When testing goodwill for impairment, the recoverable amounts of the CGUs are determined as the lower of value in use and fair value less costs to sell. The key assumptions for the value in use calculations are discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using rates that reflect current market assumptions of the time value of money and the risks specific to the CGUs. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. f The Group prepares cash flow forecasts based on the CGUs results for the next five years. A terminal value is calculated based on a conservative growth rate of 3% (2009: 3%). This rate does not exceed the average long-term growth rate for the relevant markets. The valuation method applied is consistent with the prior period. f The rate used to discount the forecast cash flows is 13.5% (2009: 13.6%). f Goodwill of 0.7 was impaired on a generator business in the Massbuild Division. No goodwill was impaired in the prior year. f Additions through minority buyouts in the prior period relate to minor business acquisitions in the Masscash Division. f In 2010 the additions through acquisitions relate to the purchase of Kangela and Kawena, Cambridge Properties, Sunshine, Finro, DF Scott, Mikeva, MC Meat, Astor, Piet Retief Liquors, Emsengeni, Manzini, Trident Makopane and three Mica stores. Further details relating to these acquisitions can be found in note 3 on page 174. f In 2009 the additions through acquisitions relate to the purchase of Cambridge Food and Top Spot in Masscash and Buildrite in Massbuild, more specifically, Builders Trade Depot. Further details relating to these acquisitions can be found in note 3 on page 174. f In the current year, the contract business of CellShack was disposed of and the relative goodwill on that business was realised. 184 Massmart Annual Report 2010

186 Group Financial Statements 15. OTHER INTANGIBLES Cost/carrying Accumulated Net book value depreciation value Rm Rm Rm 2010 Owned assets Computer software Trademarks Total Owned assets Computer software Trademarks Total Opening Additions Closing net through Foreign net book acqui- Amor- exchange Im- book value Additions sitions Disposals tisation loss pairment value Rm Rm Rm Rm Rm Rm Rm Rm Reconciliation of other intangible assets: 2010 Owned assets Computer software (0.8) (46.6) (0.2) (1.6) Trademarks 2.5 (0.3) 2.2 Total (0.8) (46.9) (0.2) (1.6) Owned assets Computer software (44.9) (1.6) Trademarks 2.8 (0.3) 2.5 Total (45.2) (1.6) f The Group has reviewed the useful lives of the assets for reasonability. There were no material adjustments in the current period. f The following useful lives are used in the calculation of depreciation: Computer software 3 to 8 years Trademarks 10 years Massmart Annual Report

187 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June INVESTMENTS Rm Rm Investment in associate Share of post-acquisition profit, net of dividend received Amounts owing to associate Details of the Group s associate at 27 June 2010 are as follows: Name of associate Clidet No 484 (Pty) Ltd Place of incorporation and operation South Africa Proportion of ownership interest 33.3% Proportion of voting power held 33.3% Principal activity Investment property 33.3% of the R100 share capital was purchased for R33. The financial reporting date for Clidet No 484 (Pty) Ltd is 27 June. This investment falls into the corporate segment in terms of segmental reporting. Summarised financial information in respect of the Group s associate is set out below: Total assets Total liabilities Net assets Group s share of associate s net assets Revenue Profit for the year Group s share of associate s profit for the year has been included in other operating costs in the consolidated income statement Unlisted investments Fair value through profit or loss (FVTPL) Held for trading Bare dominium revaluation Investment in offshore trading structure Total financial assets classified as held for trading Designated as at FVTPL Participation in insurance cell-captive on extended warranties Participation in insurance cell-captive on premium contributions Total financial assets designated as at FVTPL Total fair value through profit or loss (FVTPL) Loans and receivables Trencor export partnership Total loans and receivables Held-to-maturity investments carried at amortised cost Other investments Total held-to-maturity investments Total unlisted investments Listed investments Other investments Total investments Massmart Annual Report 2010

188 Group Financial Statements 16. INVESTMENTS continued Rm Rm Reconciliation of financial assets carried at fair value through profit or loss (FVTPL): Opening balance Fair value adjustments taken to the income statement Realisation of a portion of the investment in offshore trading structure recognised in cash reserves (90.8) Foreign exchange adjustment taken to the income statement (6.8) 14.9 Closing balance Further details on the investments in this category: f The bare dominium revaluation reflects Massmart s right to acquire a 49% share in the bare dominium over seven Makro properties. f The investment in offshore trading structure is in M-class preference shares representing an international treasury, shipping and trading business unit. f The participation in an insurance cell-captive on extended warranties relates to an insurance arrangement with Mutual & Federal pertaining to extended warranties sold within the Group. f The participation in an insurance cell-captive on premium contributions relates to an insurance arrangement with Mutual & Federal pertaining to general insurance within the Group. Reconciliation of loans and receivables: Opening balance Investment realised (0.2) (0.1) Closing balance Further details on the investments in this category: f The Trencor export partnership represents our participation in export containers. Reconciliation of held-to-maturity investments: Opening balance Amortisation taken to the income statement 0.5 (11.1) Closing balance Further details on the investments in this category: f The preference share investment represented cumulative preference shares. A long-term liability of the Group was secured by a cession of the preference shares and legal offset was permitted. The investment in preference shares was realised in February 2009, and the related loan settled. Reconciliation of available-for-sale investments: Opening balance Fair value adjustment 0.1 Closing balance Further details on the investments in this category: f Makro Zimbabwe was deconsolidated in the 2007 financial year and the investment has been carried as an available-for-sale financial asset. The fair value of this asset was determined as zero and the adjustment taken to equity as a reserve. For the period under review the fair value was again assessed as zero and as a result there has been no fair value movement. f Listed investments include shares held on the JSE. f The directors value the unlisted investments at R312.2 million (2009: R275.2 million). f For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these investments, see note 39 on page 211. Massmart Annual Report

189 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June OTHER FINANCIAL ASSETS Rm Rm Housing loans to the executive committee members of Massmart Holdings Limited: Balance at the beginning of the year Advanced during the year Repayments (0.3) Balance at the end of the year 0.3 Employee share trust loans to the directors and Executive Committee members of Massmart Holdings Limited: Balance at the beginning of the year Advanced during the year Repayments (21.9) (30.7) Balance at the end of the year Other employees loans: Housing and staff loans Employee share trust loans Finance lease deposit Other loans f These loans are classified as Loans and receivables. For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these values, see note 39 on page 211. f All housing and staff loans bear interest at various rates below the prime interest rate. The loans to the employee share trust participants, including executive directors, attract interest of zero percent and are secured by the underlying shares. f The finance lease deposit accrues interest at 13.6%. f Details of the housing and employee share trust loans to the directors and Executive Committee members of Massmart Holdings Limited: Other Pattison Hayward Executive GM GRC Committee Total Rm Rm Rm Rm 2010 Balance at the beginning of the year Advanced during the year Repayments (3.9) (3.0) (15.3) (22.2) Balance at the end of the year Balance at the beginning of the year Advanced during the year Repayments (4.8) (2.2) (23.7) (30.7) Balance at the end of the year Massmart Annual Report 2010

190 Group Financial Statements 18. DEFERRED TAXATION Rm Rm The movements during the year are analysed as follows: Net asset at the beginning of the year Charge to profit or loss for the year (34.0) (9.1) Charge to equity (4.5) 4.5 Disposal of subsidiary (13.3) 2.0 Net asset at the end of the year Deferred taxation balances are presented in the balance sheet as follows: Deferred taxation assets Deferred taxation liabilities (19.4) (148.5) Opening Charged to Charged to Acquisitions/ Exchange Closing balance income equity disposals differences balance Rm Rm Rm Rm Rm Rm 2010 Temporary differences Trademarks Assessed loss unutilised (3.7) 65.5 Export partnerships (4.3) 0.3 (4.0) Debtors provisions Prepayments (127.5) (21.5) (0.8) (149.8) Creditors provisions (0.1) 63.3 Property, plant and equipment (38.8) (17.3) (17.6) (73.7) Finance leases 12.3 (1.5) 10.8 Long-term provisions Income not accrued (0.3) (4.8) (5.1) Deferred income 55.3 (22.7) 22.6 (0.6) 54.6 Operating lease adjustment (0.6) (0.3) Other temporary differences 3.8 (9.6) (4.5) (20.2) 0.1 (30.4) Total (29.4) (4.5) (13.3) (4.6) Temporary differences Trademarks 1.4 (0.6) 0.8 Assessed loss unutilised (3.7) 44.7 Export partnerships (4.4) 0.1 (4.3) Debtors provisions Prepayments (107.0) (20.5) (127.5) Creditors provisions 59.8 (10.4) 1.0 (0.1) 50.3 Property, plant and equipment (28.8) (12.1) (38.8) Finance leases 13.2 (0.9) 12.3 Long-term provisions Income not accrued (0.6) 0.3 (0.3) Deferred income 66.0 (10.4) (0.3) 55.3 Operating lease adjustment (0.3) Other temporary differences (15.6) Total (5.8) (3.3) Massmart Annual Report

191 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June INVENTORIES Rm Rm Food Inventory at cost 1, ,542.8 Provisions (122.0) (113.8) 1, ,429.0 Liquor Inventory at cost Provisions (19.2) (14.4) General Merchandise Inventory at cost 2, ,583.8 Provisions (235.4) (221.0) 2, ,362.8 Home Improvements Inventory at cost 1, Provisions (146.3) (106.0) 1, Total inventory net of provisions 5, ,893.2 Carrying amount of inventories carried at net realisable value f Inventories are carried at the lower of cost and net realisable value. f Provisions include: shrinkage and obsolescence provisions, write-downs to net realisable value and unearned rebates and settlement discounts per SAICA Circular 9/2006 Transactions giving rise to Adjustments to Revenue/Purchases. f Inventory is fully funded by trade payables. Details of trade payables can be found in note 26 on page 199. f No inventory is pledged as security. Composition of total inventories % Food 29.4 Liquor 6.1 General Merchandise 44.1 Home Improvements Massmart Annual Report 2010

192 Group Financial Statements 20. TRADE, OTHER RECEIVABLES AND PREPAYMENTS Rm Rm Trade receivables 1, ,130.3 Allowance for doubtful debts (56.1) (52.7) 1, ,077.6 Prepayments Other accounts receivable 1, Total receivables net of provisions 2, ,851.1 Movement in allowance for doubtful debts Balance at the beginning of the year Decrease in allowance recognised in profit or loss 3.4 (7.3) Balance at the end of the year Ageing of debtors provided for 60 to 90 days to 120 days days Total f No interest is charged on the trade receivables for the first 30 days from the date of the invoice. Thereafter, differing structures exist between the Divisions with interest being charged between 12.0% and 24.0% (2009: 12.0% and 17.5%) per annum on the outstanding balance. Trade receivables between 30 days and 180 days are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience. It is the Group s policy to provide fully for all receivables that are past due because historical experience is such that these receivables are generally not recoverable. f Before accepting any new customer, the Group uses an external credit scoring system to assess the potential customer s credit quality and defines credit limits by customer. Limits and scoring attributed to customers are reviewed quarterly to once a year. There is no customer who represents more than 5% of the total balance of trade receivables. f Included in the Group s trade receivables balance are debtors with a carrying amount of R8.1 million (2009: R7.5 million) which are past due at the reporting date for which the Group has not provided. The Group considers the amounts recoverable and currently holds security over these debtors or the debtors are insured. The average age of these receivables is 88 days (2009: 120 days) Rm Rm Ageing of past due debtors but not impaired 60 to 90 days to 120 days days Total f In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. f Included in the allowance for doubtful debts are specific trade receivables with a balance of R7.0 million (2009: R7.0 million) which have been placed under liquidation. This represents the difference between the carrying amount of the specific trade receivable and the present value of the expected liquidation proceeds. f Trade receivables are classified as Loans and receivables. For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these values, see note 39 on page 211. Massmart Annual Report

193 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June ISSUED CAPITAL 192 Massmart Annual Report 2010 Share capital Share premium Rm Rm Rm Rm Authorised 500,000,000 (2009: 500,000,000) ordinary shares of 1 cent each ,000,000 (2009: 20,000,000) non-redeemable cumulative non-participating preference shares of 1 cent each ,000,000 (2009: 18,000,000) A convertible redeemable non-cumulative participating preference shares of 1 cent each ,000,000 (2009: 2,000,000) B convertible redeemable non-cumulative participating preference shares of 1 cent each Issued 201,495,504 (2009: 201,302,639) ordinary shares of 1 cent each ,673,670 (2009: 17,758,998) A convertible redeemable non-cumulative participating preference shares of 1 cent each ,871,523 (2009: 1,979,060) B convertible redeemable non-cumulative participating preference shares of 1 cent each Number of Share capital Share premium shares Rm Rm Ordinary shares Balance at June ,193, Shares issued in terms of the Massmart Thuthukani Empowerment Trust 109,127 Ordinary shares issued June ,302, Treasury shares (1,360,836) (2.3) Ordinary shares issued excluding treasury shares June ,941, Balance at June ,302,639* Shares issued in terms of the Massmart Thuthukani Empowerment Trust 85,328 Shares issued in terms of the Massmart Black Scarce Skills Trust 107,537 Ordinary shares issued June ,495, Treasury shares (60,056) (7.4) Ordinary shares issued excluding treasury shares June ,435, * The number of shares is the ordinary shares issued before deducting treasury shares. f Ordinary shares, which have a par value of 1 cent, carry one vote per share and carry the right to dividends. Number of Share capital Share premium shares Rm Rm A convertible redeemable non-cumulative participating preference shares Balance at June 2008 Net shares issued in terms of the Massmart BEE transaction 17,868, Shares converted to ordinary shares (109,127) Treasury shares (17,758,998) (0.2) Balance at June Net shares issued in terms of the Massmart BEE transaction 17,758, Shares converted to ordinary shares (85,328) Treasury shares (17,673,670) (0.2) Balance at June 2010 f A convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Thuthukani Empowerment Trust. These shares carry one vote per share, which are cast by the appointed trustees, and carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.

194 Group Financial Statements 21. ISSUED CAPITAL continued Number of Share capital Share premium shares Rm Rm B convertible redeemable non-cumulative participating preference shares Balance at June 2008 Net shares issued in terms of the Massmart BEE transaction 1,979,060 Treasury shares (1,979,060) Balance at June 2009 Net shares issued in terms of the Massmart BEE transaction 3,979,060 Shares converted to ordinary shares (107,537) Treasury shares (3,871,523) Balance at June 2010 f B convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Black Scarce Skills Trust. These shares carry one vote per share, which are cast by the trustees, and do not carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue. Share options granted under the Massmart Holdings Limited Employee Share Trust f As at June 2010, executives and senior employees have options over 14,156,168 ordinary shares (of which 10,840,931 are unvested). As at June 2009, executives and senior employees had options over 16,055,227 ordinary shares (of which 13,195,878 are unvested). f Share options granted under the Employee Share Incentive Scheme carry no rights to dividends and no voting rights. Further details of the Employee Share Incentive Scheme are contained in note 29 on page 200. f During the period under review, the only shares bought in the market were by the Share Trust whereby 1.2 million shares were bought at an average price of R totalling R137.2 million. f During the prior year, the total share buyback (including shares bought in the market by the Share Trust) was 1.6 million shares at an average price of R78.76 totalling R126.0 million. f The directors have the authority, until the next annual general meeting, to issue the ordinary shares of the Company up to a maximum of 5% of the shares already issued. 22. OTHER RESERVES Rm Rm Foreign currency translation reserve (38.0) (7.1) Hedging reserve (0.6) (12.4) Share-based payment reserve Capital redemption reserve fund Amortisation of trademarks Fair value adjustment of available-for-sale financial asset (13.2) (13.2) Fair value adjustment on listed shares 0.3 Change in minority interests Financial liability raised on a business acquisition (120.0) Cost of acquiring minority interests (212.9) Treasury shares Massmart Annual Report

195 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June OTHER RESERVES continued Rm Rm Reconciliation of the foreign currency translation reserve: Balance at the beginning of the year (7.1) 20.2 Translation on consolidation (30.9) (27.3) Balance at the end of the year (38.0) (7.1) f Exchange differences relating to the translation from functional currencies of the Group s foreign subsidiaries into Rands are accounted for in the foreign currency translation reserve. Reconciliation of the hedging reserve: Balance at the beginning of the year (12.4) (0.7) Loss recognised on cash flow hedges 11.8 (11.7) Balance at the end of the year (0.6) (12.4) f The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The hedge is released from equity at the same time the forecast transaction is recognised in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period. Reconciliation of the share-based payment reserve: Balance at the beginning of the year Share-based payment expense related to the Massmart Holdings Limited Employee Share Trust Share-based payment expense related to the Massmart Thuthukani Empowerment Trust Share-based payment expense related to the Massmart Black Scarce Skills Trust Balance at the end of the year f The share-based payment reserve arises on grant of share options to employees under the Employee Share Incentive Schemes. Details of the Employee Share Incentive Schemes can be found in note 29 on page 200. The share-based payment valuation was performed by Alexander Forbes for all periods and all schemes are equity-settled share schemes. f In the prior year, the financial liability raised on a business acquisition was a put given to the seller of Cambridge Food on the remaining 49% interest that he held. Further details on the Cambridge acquisition can be found in note 3 on page 174. In the current year the put was waivered, and the financial liability was released. The Group now owns the full 100% interest in Cambridge Food. Massmart Share Schemes Massmart Holdings Limited Employee Share Trust Details of the share options outstanding during the year are as follows: Weighted Weighted average average Number of exercise price Number of exercise price share options Rand share options Rand Outstanding at the beginning of the year 16,055, ,304, Granted during the year 1,051, ,373, Forfeited during the year (692,519) (880,886) Exercised during the year (2,258,320) (1,742,166) Outstanding at the end of the year 14,156, ,055, Exercisable at the end of the year 3,315,237 2,859, Massmart Annual Report 2010

196 Group Financial Statements 22. OTHER RESERVES continued In 2010, the weighted average share price at the date of exercise for share options exercised during the year was R The options outstanding at the end of the year had a weighted average remaining contractual life of 3.7 years. Options were granted on 1 September 2009, 1 October 2009, 16 November 2009, 1 March 2010, 1 April 2010 and 1 May The estimated fair values of the options granted on those dates are R23.77, R25.93, R26.48, R27.58, R30.99 and R36.14, respectively. In 2009, the weighted average share price at the date of exercise for share options exercised during the year was R The options outstanding at the end of the year had a weighted average remaining contractual life of 4.3 years. Options were granted on 1 September 2008, 27 October 2008, 15 November 2008, 1 March 2009 and 27 May The estimated fair values of the options granted on those dates are R25.38, R25.27, R26.04, R23.00 and R22.97, respectively. These fair values were calculated using the binomial model. The inputs into the model were as follows: f Weighted average share price (Rand) at granting dates f Expected volatility 32.6% 36.0% 31.5% 34.7% f Expected life 3 5 years 3 5 years f Risk-free rate 7.5% 8.4% 7.0% 9.4% f Expected dividend yield 4.8% 5.0% 3.9% 4.6% Expected volatility was determined by calculating the historical volatility of the Company s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Massmart Thuthukani Empowerment Trust In 2010, the weighted average share price at the date of exercise for share options was R The options outstanding at the end of the year had a weighted average remaining contractual life of 27 months. In 2009, the weighted average share price at the date of exercise for share options was R The options outstanding at the end of the year had a weighted average remaining contractual life of three years. These fair values were calculated using the binomial model. The inputs into the model were as follows: f Weighted average share price (Rand) at granting dates (no issues in 2008, 2009 or 2010) f Expected volatility 30.1% 32.3% 30.1% 32.3% f Expected life 5 years 5 years f Risk-free rate 8.3% 8.4% 8.3% 8.4% f Expected dividend yield 3.7% 3.7% Expected volatility was determined by calculating the historical volatility of the Company s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Massmart Annual Report

197 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June OTHER RESERVES continued Massmart Black Scarce Skills Trust In 2010, the weighted average share price at the date of exercise for share options exercised during the year was R The options outstanding at the end of the year had a weighted average remaining contractual life of 4 years. Options were granted on 27 May 2009 and 1 April The estimated fair values of the options granted on those dates are R22.97 and R30.99, respectively. In 2009, the weighted average share price at the date of exercise for share options exercised during the year was R The options outstanding at the end of the year had a weighted average remaining contractual life of 4.6 years. Options were granted on 1 October 2008 and 1 April The estimated fair values of the options granted on those dates are R23.54 and R21.74, respectively. No options were exercised in the year. These fair values were calculated using the binomial model. The inputs into the model were as follows: f Weighted average share price (Rand) at granting dates f Expected volatility 32.6% 37.1% 31.3% 34.7% f Expected life 3 5 years 3 5 years f Risk-free rate 7.1% 8.4% 7.1% 8.7% f Expected dividend yield 4.6% 4.9% 4.0% 4.4% Expected volatility was determined by calculating the historical volatility of the Company s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. 23. MINORITY INTEREST Rm Rm At the beginning of the year Net changes in minority interests (0.8) (2.2) Income attributable to minorities Minorities relating to acquisitions 87.1 Distribution to minorities (41.6) (19.2) At the end of the year f The minority interests comprise mainly CBW store managers holdings in certain Masscash stores and Cambridge Food, 51% of which was acquired with effect 1 December On 31 March 2010 the remaining 49% interest in Cambridge Food was acquired. f Further details on the Cambridge Food acquisition can be found in note 3 on page 174. f The minorities relating to acquisitions is the take on minority balance on all acquisitions in the period. 196 Massmart Annual Report 2010

198 Group Financial Statements 24. NON-CURRENT LIABILITIES Rm Rm Interest-bearing Unsecured Medium-term payable Less: Included in current liabilities (4.2) (4.0) Secured Medium-term bank loans Less: Included in current liabilities (217.9) (122.3) Capitalised finance leases Less: Included in current liabilities (25.0) (21.0) Total interest-bearing liabilities Interest-free Unsecured Minority shareholders loans Income received in advance Less: Included in trade and other payables (26.3) (49.0) Operating lease liability Add: Included in trade and other payables Total non-interest bearing liabilities Total non-current liabilities f Included in current liabilities is a medium-term payable of R4.2 million (2009: R4.0 million), which is an amount owing to the Massmart Education Trust relating to cash reserves invested with Group Treasury. The short-term portion has been accounted for in note 28 on page 200. f Two medium-term bank loans, raised in the 2006 financial year to fund the Massbuild acquisitions, repayable in nine equal instalments over five years, with the final payment taking place in the current financial year. The loans bear interest at a fixed rate of 8.8% and 8.7%, respectively. The loans are secured by intra-group cross-suretyships. The short-term portion has been accounted for in note 28 on page 200. f A new three-year fixed term loan of R500 million was secured during the second half of the financial year payable quarterly over three years. The loan bears interest of 9.8%. The loan is secured by intra-group cross-suretyships. The short-term portion has been accounted for in note 28 on page 200. f Capitalised finance leases include vehicle, fixtures, fittings, plant and computer equipment and property leases, repayable in monthly instalments varying from one to five years at varying interest rates between 4.5% and 17.5% (2009: between 8.25% and 15.5%). The short-term portion has been accounted for in note 28 on page 200. f The capitalised finance leases are secured by moveable assets with a book value of R37.5 million (2009: R41.0 million) and the property lease by the value of the underlying land amounting to R38.3 million (2009: R40.3 million). These assets are accounted for in note 13 on page 182. f The income received in advance is for extended warranties which are sold within the Group and which have been released over the period under review. The short-term portion has been accounted for in note 26 on page 199. f The operating lease liability relates to the lease smoothing adjustment required by IAS 17 Leases. The short-term portion has been accounted for in note 26 on page 199. f For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these values, see note 39 on page 211. Massmart Annual Report

199 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June NON-CURRENT PROVISIONS Rm Rm Onerous lease provision Less: Payable within one year included in current provisions (2.1) (0.8) Provision for post-retirement medical aid contributions and other medical aid provisions Repayable Repayable in Repayable within 1 year* 2 5 years after 5 years Total Rm Rm Rm Rm * Included in current provisions in note 27 on page 199. f Certain Group companies provide post-retirement healthcare benefits to their retirees. This fund is accounted for as a defined benefit plan and measured using the projected unit credit method. The liability is unfunded. The main assumption used in calculating the costs and the provision is an interest rate medical inflation rate gap of 1.50% (2009: 1.25%) Rm Rm The net expense recognised in the income statement is: Current service cost Interest cost Benefits paid against balance sheet held liability (1.4) (1.1) Net actuarial (gain)/loss recognised in the year (2.9) 1.7 Net expense recognised as part of employment costs Movements in the post-retirement medical aid liability: Opening defined benefit obligation Expense as above Closing defined-benefit obligation f The last valuation of the liability for the post-retirement medical aid contributions was performed as at 30 June 2010 by Alexander Forbes, Fellow of the Institute of Actuaries (2009: Alexander Forbes, Fellow of the Institute of Actuaries). The current year costs have been assessed in accordance with the advice of independent actuaries. f The net actuarial loss in the current year arose as a result of a combination of the following factors: An unexpected gain of R2.7 million arose as a result of an increase in the real discount rate, ie an increase in the difference between the discount rate and the healthcare cost inflation assumption, from 1.25% per annum to 1.50% per annum. This change was necessitated by an increase in real bond yields. Higher than expected increases in medical scheme contributions as well as the medical scheme contribution increase occurring 1 July 2010 as opposed to 1 August 2010 as expected, resulted in a net unexpected loss of R0.7 million. Unexpected changes in the membership and membership profile resulted in a net gain of R0.9 million. f Other than the changes listed above, the remaining assumptions are consistent with the assumptions applied in the prior year. 198 Massmart Annual Report 2010

200 Group Financial Statements 26. TRADE AND OTHER PAYABLES Rm Rm Trade payables 7, ,128.2 Income received in advance short-term portion Operating lease liability short-term portion (6.0) (7.0) Leave pay accrual FEC liability Sundry payables and other accruals 1, , , ,670.3 f The income received in advance is for extended warranties which are sold within the Group and which have been released over the period under review. The long-term portion has been accounted for in note 24 on page 197. f The operating lease liability relates to the lease smoothing adjustment required by IAS 17 Leases. The long-term portion has been accounted for in note 24 on page 197. f The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. Settlement discounts received range from 1.0% to 3.0% (2009: 1.0% to 2.0%). f For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these values, see note 39 on page PROVISIONS Rm Rm Restructuring costs raised on acquisition 0.7 Onerous lease provision Leasehold improvements Other f Provisions raised against specific assets, for example inventories and trade receivables, are offset against those assets. Unused Opening Amounts Amounts amounts Closing balance provided utilised reversed balance Rm Rm Rm Rm Rm Reconciliation of provisions: 2010 Restructuring costs raised on acquisition 0.7 (0.7) Onerous lease provision (0.8) 2.1 Leasehold improvements 6.0 (4.5) 1.5 Other (0.7) (5.3) Restructuring costs raised on acquisition 1.9 (1.2) 0.7 Onerous lease provision (0.7) 0.8 Leasehold improvements Other (1.3) (0.7) (2.5) 22.2 Massmart Annual Report

201 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June OTHER CURRENT LIABILITIES Rm Rm Medium-term bank loans Capital short-term portion Interest accrual Capitalised finance leases Massmart Education Trust loan Trade finance facility Lamberti Education Foundation Trust loan Financial liability raised on a business acquisition f Two medium-term bank loans, raised in the 2006 financial year to fund the Massbuild acquisitions, repayable in nine equal instalments over five years, with the final payment taking place in the current financial year. The loans bear interest at a fixed rate of 8.8% and 8.7%, respectively. The loans are secured by intra-group cross-suretyships. The long-term portion has been accounted for in note 24 on page 197. f A new three-year fixed term loan of R500 million was secured during the second half of the financial year payable quarterly over three years. The loan bears interest of 9.8%. The loan is secured by intra-group cross-suretyships. The long-term portion has been accounted for in note 24 on page 197. f Capitalised finance leases include vehicle, fixtures, fittings, plant and computer equipment and property leases, repayable in monthly instalments varying from one to five years at varying interest rates between 4.5% and 17.5% (2009: between 8.25% and 15.5%). The long-term portion has been accounted for in note 24 on page 197. f The capitalised finance leases are secured by moveable assets with a book value of R37.5 million (2009: R41.0 million) and the property lease by the value of the underlying land amounting to R38.3 million (2009: R40.3 million). These assets are accounted for in note 13 on page 182. f The Massmart Education Trust loan represents cash reserves invested with Group Treasury. The long-term portion has been accounted for in note 24 on page 197. f The trade finance facility is an offshore US Dollar facility available for working capital requirements. The Group has used this facility to fund three African working capital loans namely Ghana, Malawi and Mozambique (2009: Ghana and Malawi). The facility is capped at USD20 million, of which we have utilised USD8.3 million (2009: USD9.1 million) at the balance sheet date. f The Lamberti Education Foundation Trust loan represents cash reserves invested with Group Treasury. f In December 2008, the Group acquired a 51% shareholding in Cambridge Food. The seller was given a put option on the remaining 49%. Further details on the Cambridge Food acquisition can be found in note 3 on page 174. In the current year the put was waivered, and the financial liability was released. The Group now owns the full 100% interest in Cambridge Food. f For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these values, see note 39 on page EMPLOYEE SHARE INCENTIVE SCHEMES s 000s Massmart Holdings Limited Employee Share Trust Total shares and options available to the scheme 39,500 39,500 Total shares and options available to the scheme 39,500 39,500 Shares and treasury shares issued to the scheme (10,142) (9,002) Remaining capacity for issue in terms of the JSE practice 29,358 30,498 Opening balance of shares and options 19,502 18,105 New shares and options offered to employees and executive directors 1,312 4,916 Shares and options sold by employees and directors (2,607) (2,493) Shares repurchased from/forfeited by employees and options lapsed/forfeited (692) (1,026) Closing balance of shares and options 17,515 19,502 The closing balance includes 3,358,878 (2009: 3,446,797) shares and 14,156,168 (2009: 16,055,227) options. Shares and options previously issued to employees who then subsequently left the Group are excluded from the figures above. Any amendments required to bring the Share Trust rules in line with the new Schedule 14 have to be approved by the JSE and shareholders by no later than 1 January Massmart Annual Report 2010

202 Group Financial Statements 29. EMPLOYEE SHARE INCENTIVE SCHEMES continued Options may be exercised at any time, but shares arising out of options may only be sold when they have vested with the participant. Vesting occurs over a five-year period as follows: 25% two years after the offer date; 50% three years after the offer date; 75% four years after the offer date; 100% five years after the offer date; and expires ten years after the offer date for the first three offers and six years after the offer date for the remainder of the offers. In terms of the scheme rules, all share loans on offers made prior to 22 May 2002 must be repaid or options exercised no later than 10 years from the offer date. For subsequent offers, share loans must be repaid or options exercised no later than six years from the offer date. The following options granted to employees and directors in terms of the Massmart Employee Share Incentive Scheme have not yet been exercised: No of No of options No of New No of Exercise options at forfeited options options options at Offer date Expiry date price (R) June 2009 and expired exercised granted June March March ,750 48, November November , , August August ,556 75, , January January ,000 50, May May ,000 15, February February ,668 19,668 1 April March ,046 7, May May , , May May ,766 7,766 1 September August ,158 6, ,698 24, February February ,750 12,000 2,750 1 April March , ,000 1 May April ,615 14,080 2, May May ,057 6, , , May May ,006 35,303 87,703 1 October September ,556 7,556 1 November October ,757 1,437 31, November November ,531 33,405 69,126 1 April March ,117 1,865 11,434 93, May May ,258 14, , , August August ,178 40,127 77,341 60,710 1 October September ,885 27,588 35, November November ,528 25,000 97,500 93, February February ,923 29, ,903 2 April April ,388 18, May May ,897,568 63, ,992 1,529, August August ,381 39, , November November ,130 32, ,112 1 April March ,731, , ,390 1,312, May May ,689, , ,371 3,214,509 1 September August , , October October ,055 28, , November November ,900 98,900 1 March February ,588 58, , May May ,719, ,648 2,598,386 1 September August , ,226 1 October September ,902 67, November November ,665 73,665 1 March February , ,021 1 April March , ,680 1 May April , ,286 16,055, ,519 2,258,320 1,051,780 14,156,168 Massmart Annual Report

203 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June EMPLOYEE SHARE INCENTIVE SCHEMES continued s 000s Massmart Thuthukani Empowerment Trust Total shares and options available to the scheme 18,000 18,000 Opening balance of share units 13,694 15,278 Shares sold (85) (101) Shares repurchased from/forfeited by employees and options lapsed/forfeited (783) (1,483) Closing balance of share units 12,826 13,694 Vesting occurs over a six-year period as follows: 33.3% in October 2010; 33.3% in October 2011; 33.4% in October 2012; and expires six years after the offer date. The following options granted to eligible employees in terms of the Massmart Thuthukani Empowerment Trust have not yet been exercised: No of No of No of options options No of options Exercise opening forfeited options closing Offer date Expiry date price (R) balance and expired exercised balance October September ,693, ,232 85,328 12,826, October September ,278,005 1,483, ,087 13,693, s 000s Massmart Black Scarce Skills Trust Total preference shares available to the scheme 3,979 2,000 Reconciliation of units: Opening balance of share units 2,271 1,624 New share units offered to employees Shares sold by employees (285) (51) Share units repurchased from/forfeited by employees and options lapsed/forfeited (87) (90) Closing balance of share units 2,203 2,271 Conversion of share units into preference shares Vesting occurs over a five-year period as follows: 25% two years after the offer date; 50% three years after the offer date; 75% four years after the offer date; 100% five years after the offer date; and expires six years after the offer date. 202 Massmart Annual Report 2010

204 Group Financial Statements 29. EMPLOYEE SHARE INCENTIVE SCHEMES continued The following options granted to eligible employees in terms of the Massmart Black Scarce Skills Trust have not yet been exercised: No of No of No of options options No of New options Exercise opening forfeited options options closing Offer date Expiry date price (R) balance and expired exercised granted balance October September ,132 10, , ,485 2 April April ,807 4,498 17, November November ,794 1,517 9,277 1 April March ,751 44, , ,507 1 October September ,566 30, ,787 1 April March ,759 59, May May ,889 15,889 1 April March , ,862 2,270,698 86, , ,862 2,202, October September ,558 19,919 51, ,132 2 April April ,464 3,657 21, November November ,794 10,794 1 April March ,037,045 66, ,751 1 October September , ,566 1 April March ,759 59, May May ,889 15,889 1,623,861 89,870 51, ,214 2,270, RETIREMENT BENEFIT INFORMATION All full-time permanent Massmart staff are members of either the Massmart Pension Fund, the Massmart Provident Fund or the SACCAWU National Provident Fund. These funds are defined contribution funds and are subject to the Pension Funds Act, Following the recent acquisitions, many of their staff are still members of the retirement funds of the previous business owners. Projects are underway to transfer these employees to one of the above funds in future. With effect from 1 March 2007, the Massmart Pension Fund and Massmart Provident Fund had been classified as valuation exempt. This exemption expired on 1 March 2010 and had to be re-applied for by 1 March The application for both funds was submitted in May 2010 to the Financial Services Board. Approval for the Massmart Provident Fund was received on 11 June 2010 and we await confirmation of the approval for the Massmart Pension Fund. The funds valuator certified that the funds were financially sound at 28 February 2006, being the last statutory actuarial valuation date of the funds and the assets were suitable in nature, in terms of the liabilities as at valuation date. Contributions received by the funds for the year ended 30 June 2010 amounted to R257 million (2009: R229 million). The Group s contribution of R154 million (2009: R138 million) was included in the income statement for the year as part of the employee costs. Massmart Annual Report

205 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June COMMITMENTS Rm Rm Commitments in respect of capital expenditure approved by directors: Contracted for Stores to be opened Stores to be refurbished Purchase of new system software Purchase of new hardware Store relocations Minor revamps Purchase of plant and equipment 7.8 Other Not contracted for Stores to be opened Stores to be refurbished Purchase of new system software Purchase of new hardware Store relocations Minor revamps Store conversions 55.7 Purchase of plant and equipment 33.5 Other f Massmart has the right of first refusal on the sale of any shares by the minority shareholders in various CBW stores. Historically Massmart has exercised this right. The amount to be paid in future, should Massmart exercise its rights, totals R224.7 million (2009: R275.0 million). In the prior year, the minority interest in Cambridge Food, which was included in the R275.0 million, was recognised in the Group s statement of financial position as a put option. Further detail on the acquisition can be found in note 3 on page 174 and note 28 on page 200. f Capital commitments will be funded using current facilities. 32. OPERATING LEASE COMMITMENTS Rm Rm Land and buildings Year Years 2 to 5 3, ,358.5 Subsequent to year 5 3, , , ,472.8 Plant and equipment Year Years 2 to Other Year Years 2 to Subsequent to year , ,515.4 f Promissory notes that represent commitments under non-cancellable operating leases of R650.0 million (2009: R799.9 million) entered into by Masstores (Pty) Limited on behalf of certain Makro stores are included in operating lease commitments in land and buildings. These leases terminate in December 2020 and have a discounted present value of R485.1 million (2009: R554.1 million), discounted at 15% (2009: 15%). In accordance with IAS 17 Leases, the rentals paid are amortised over the entire remaining lease period on a straight-line basis. 204 Massmart Annual Report 2010

206 Group Financial Statements 33. CONTINGENT LIABILITIES Rm Rm f There are no current or pending legal or arbitration proceedings, of which the Group is aware, which would have a material effect on the Group s financial position. 34. RELATED-PARTY TRANSACTIONS Rm Rm Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. Compensation of key management personnel: The remuneration of executive directors and other key management (defined as the 11-person Massmart Executive Committee) during the year was as follows: Short-term benefits (salaries, benefits and short-term incentives) Retirement benefits Other long-term benefits Gains on exercise of share options f The remuneration of directors and key executives is determined by the Remuneration Committee having regard to the performance of individuals and market trends. There was no movement in the number of members on the Executive Committee between the two years under review. Other related-party transactions: f From time to time, in the normal course of business, Massmart and its divisions make use of private aircraft hired from competitively selected charter companies, two of which operate aircraft indirectly beneficially owned by the Group s Chairman, Mark Lamberti. f The Group holds cash reserves on behalf of the Group s Chairman, Lamberti Education Foundation Trust. Further details relating to these cash reserves can be found in note 28 on page 200. f Loans to directors have been disclosed in note 17 on page 188. f The post-retirement medical aid liability, Massmart Pension Fund and Massmart Provident Fund are managed for the benefit of past and current employees of the Group. Further details can be found in note 25 and note 30 on page 198 and page 203, respectively. 35. DIRECTORS EMOLUMENTS Remuneration of directors and executives The comments below provide further background and context to the figures disclosed in this note, Directors emoluments, and Interests of directors in the Company s Share Scheme (note 36 on page 207). GM Pattison Grant received a 5% increase to his salary and allowances for the 2010 financial year, from R2.88 million to R3.02 million. For the 2010 financial year Grant did not receive any bonus in terms of the Group s Short-term Executive Incentive Scheme which rewards the Group s executive directors based on annual growth in headline earnings per share (HEPS). The Remuneration and Nominations Committee awarded him a qualitative bonus of four months in recognition of his exceptional efforts strategically and operationally in a difficult economic and operating environment to minimise profit declines and enhance the Group s base for future growth. This bonus totalled R0.98 million. Grant s total cash remuneration for the year of R3.99 million is 6% lower than that for Grant did not sell any Massmart shares or options during the 2010 financial year. Through the Share Scheme, Grant has 1,562,298 Massmart shares and options. The average length of time that he has held these is 4.5 years and the average strike price is R50.02 per share. A family trust of which Grant is a beneficiary also owns 445,010 Massmart shares directly. GRC Hayward Guy received an 8% increase to his salary and allowances for the 2010 financial year, from R2.24 million to R2.42 million. For the 2010 financial year Guy did not receive any bonus in terms of the Group s Short-term Executive Incentive Scheme which rewards the Group s executive directors based on annual growth in HEPS. The Remuneration and Nominations Committee awarded him a qualitative bonus of four months in recognition of his exceptional efforts strategically and operationally in a difficult economic and operating environment to minimise profit declines and enhance the Group s base for future growth. This bonus totalled R0.81 million. Guy s total cash remuneration for the year of R3.23 million is 4% lower than that for Guy did not sell any Massmart shares or options during the 2010 financial year. Through the Share Scheme, Guy still has 1,032,898 Massmart shares and options. The average length of time that he has held these is 4.7 years and the average strike price is R48.75 per share. Guy also owns 22,000 Massmart shares directly. Massmart Annual Report

207 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June DIRECTORS EMOLUMENTS continued Gains on Other- exercise wise in Fringe of share connection benefit of options Services as Bonuses with the interest- and on directors of Salary and per- Retirement affairs of free loans shares Massmart and formance- and Massmart used to pur- Holdings allow- related Other related Holdings finance chased by Limited ances payments 2 benefits benefits Limited Sub-total shares 3 directors Total R000 R000 R000 R000 R000 R000 R000 R000 R000 R000 For the year ended June 2010 Executive directors Pattison, GM 3, ,659 4,513 9,172 Hayward, GRC 2, ,777 3,733 7,510 5,438 1, ,436 8,246 16,682 Non-executive directors Lamberti, MJ Seabrooke, CS Brand, MD Combi, ZL Dlamini, KD Gwagwa, NN Hodkinson, JC Langeni, P Matthews, IN Maw, P Mokhobo, DNM Rubin, MJ , ,201 5,201 Total 5,161 5,438 1, ,637 8,246 21,883 1 Resigned 1 May In order to match incentive awards with the performance to which they relate, bonuses above reflect the amounts accrued in respect of each year and not amounts paid in that year. 3 Held in terms of the rules of the Company s share scheme. For the year ended June 2009 Executive directors Pattison, GM 2,875 1, ,857 6,344 2, ,152 Hayward, GRC 2,240 1, ,112 3,405 7,517 5,115 2, ,969 9,749 2,951 21,669 Non-executive directors Lamberti, MJ Seabrooke, CS Brand, MD Combi, ZL , ,050 Dlamini, KD , ,073 Gwagwa, NN , ,967 Hodkinson, JC Langeni, P , ,112 Matthews, IN Maw, P Mokhobo, DNM , ,037 Rubin, MJ , ,529 8,392 13,921 Total 5,404 5,115 2, ,498 9,749 11,343 35,590 1 With these proceeds he acquired 33,210 Massmart shares. 2 In order to match incentive awards with the performance to which they relate, bonuses above reflect the amounts accrued in respect of each year and not amounts paid in that year. 3 Held in terms of the rules of the Company s share scheme. 4 Individual recipient of 25% of fees remaining fees paid to company. 5 Gain on shares sold to non-executive directors at par value. Further detail can be found on page Massmart Annual Report 2010

208 Group Financial Statements 36. INTERESTS OF DIRECTORS IN THE COMPANY S SHARE SCHEME Details of directors shares and share options per director: Number of Gain on sale/ Subscription Market shares/share exercise Relevant date price (R) price (R) options (R000s) Expiry date Pattison, GM Balance at the beginning of the previous year 1,931,386 Shares traded* 13 November (400,000) Options exercised 27 May (55,219) 2,951 New shares/options granted 27 May , May 2015 Balance at the beginning of the year 1,562,298 No shares were traded, exercised or granted in the current period Balance at the end of the year 1,562,298 Comprising: 27 August , August May ,919 1 April , March May , May May , May May , May May , May 2015 * These shares were transferred to The Pattison Family Trust. Hayward, GRC Balance at the beginning of the previous year 817,697 New shares/options granted 27 May , May 2015 Balance at the beginning of the year 1,032,898 No shares were traded, exercised or granted in the current period Balance at the end of the year 1,032,898 Comprising: 10 March , November , November August , August May ,881 1 April , March May , May May , May April ,641 1 April May , May May , May 2015 Massmart Annual Report

209 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June PRINCIPAL SUBSIDIARIES Details of Massmart s material subsidiary companies are as follows: Number Place of of shares incorporation Voting in issue and Ownership power Principal Shares at Indebt- Name of company 000s operation % % activity book value edness 2010 De La Rey 1001 Building Selling of building Materials (Pty) Limited South Africa materials Builders Trade Depot Wholesale and (Pty) Limited South Africa retail of DIY products 54.9 Jumbo Cash & Carry Wholesale cash (Pty) Limited South Africa and carry 74.5 Masscash Holdings (Pty) Limited South Africa Holding company 1.0 Massmart International Holdings Limited Mauritius Holding company 81.5 Massmart Management Management, & Finance Company investment and (Pty) Limited South Africa finance (60.1) Retailing, warehousing, mass Masstores (Pty) Limited 200 South Africa merchandising (478.0) Servistar (Pty) Limited South Africa DIY retailer (134.4) 2009 De La Rey 1001 Building Selling of building Materials (Pty) Limited South Africa materials Builders Trade Depot Wholesale and (Pty) Limited South Africa retail of DIY products 51.9 Jumbo Cash & Carry Wholesale cash (Pty) Limited South Africa and carry 74.5 Masscash Holdings (Pty) Limited South Africa Holding company 1.0 Massmart International Holdings Limited Mauritius Holding company 81.5 Massmart Management Management, & Finance Company investment (Pty) Limited South Africa and finance 33.4 Retailing, warehousing, mass Masstores (Pty) Limited 200 South Africa merchandising (478.0) Servistar (Pty) Limited South Africa DIY retailer f The above details are given in respect of interests in subsidiaries, where material. A full list of subsidiaries is available to shareholders, on request, at the registered office of the Company. 208 Massmart Annual Report 2010

210 Group Financial Statements 38. NOTES TO THE CASH FLOW STATEMENT Rm Rm 38.1 Cash flow from trading Profit before taxation 1, ,902.0 Adjusted for: Depreciation, amortisation and impairment Net loss on disposal of property, plant and equipment Interest income (45.9) (64.2) Interest expense Investment income (33.8) (29.5) Dividend income (2.3) (13.4) Share-based payment expense Unrealised foreign exchange loss Other non-cash movements (41.3) (8.8) 2, , Working capital movements Increase in inventories (629.9) (82.6) Increase in trade receivables and prepayments (394.8) (83.7) Increase in trade payables 1, (Decrease)/increase in provisions (1.7) Taxation paid Normal taxation: Amounts owing at the beginning of the year (161.1) (232.7) Amounts owing at the end of the year Receiver of Revenue balance acquired on current year acquisitions 2.8 (15.5) Deferred tax balance acquired on current year acquisitions (1.9) Taxation charged to the income statement (excluding deferred taxation) (574.3) (611.3) (552.8) (700.3) 38.4 Investment to maintain operations Land and buildings/leasehold improvements (9.7) (47.6) Vehicles (22.8) (15.9) Fixtures, fittings, plant and equipment (125.5) (204.6) Computer hardware (33.6) (27.3) Computer software (92.4) (59.1) (284.0) (354.5) 38.5 Investment to expand operations Land and buildings/leasehold improvements (40.8) (145.9) Vehicles (14.6) (11.8) Fixtures, fittings, plant and equipment (239.9) (110.2) Computer hardware (33.3) (35.5) Computer software (17.5) (14.9) Goodwill (21.8) (346.1) (340.1) 38.6 Proceeds on disposal of property, plant and equipment Land and buildings/leasehold improvements 0.6 Vehicles Fixtures, fittings, plant and equipment Computer equipment Computer software Proceeds on disposal of assets classified as held for sale f The profit on assets classified as held for sale in the prior year relates to the cash sale of the Massdiscounters retail debtors book effective from 30 June 2008, immediately after closing the 2008 financial year. Massmart Annual Report

211 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June NOTES TO THE CASH FLOW STATEMENT continued Rm Rm 38.8 Investment in subsidiaries Fair value of assets and liabilities acquired in subsidiaries: Cash and cash equivalents (9.4) (1.0) Inventories (78.3) (55.3) Trade and other receivables and prepayments (73.7) (3.1) Tangible assets (205.8) (33.0) Intangible assets (1.2) Loans and investments (25.2) 10.2 Taxation (2.8) 15.5 Trade payables Provisions 32.8 Long-term debt 15.2 Deferred taxation 13.3 Goodwill (305.8) (205.3) Minorities 87.1 Other (2.0) Total purchase price (379.3) (199.5) Less: Cash and cash equivalents of subsidiary Cash impact of acquisition, net of cash and cash equivalents acquired (369.9) (198.5) 38.9 Disposal of subsidiary Net assets at date of disposal: Inventories 3.3 Trade and other receivables and prepayments Goodwill 16.0 Total net assets at date of disposal Gain on disposal Cash and cash equivalents received on sale f The disposal of subsidiary in the current year relates to the sale of the cell phone contract business in CellShack (Masscash). The disposal in the prior year relates to the sale of the Jabulani Cash and Carry store (Masscash) Other investing activities Off-shore investment (26.9) 46.5 Cost of acquiring minority interests (212.8) Treasury shares Other (15.2) (52.7) (163.8) Cash and cash equivalents at the end of the year Cash on hand and balances with banks 1, ,055.8 Bank overdrafts (57.4) (30.7) Cash and cash equivalents at the end of the year 1, , Massmart Annual Report 2010

212 Group Financial Statements 39. FINANCIAL INSTRUMENTS 39.1 Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balances. The capital structure of the Group consists of debt, more specifically medium-term interest-bearing debt and equity attributable to equity holders of the parent, comprising share capital, share premium, other reserves and retained profit. (See notes 21 and 22, respectively, on pages 192 and 193). The targeted level of gearing is determined after consideration of the following key factors: the needs of the Group to fund current and future capital expenditure to achieve its stated production growth target; and the desire of the Group to maintain its gearing within levels considered to be acceptable taking into account potential business opportunities and the position of the Group in the business cycle. The Group has medium-term debt facilities that include certain covenants, including: maximum gearing ratio; minimum interest cover; and specified levels of shareholders equity. At year-end, of the Group s general banking facility of R1,911.9 million (2009: R1,701.0 million), only R57.4 million (2009: R30.7 million) had been utilised and thus R1,854.6 million (2009: R1,670.3 million) was still available Significant accounting policies Details of significant accounting policies, including the recognition criteria, the basis for measurement and the basis on which income and expenses are recognised, in respect of each category of financial asset, financial liability and equity instrument, are disclosed under the notes in accounting policies (in note 1 on page 162) Categories of financial instruments Fair values of financial instruments All financial instruments have been classified according to the relevant IAS 39 Financial Instruments: Recognition and Measurement category. There is no difference between their fair value and carrying value and they are accounted for as follows: Financial assets f Fair value through profit or loss (FVTPL) These are held at fair value and any adjustments to fair value are taken to the income statement. Listed investments are carried at market value by reference to stock exchange quoted selling prices. f Loans and receivables These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. f Held-to-maturity investments These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. f Available-for-sale investments These are held at fair value and any adjustment to fair value is taken to equity. Financial liabilities f All financial liabilities are held as non-trading liabilities and are shown at amortised cost. The cash flows expected from the Group s participation in export partnerships over the next two to five years cannot, in the opinion of the directors, be accurately fair valued and therefore have not been discounted. For fair presentation purposes, it is noted that any fair value impairment in the amounts due to the Group by virtue of its participation in such partnerships would result in a corresponding reduction in the fair value of the related deferred tax liability. Consequently, such fair value impairment would have no impact on either the statement of cash flows or income statement of the Group. Massmart Annual Report

213 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June FINANCIAL INSTRUMENTS continued Liability Held-to- Available- Financial at amor- Loans maturity for sale Noninstru- tised and re- invest- financial financial Total ment FVTPL cost ceivables ments assets instrument Rm Rm Rm Rm Rm Rm Rm Rm 2010 Assets Non-current assets Property, plant and equipment 2, ,055.2 Goodwill 1, ,875.0 Other intangibles Investments Investment in associate Bare dominium revaluation Investment in offshore trading structure Participation in insurance cellcaptive on extended warranties Participation in insurance cellcaptive on premium contributions Trencor export partnership Other unlisted investments Other listed investments Other financial assets Housing and staff loans Employee share trust loans Finance lease deposit Other loans Deferred taxation Current assets Inventories 5, ,601.5 Trade, other receivables and prepayments 2, , , Trade and other receivables 2, , ,276.8 Prepayments Taxation Cash and bank balances 1, , ,368.3 Total assets 14, , , ,060.4 Liabilities Non-current liabilities Non-current liabilities interest-bearing Medium-term bank loans Capitalised finance lease Non-current liabilities interest-free Minority shareholders loans Operating lease liability Non-current provisions Deferred taxation Current liabilities Trade and other payables 9, , , Trade payables 7, , ,329.0 Operating lease liability (6.0) (6.0) Income received in advance Sundry payables and other accruals 1, , ,844.4 Provisions Taxation Other current liabilities Medium-term payable Medium-term bank loans Capitalised finance lease Bank overdrafts Total liabilities 10, , , Massmart Annual Report 2010

214 Group Financial Statements 39. FINANCIAL INSTRUMENTS continued Liability Held-to- Available- Financial at amor- Loans maturity for sale Noninstru- tised and re- invest- financial financial Total ment FVTPL cost ceivables ments assets instrument Rm Rm Rm Rm Rm Rm Rm Rm 2009 Assets Non-current assets Property, plant and equipment 1, ,696.6 Goodwill 1, ,588.2 Other intangibles Investments Investment in associate Bare dominium revaluation Investment in offshore trading structure Participation in insurance cell-captive on extended warranties Participation in insurance cell-captive on premium contributions Trencor export partnership Other unlisted investments Other listed investments Other financial assets Housing and staff loans Employee share trust loans Finance lease deposit Other loans Deferred taxation Current assets Inventories 4, ,893.2 Trade, other receivables and prepayments 1, , , Trade and other receivables 1, , ,766.2 Prepayments Taxation Cash and bank balances 1, , ,055.8 Assets classified as held for sale Total assets 12, , , ,171.6 Liabilities Non-current liabilities Non-current liabilities interest-bearing Medium-term bank loans Capitalised finance lease Non-current liabilities interest-free Minority shareholders loans Income received in advance Operating lease liability Non-current provisions Deferred taxation Current liabilities Trade and other payables 7, , , Trade payables 6, , ,128.2 Operating lease liability (7.0) (7.0) Income received in advance Sundry payables and other accruals 1, , ,467.9 Provisions Taxation Other current liabilities Medium-term payable Medium-term bank loans Capitalised finance lease Bank overdrafts Total liabilities 9, , , ,262.5 Massmart Annual Report

215 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June FINANCIAL INSTRUMENTS continued 39.4 Financial risk management The Group does not trade in financial instruments, but in the ordinary course of business operations, the Group is exposed to a variety of financial risks arising from the use of financial instruments. These risks include: market risk (comprising interest rate risk, currency risk and other price risk); liquidity risk; and credit risk. The Group has developed a comprehensive risk management process to facilitate, control and monitor these risks. This process includes formal documentation of policies, including limits, controls and reporting structures. The Executive Committee is responsible for risk management activities within the Group. Market risk management Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The market risks that the Group is primarily exposed to include currency risk, interest rate risk, and other price risk. Market risk is managed by identifying and quantifying risks on the basis of current and future expectations and ensuring that all trading occurs within defined parameters. This involves the review and implementation of methodologies to reduce risk exposure. The reporting on the state of the risk and risk practices to executive management is part of this process. The processes set up to measure, monitor and mitigate these market risks are described below. There has been no change to the Group s exposure to market risk or the manner in which it manages and measures the risk since the prior period. Interest rate management During the year, the position of the Group alternated between having surplus cash and being in a borrowed position. The size of the Group s position, be it either surplus cash or borrowings, exposes it to interest rate risk. The interestbearing debt funding requirements and the investment of surplus cash funds are managed by Massmart through its own commercial bank facilities. 214 Massmart Annual Report 2010

216 Group Financial Statements 39. FINANCIAL INSTRUMENTS continued 39.4 Financial risk management continued The carrying amount of the Group s financial assets and liabilities at balance sheet date that are subject to interest rate risk is as follows: Subject to interest rate movement Non-interest Fixed Floating bearing Total Rm Rm Rm Rm 2010 Financial assets Investments Investment in associate Bare dominium revaluation Investment in offshore trading structure Participation in insurance cell-captive on extended warranties Participation in insurance cell-captive on premium contributions Trencor export partnership Other unlisted investments Other listed investments Other financial assets Housing and staff loans Employee share trust loans Finance lease deposit Other loans Trade, other receivables and prepayments Trade and other receivables 2, ,276.9 Cash and bank balances 1, ,368.3 Total financial assets , , ,229.0 Financial liabilities Non-current liabilities interest-bearing Medium-term bank loans Capitalised finance lease Non-current liabilities interest-free Minority shareholders loans Trade and other payables Trade payables 7, ,329.0 Sundry payables and other accruals 1, ,845.0 Other current liabilities Medium-term payable Medium-term bank loans Capitalised finance lease Bank overdrafts Total financial liabilities , ,940.8 Massmart Annual Report

217 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June FINANCIAL INSTRUMENTS continued 39.4 Financial risk management continued Subject to interest rate movement Non-interest Fixed Floating bearing Total Rm Rm Rm Rm 2009 Financial assets Investments Investment in associate Bare dominium revaluation Investment in offshore trading structure Participation in insurance cell-captive on extended warranties Participation in insurance cell-captive on premium contributions Trencor export partnership Other unlisted investments Other listed investments Other financial assets Housing and staff loans Employee share trust loans Finance lease deposit Other loans Trade, other receivables and prepayments Trade and other receivables 1, ,766.2 Cash and bank balances 1, ,055.8 Total financial assets , , ,355.3 Financial liabilities Non-current liabilities interest-bearing Medium-term bank loans Capitalised finance lease Non-current liabilities interest-free Minority shareholders loans Trade and other payables Trade payables 6, ,128.2 Sundry payables and other accruals 1, ,467.9 Other current liabilities Medium-term payable Medium-term bank loans Capitalised finance lease Bank overdrafts Total financial liabilities , ,135.5 Interest rate sensitivity The Group is sensitive to the movements in the SA Prime interest rate. The rates of sensitivity represent management s assessment of the possible change in interest rates. The average interest rate for the Group for the year was 8.0% (2009: 13.52%), and the variable interest paid was R24.8 million (2009: R28.9 million). If the SA Prime interest rate increased and decreased by 50 average basis points (2009: increased and decreased by 50 average basis points) at year-end, the income for the year would have decreased and increased by R1.6 million, respectively (2009: decreased and increased by R1.1 million, respectively). 216 Massmart Annual Report 2010

218 Group Financial Statements 39. FINANCIAL INSTRUMENTS continued Currency risk management All foreign-denominated trading liabilities are covered by forward exchange contracts. Foreign-denominated assets are not covered by forward exchange contracts. The carrying amount of the Group s foreign currency denominated monetary assets at balance sheet date is as follows: South African Rand US Dollar Euro Other Total Rm Rm Rm Rm Rm 2010 Investments Trade receivables 2, ,276.8 Cash and bank balances 1,066.0 (9.6) , , , Investments Trade receivables 1, ,766.2 Cash and bank balances , , ,067.9 Foreign currency sensitivity The US Dollar is the primary currency to which the Group is exposed. In the past, the US Dollar movement against the Rand has been a good proxy for the Group s exposure to the basket of African currencies. During the 2009 financial year, this relationship broke as the African currencies weakened considerably and can be seen in the graph below. In the 2010 financial year, the relationship was restored. Rand movement Relationship between the African basket and the US Dollar (%) 25% 20% 15% 10% 5% 0% -5% -10% -15% Rand/African basket Rand/US$ S T R E N G T H W E A K N E S S This graph shows the annual change of closing spot rates at each financial year-end. As a result of the recent African currency volatility, we have extended the sensitivity calculation to include the sensitivity to the Group s three larger African currencies, namely the Malawian Kwacha, the Nigerian Naira and the Zambian Kwacha. The yearend spot rates were: Spot rate Spot rate June 2010 June 2009 Currency US Dollar Malawian Kwacha Nigerian Naira Zambian Kwacha Massmart Annual Report

219 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June FINANCIAL INSTRUMENTS continued The table below indicates the Group s sensitivity at year-end to movements in the relevant foreign currencies on financial instruments, excluding forward exchange contracts. The rates of sensitivity are the rates used when reporting the currency risk to the Executive Committee of the Group and represent management s assessment of the possible change in reporting foreign currency exchange rates. Rm Rm 5% increase 5% decrease 2010 US Dollar Profit/(loss) 6.7 (6.7) Financial assets/(liabilities) (6.7) 6.7 Malawian Kwacha Profit/(loss) 1.7 (1.7) Financial assets/(liabilities) (1.7) 1.7 Nigerian Naira Profit/(loss) 0.3 (0.3) Financial assets/(liabilities) (0.3) 0.3 Zambian Kwacha Profit/(loss) 0.2 (0.2) Financial assets/(liabilities) (0.2) US Dollar Profit/(loss) 1.3 (1.3) Financial assets/(liabilities) (1.3) 1.3 Malawian Kwacha Profit/(loss) 0.8 (0.8) Financial assets/(liabilities) (0.8) 0.8 Nigerian Naira Profit/(loss) 0.7 (0.7) Financial assets/(liabilities) (0.7) 0.7 Zambian Kwacha Profit/(loss) 0.3 (0.3) Financial assets/(liabilities) (0.3) 0.3 Forward foreign exchange contracts Forward exchange contracts are entered into to manage exposure to fluctuations in foreign currency exchange rates on specific trading transactions. The Group s policy is to enter into forward contracts for all committed foreign currency purchases. Forward foreign exchange contracts have been accounted for according to IAS 39 Financial Instruments: Recognition and Measurement. Fair value has been determined using money market derivative rates at 27 June 2010 and the net gain or exposure on the contracts has been reflected in the financial statements. At year-end, the open forward exchange contracts were as follows: Foreign Fair value Contract currency adjustment equivalent Average (millions) Rm Rm exchange rate 2010 US Dollar 88.9 (0.6) Sterling Euro (0.6) US Dollar 41.7 (31.5) Sterling Euro (31.5) Massmart Annual Report 2010

220 Group Financial Statements 39. FINANCIAL INSTRUMENTS continued Forward foreign exchange contracts sensitivity The following table indicates the Group s sensitivity of the outstanding forward exchange contracts at the balance sheet date to movements in the US Dollar. The US Dollar is the primary currency in which the Group has entered into forward foreign exchange contracts. The rates of sensitivity are the rates used when reporting the currency risk to the Executive Committee of the Group and represent management s assessment of the possible change in foreign currency exchange rates. The Rand/US Dollar year-end rate was R7.67 (2009: R7.94). US Dollar Rm Rm 5% increase 5% decrease 2010 Profit/(loss) 33.1 (36.5) Derivative financial assets/(liabilities) 34.8 (34.8) Equity Profit/(loss) 4.5 (29.1) Derivative financial assets/(liabilities) 16.9 (16.9) Equity Liquidity risk management Liquidity risk is the risk that the Group will be unable to meet a financial commitment in any location or currency. This risk is minimised through the holding of cash balances and sufficient available borrowing facilities (refer to note 24 on page 197). In addition, detailed cash flow forecasts are regularly prepared and reviewed so that the cash needs of the Group are managed according to its requirements. The following table details the Group s contractual maturity for its non-derivative financial liabilities. The table has been compiled based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to repay the liability. The cash flows include both the principal and interest payments. Repayable Repayable Repayable within 1 year 2 5 years after 5 years Total Rm Rm Rm Rm 2010 Financial liabilities Non-current and current liabilities interest-bearing Medium-term payable Medium-term bank loans Capitalised finance lease Non-current liabilities interest-free Minority shareholders loans Trade and other payables Trade payables 7, ,329.0 Sundry payables and other accruals 1, ,845.0 Bank overdrafts Total undiscounted cash flows of the Group s financial liabilities 9, ,039.0 Less: Future finance charges (98.2) Total financial liabilities 9, Financial liabilities Non-current and current liabilities interest-bearing Medium-term payable Financial liability raised on a business acquisition Medium-term bank loans Capitalised finance lease Non-current liabilities interest-free Minority shareholders loans Trade and other payables Trade payables 6, ,128.2 Sundry payables and other accruals 1, ,500.1 Bank overdrafts Total undiscounted cash flows of the Group s financial liabilities 8, ,217.1 Less: Future finance charges (49.4) Total financial liabilities 8,167.7 Massmart Annual Report

221 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June FINANCIAL INSTRUMENTS continued Credit risk management Potential areas of credit risk include trade and consumer accounts receivable and short-term cash investments. Credit risk arises from the risk that a counterparty may default or not meet its obligations timeously. Trade accounts receivable consist primarily of a large, widespread customer base. Group companies regularly monitor the financial position of their customers. Where considered appropriate, credit guarantee insurance is used. The granting of credit is controlled by application and account limits. Provision is made for both specific and general bad debts, and at the year-end management did not consider there to be any material credit risk exposure that was not already covered by credit guarantee insurance or bad debt provisions. Further details relating to trade and other receivables can be found in note 20 on page 191. The carrying amount of the financial assets represents the Group s maximum exposure to credit risk without taking into consideration any collateral provided: Maximum credit risk Rm Rm Investments Trencor export partnership Trade, other receivables and prepayments Trade and other receivables 2, ,766.2 Cash and bank balances 1, , , , Massmart Annual Report 2010

222 Group Financial Statements 40. SEGMENTAL REPORTING Primary business segments The Group is organised into four divisions for operational and management purposes, being Massdiscounters, Masswarehouse, Massbuild and Masscash. Massmart reports its primary business segment information on this basis. The principal offering for each division is as follows: Massdiscounters general merchandise discounter Masswarehouse warehouse club Massbuild home improvement retailer and building materials supplier Masscash food wholesaler, retailer and buying association Mass- Mass- Total Corporate discounters warehouse Massbuild Masscash Rm Rm Rm Rm Rm Rm 2010 Sales 47, , , , ,418.0 Operating profit before interest and taxation 1,866.7 (69.7) Trading profit before interest and taxation* 2, Net finance (costs)/income (46.7) (209.8) Operating profit before taxation 1,820.0 (279.5) Trading profit before taxation* 2, Inventory 5, , , ,354.4 Total assets 14,289.4 (2,364.2) 4, , , ,872.6 Total liabilities 10,697.6 (5,000.4) 4, , , ,084.3 Net capital expenditure** Depreciation and amortisation Impairment losses Non-cash items other than depreciation and impairment (28.8) 55.7 (22.0) Cash flow from operating activities 1, Cash flow from investing activities (1,130.7) 56.8 (285.0) (72.4) (387.5) (442.6) Cash flow from financing activities (575.2) Sales June 2010 Trading profit before taxation June 2010 % Massdiscounters 25.6 Masswarehouse 24.2 Massbuild 13.4 Masscash 36.7 % Massdiscounters 30.4 Masswarehouse 33.5 Massbuild 13.6 Masscash 22.5 Massmart Annual Report

223 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June SEGMENTAL REPORTING continued Mass- Mass- Total Corporate discounters warehouse Massbuild Masscash Rm Rm Rm Rm Rm Rm 2009 Sales 43, , , , ,215.7 Operating profit before interest and taxation 1,950.6 (66.9) Trading profit before interest and taxation* 2, Net finance (costs)/income (48.6) (300.0) Operating profit before taxation 1,902.0 (366.9) Trading profit before taxation* 2, Inventory 4,893.2 (1.0) 1, , ,077.6 Total assets 12,526.9 (2,149.9) 4, , , ,077.3 Total liabilities 9,430.2 (4,557.0) 4, , , ,464.2 Net capital expenditure** Depreciation and amortisation Impairment losses Non-cash items other than depreciation and impairment (14.1) (54.6) Cash flow from operating activities Cash flow from investing activities (697.4) (93.8) (37.8) (106.1) (192.1) (267.6) Cash flow from financing activities (160.7) (725.6) Sales June 2009 Trading profit before taxation June 2009 % Massdiscounters 26.0 Masswarehouse 25.7 Massbuild 13.0 Masscash 35.3 % Massdiscounters 31.8 Masswarehouse 34.2 Massbuild 11.5 Masscash 22.5 f f The corporate column includes certain consolidation entries. All inter-company transactions have been eliminated in the above results. f Additional information can be found in the Operational review on pages 66 to 99. * Trading profit before taxation is earnings before corporate net interest, asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements. ** Net capital expenditure is defined as capital expenditure less disposal proceeds. Secondary geographic segments The Group s four divisions operate in two principal geographical areas South Africa and the Rest of Africa. Total South Africa Rest of Africa Total South Africa Rest of Africa Rm Rm Rm Rm Rm Rm Sales 47, , , , , ,760.7 Segment assets 14, , , , Net capital expenditure All inter-company transactions have been eliminated in the above results. 222 Massmart Annual Report 2010

224 Group Financial Statements 41. VALUE ADDED STATEMENT June June Rm % Rm % Sales, royalties, franchise fees, rentals and management and administration fees (inclusive of VAT) 51, ,923.7 Cost of sales (38,879.3) (35,351.0) Interest and investment income Net costs of services and other operating expenses (3,069.7) (2,621.6) Value added 10, ,052.5 Applied as follows: To employees as salaries, wages and other benefits 3, , To government as taxation 5, , To shareholders as dividends To lenders as interest Depreciation and amortisation Minorities Net earnings retained , , Value added statement To employees as salaries, wages and other benefits To government as taxation To shareholders as dividends % To lenders as interest 0.9 Depreciation and amortisation 3.8 Minorities 0.3 Net earnings retained 3.5 Massmart Annual Report

225 Group Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY Critical judgements in applying the Group s accounting policies In the process of applying the Group s accounting policies, which are described in note 1 on page 162, management has not made any critical judgements that have a significant effect on the amounts recognised in the financial statements apart from those involving estimations. Key sources of estimation uncertainty f Property, plant and equipment Property, plant and equipment is depreciated over its useful life taking into account, where appropriate, residual values. Assessment of useful lives and residual values are performed annually, taking into account factors such as technological innovation, maintenance programmes, market information and management considerations. In assessing the residual values, the remaining life of the asset, its projected disposal value and future market conditions are taken into account. For more detail on property, plant and equipment, please see note 13 on page 182. f Goodwill impairment Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at the balance sheet date was R1,875.0 million (2009: R1,588.2 million). A small impairment loss of R0.7 million was recognised in the current year. No impairment loss was recognised in the prior year. Details of the impairment loss calculation are provided in note 14 on page 184. f Inventory provisions Inventory provisions include shrinkage, obsolescence and write-downs which take into account historical information related to sales trends and stock counts and represent the expected write-down between the estimated net realisable value and the original cost. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. For more detail on the provisions, please see note 19 on page 190. f Allowance for doubtful debts The Group assesses its doubtful debt allowance at each reporting date. Key assumptions applied are the estimated debt recovery rates and the future market conditions that could affect recovery. For more detail on the allowance, please see note 20 on page 191. f Fair value of options granted The fair value of options granted in terms of IFRS 2 Share-based Payment is obtained using option pricing models. Assumptions include expected volatility, expected life, risk-free rate and expected dividend yield. By obtaining an external valuation by accredited valuators, management is of the opinion that the risk relating to estimation uncertainty has been mitigated. For more detail on the valuations, please see note 22 on page 193. f Provision for post-retirement medical aid Post-retirement healthcare benefits are provided to certain retired employees. Actuarial valuations are performed to assess the financial position of the fund. Assumptions used include the discount rate, healthcare cost inflation, mortality rates, withdrawal rates and membership. By obtaining an external valuation by accredited valuators, management is of the opinion that the risk relating to estimation uncertainty has been mitigated. Details can be found in note 25 on page EVENTS AFTER THE BALANCE SHEET DATE On 27 September 2010, 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 R148 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 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. 224 Massmart Annual Report 2010

226 Group Financial Statements 44. SHAREHOLDER ANALYSIS The following analysis of shareholders was extracted from the shareholders register as at June 2010: Number Number % of shares % Shareholder spread 1 1,000 shares 5, ,716, ,001 10,000 shares 1, ,209, , ,000 shares ,492, ,001 1,000,000 shares ,878, ,000,001 shares and over ,197, , ,495, Distribution of shareholders Unit trusts/mutual fund ,393, Pension funds ,891, Other managed funds ,900, Foreign government ,902, Private investors ,477, Custodians ,356, Insurance companies ,342, Charity ,166, American Depositary Receipts , Investment trust , Local authority 1 85,978 Hedge fund 1 30,689 Remainder 7, ,262, , ,495, Public/non-public shareholders Non-public shareholders: Directors and Group Executives of the Company ,709, Share trust 2 68, Public shareholders 7, ,717, , ,495, 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: f Aberdeen Asset Management Group 33,505, f Public Investment Corporation 27,857, f JP Morgan Asset Management 15,121, f Lazard Asset Management LLC Group 13,907, f Baillie Gifford & Co Ltd 10,900, Further details of the directors shareholdings can be found in the Directors report on page 155. Massmart Annual Report

227 Company Financial Statements Company Financial Statements 226 Massmart Annual Report 2010

228 Financial Statements Cambridge Kwa Mashu KwaZulu-Natal Massmart Annual Report

229 Company Financial Statements COMPANY FINANCIAL STATEMENTS 226 Income Statement 229 Statement of Comprehensive Income 229 Statement of Financial Position 230 Statement of Cash Flows 231 Statement of Changes in Equity 232 Notes to the Annual Financial Statements Massmart Annual Report 2010

230 Company Financial Statements INCOME STATEMENT for the year ended 27 June Notes Rm Rm Revenue Management and administration fees received Dividends received Employment costs (11.5) (8.3) Net operating income Operating profit Finance costs (0.4) Net finance costs 3 (0.4) Profit before taxation Taxation 4 (67.7) (58.2) Profit for the year Profit attributable to: Owners of the parent Profit for the year Dividend per share Interim Final* Total * Declared after the financial year-end. f Details of the dividend can be found in note 11 on page 181 in the Group financial statements. f The accounting policies are in line with the Massmart Group accounting policies. Refer to note 1 on page 162 of the Group financial statements. STATEMENT OF COMPREHENSIVE INCOME for the year ended 27 June Rm Rm Profit for the year No movement Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Total comprehensive income for the year Massmart Annual Report

231 Company Financial Statements STATEMENT OF FINANCIAL POSITION as at 27 June Notes Rm Rm Assets Non-current assets Interests in subsidiaries Other financial assets Deferred taxation Current assets Taxation Cash and bank balances 16.7 Total assets Equity and liabilities Capital and reserves Share capital Share premium General reserves Retained profit (32.7) 71.2 Preference shares Total equity Current liabilities Trade and other payables Current liabilities Total equity and liabilities f The accounting policies are in line with the Massmart Group accounting policies. Refer to note 1 on page 162 of the Group financial statements. 230 Massmart Annual Report 2010

232 Company Financial Statements STATEMENT OF CASH FLOWS for the year ended 27 June Notes Rm Rm Cash flow from operating activities Operating cash before working capital movements Working capital movements Cash generated from operations Interest paid (0.4) Investment income Taxation paid 11.3 (75.6) (79.6) Dividends paid 11.4 (839.7) (883.4) Net cash outflow from operating activities (11.5) (334.0) Loans to subsidiaries (2.9) (51.5) Other investing activities Net cash inflow from investing activities Net acquisition of treasury shares 11.5 (97.5) (82.2) Net cash outflow from financing activities (97.5) (82.2) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year (1.2) Cash and cash equivalents at the end of the year 16.7 f The accounting policies are in line with the Massmart Group accounting policies. Refer to note 1 on page 162 of the Group financial statements. Massmart Annual Report

233 Company Financial Statements STATEMENT OF CHANGES IN EQUITY for the year ended 27 June 2010 Share Share Preference General Retained capital premium shares reserves profit Total Rm Rm Rm Rm Rm Rm Balance as at 30 June Total comprehensive income Share trust loss (82.2) (82.2) Dividends paid (883.4) (883.4) Realisation of prior year treasury shares Treasury shares (17.6) (17.6) Share-based payment reserve Balance as at 30 June Total comprehensive income Share trust loss (97.5) (97.5) Dividends paid (839.7) (839.7) Realisation of prior year treasury shares Treasury shares (7.4) 2.5 (4.9) Share-based payment reserve Balance as at 30 June (32.7) f The accounting policies are in line with the Massmart Group accounting policies. Refer to note 1 on page 162 of the Group financial statements. 232 Massmart Annual Report 2010

234 Company Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June REVENUE Rm Rm Dividends received (included are dividends from subsidiary companies) Management and administration fees received (included are management and administration fees from subsidiary companies) OPERATING PROFIT Rm Rm Credits to operating profit include: Foreign exchange profit 0.3 Charges to operating profit include: Foreign exchange loss Share-based payment Contribution to pension scheme NET FINANCE COSTS Rm Rm Finance costs Interest on Group loans (0.4) Net finance costs (0.4) 4. TAXATION Rm Rm Current year South African normal taxation Deferred taxation (5.1) (0.5) Secondary Taxation on Companies Prior year overprovision: South African normal taxation Current taxation (19.7) (19.7) Total % % The rate of taxation is reconciled as follows: Standard corporate taxation rate Exempt income (27.6) (28.1) Disallowable expenditure 0.1 Secondary Taxation on Companies Prior year adjustment (3.2) Other (0.4) Effective rate Massmart Annual Report

235 Company Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June INTEREST IN SUBSIDIARIES Rm Rm Shares at cost less amounts written off Amounts owing by subsidiaries f Details of net shares at cost can be found in note 37 on page 208 in the consolidated financial statements. f These loans are unsecured, earn interest at variable rates and have no fixed terms of repayment. 6. OTHER FINANCIAL ASSETS Rm Rm Unlisted investments Investment in Imagegate Limited (UK) Investment in Massmart Black Scarce Skills Trust and Massmart Thuthukani Empowerment Trust Listed investments f The directors value the unlisted investments at R4.2 million (2009: R4.7 million). f The investment in Imagegate Limited (UK) has been classified as a loan and receivable financial asset for IAS 39 purposes. f For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these financial assets, see note 39 on page 211 in the Group financial statements. 7. DEFERRED TAXATION Rm Rm The major movements during the year are analysed as follows: Net asset at the beginning of the year 0.5 Charge to profit or loss for the year Net asset at the end of the year The major components of deferred taxation are analysed as follows: Other temporary differences Massmart Annual Report 2010

236 Company Financial Statements 8. ISSUED CAPITAL Share capital Share premium Rm Rm Rm Rm Authorised 500,000,000 (2009: 500,000,000) ordinary shares of 1 cent each ,000,000 (2009: 20,000,000) non-redeemable cumulative non-participating preference shares of 1 cent each ,000,000 (2009: 18,000,000) A convertible redeemable non-cumulative participating preference shares of 1 cent each ,000,000 (2009: 2,000,000) B convertible redeemable non-cumulative participating preference shares of 1 cent each Issued 201,495,504 (2009: 201,302,639) ordinary shares of 1 cent each ,673,670 (2009: 17,758,998) A convertible redeemable non-cumulative participating preference shares of 1 cent each ,871,523 (2009: 1,979,060) B convertible redeemable non-cumulative participating preference shares of 1 cent each Number of Share capital Share premium shares Rm Rm Ordinary shares Balance at June ,193, Shares issued in terms of the Massmart Thuthukani Empowerment Trust 109,127 Ordinary shares issued June ,302, Issue of shares 12.0 Treasury shares (1,360,836) (17.6) Ordinary shares issued excluding treasury shares June ,941, Balance at June ,302,639* Shares issued in terms of the Massmart Thuthukani Empowerment Trust 85,328 Shares issued in terms of the Massmart Black Scarce Skills Trust 107,537 Ordinary shares issued June ,495, Issue of shares 17.3 Treasury shares (60,056) (7.4) Ordinary shares issued excluding treasury shares June ,435, * The number of shares is the ordinary shares issued before deducting treasury shares. f Ordinary shares, which have a par value of 1 cent, carry one vote per share and carry the right to dividends. Massmart Annual Report

237 Company Financial Statements NOTES TO THE ANNUAL FINANCIAL STATEMENTS for the year ended 27 June ISSUED CAPITAL continued Number of Share capital Share premium shares Rm Rm A convertible redeemable non-cumulative participating preference shares Balance at June ,868, Shares converted to ordinary shares (109,127) Balance at June ,758, Shares converted to ordinary shares (85,328) Balance at June ,673, f A convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Thuthukani Empowerment Trust. These shares carry one vote per share, which is cast by the appointed trustees, and carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares, on a one-for-one basis and will rank pari passu with all ordinary shares then in issue. Number of Share capital Share premium shares Rm Rm B convertible redeemable non-cumulative participating preference shares Balance at June ,979,060 Shares converted to ordinary shares Balance at June ,979,060 Net shares issued in terms of the Massmart BEE transaction 2,000,000 Shares converted to ordinary shares (107,537) Balance at June ,871,523 f B convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Black Scarce Skills Trust. These shares carry one vote per share, which is cast by the appointed trustees, and do not carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue. Share options granted under the Massmart Holdings Limited Employee Share Trust f As at June 2010, executives and senior employees have options over 14,156,168 ordinary shares (of which 10,840,931 are unvested). As at June 2009, executives and senior employees had options over 16,055,227 ordinary shares (of which 13,195,878 are unvested). f Share options granted under the Employee Share Incentive Scheme carry no rights to dividends and no voting rights. Further details of the Employee Share Incentive Scheme are contained in note 29 on page 200. f During the period under review, the only shares bought in the market were by the Share Trust whereby 1.2 million shares were bought at an average price of R totalling R137.2 million. f During the prior year, the total share buyback (including shares bought in the market by the Share Trust) was 1.6 million shares at an average price of R78.76 totalling R126.0 million. f The directors have the authority, until the next annual general meeting, to issue the ordinary shares of the Company up to a maximum of 5% of the shares already issued. 236 Massmart Annual Report 2010

238 Company Financial Statements 9. GENERAL RESERVES Rm Rm Balance at the beginning of the year Treasury shares 2.5 Share-based payment reserve The share-based payment reserve arises on the granting of share options to employees under the employee share incentive scheme. Details of the employee share incentive scheme can be found in note 29 on page 200 in the Group financial statements. The share-based payment valuation was performed by Alexander Forbes for all periods and the scheme is equity-settled. 10. CROSS-SURETYSHIPS AND PROMISSORY NOTES Rm Rm Cross-suretyships under banking and other financial facilities 4, , , ,717.7 Banking facilities incorporate, amongst others, letters of credit, forward exchange contracts and electronic fund transfers. These facilities have been secured by cross-suretyships between Group companies. Other financial facilities relate to promissory notes that represent commitments under non-cancellable operating leases of R650.0 million (2009: R799.9 million) entered into by Masstores (Pty) Limited on behalf of Makro and are included in operating lease commitments in land and buildings. These leases terminate in December 2020 and have a discounted present value of R485.1 million (2009: R554.1 million), discounted at 15% (2009: 15%). In accordance with IAS 17 Leases, the rentals paid are amortised over the entire remaining lease period on a straight-line basis. At the balance sheet date the Massmart Group was net cash positive. 11. NOTES TO THE CASH FLOW STATEMENT Rm Rm 11.1 Cash flow from trading Profit before taxation Adjustment for: Interest paid 0.4 Investment income (887.5) (602.3) Share-based payment expense Other non-cash movements (0.1) Working capital movements Decrease in trade receivables and prepayments 16.8 Increase/(decrease) in trade and other payables 2.6 (6.4) Taxation paid Amounts owed at the beginning of the year 2.6 (18.3) Amounts charged to the income statement (67.7) (58.2) Deferred taxation (5.1) (0.5) Amounts owed at the end of the year (5.4) (2.6) (75.6) (79.6) 11.4 Dividends paid Amounts owing at the beginning of the year Amounts charged to the income statement (839.7) (883.4) Amounts owing at the end of the year (839.7) (883.4) 11.5 Net acquisition of treasury shares Share trust losses (97.5) (82.2) (97.5) (82.2) Massmart Annual Report

239 Shareholder Information Shareholder Information 238 Massmart Annual Report 2010

240 Information Jumbo Crown Mines Massmart Annual Report

241 Shareholder Information SHAREHOLDER INFORMATION 238 Notice of Annual General Meeting 241 Notice of Amendments to the Massmart Holdings Limited Employee Share Scheme 247 Form of Proxy Massmart Annual Report 2010

242 Shareholder Information NOTICE OF ANNUAL GENERAL MEETING for the year ended 27 June 2010 Notice is hereby given that the annual general meeting of the Company will be held at 08h30 at Massmart House, 16 Peltier Drive, Sunninghill Ext 6, Sandton, on Wednesday, 24 November 2010, for purposes of: 1. Transacting the following business: 1.1 to receive and adopt the annual financial statements of the Company and the Group for the year ended 27 June 2010; 1.2 to elect directors in the place of those retiring in accordance with the Company s Articles of Association; and 1.3 to transact such other business as may be transacted at an annual general meeting. 2. Considering and, if deemed fit, passing, with or without modification, the following ordinary and special resolutions: ORDINARY RESOLUTIONS 1. Resolved that the annual financial statements of the Company and the Group for the year ended 27 June 2010, circulated together with this notice, be and are hereby adopted. 2. Resolved that Mr KD Dlamini, who retires by rotation and has offered himself for re-election, be and is hereby re-elected to the Board of Directors of the Company. 3. Resolved that Dr NN Gwagwa, who retires by rotation and has offered herself for re-election, be and is hereby re-elected to the Board of Directors of the Company. 4. Resolved that Mr MJ Lamberti, who retires by rotation and has offered himself for re-election, be and is hereby re-elected to the Board of Directors of the Company. 5. Resolved that Ms P Langeni, who retires by rotation and has offered herself for re-election, be and is hereby re-elected to the Board of Directors of the Company. 6. Resolved that Mr IN Matthews, who retires by rotation and has offered himself for re-election, be and is hereby re-elected to the Board of Directors of the Company. 7. Resolved that the non-executive directors annual remuneration for the 2011 financial year, be set as follows: f Chairman of the Board R725,000 f Deputy Chairman R520,000 f Directors R215,000 f Committee Chairmen R210,000 f Committee Members R100,000 with members of the Audit Committee each receiving an additional R25,000 due to the increased meetings and responsibilities brought about by the Corporate Laws Amendment Act and King III on Corporate Governance for South Africa. Insight Initial appointment dates of directors standing for re-election KD Dlamini 1 November 2006 NN Gwagwa 1 November 2006 MJ Lamberti 30 August 1990 P Langeni 25 August 2008 IN Matthews 1 November 2001 Read more Biographical details of these directors can be found on page Massmart at a Glance Further details relating to the directors can be found on page 120 Corporate Governance 8. Resolved that Deloitte & Touche (with Mr André Dennis as the Audit Partner) be and are hereby re-elected as the Company s auditors for the ensuing financial year, as approved by the Massmart Audit Committee and recommended to shareholders. 9. Resolved that the appointments of the following as members of the Audit Committee be and are hereby ratified and confirmed: IN Matthews (Chairman) CS Seabrooke P Maw P Langeni. Massmart Annual Report

243 Shareholder Information NOTICE OF ANNUAL GENERAL MEETING for the year ended 27 June Resolved that all the ordinary shares in the authorised but unissued share capital of the Company be and are hereby placed under the control of the directors in terms of section 221(2) of the Companies Act, No. 61 of 1973, as amended (the Act ), who shall be authorised to allot and issue such shares to such person or persons on such terms and conditions as they may deem fit but not exceeding 5% (five percent) of the number of ordinary shares already in issue. Such allotment will be in accordance with the Act and the JSE Limited ( JSE ) Listings Requirements ( JSE Listings Requirements ). 11. Resolved that, subject to the JSE Listings Requirements, the directors be and are hereby authorised to issue the ordinary shares in the authorised but unissued share capital of the Company for cash to such person or persons on such terms and conditions as they may deem fit, subject to the following: 11.1 the shares shall be of a class already in issue; 11.2 the shares shall be issued to public shareholders (as defined in the JSE Listings Requirements) and not to related parties (as defined in the JSE Listings Requirements); 11.3 the issues in the aggregate in any one financial year shall not exceed 5% (five percent) of the number of shares already in issue; 11.4 the maximum discount at which the shares may be issued shall be 10% (ten percent) of the weighted average traded price of the shares over the 30 (thirty) business days prior to the date that the price of the issue is agreed between the Company and the party subscribing for the shares; 11.5 the authority hereby granted will be valid until the Company s next annual general meeting, provided that it will not extend to beyond 15 (fifteen) months; and 11.6 once the shares have been issued, the Company shall publish an announcement in accordance with paragraph of the JSE Listings Requirements. Pursuant to the JSE Listings Requirements, the Company will only be entitled to implement this general authority to allot and issue ordinary shares for cash if this Ordinary Resolution Number 11 is passed by a majority of 75% (seventyfive percent) or more of the votes cast by all Massmart shareholders present or represented by proxy at the annual general meeting, excluding any votes which may be cast by the Massmart Holdings Limited Employee Share Trust. 12. Resolved that in terms of Schedule 14 of the JSE Listings Requirements and in accordance with section 222 of the Act, where applicable, the Company hereby amends the rules of the Massmart Holdings Limited Employee Share Scheme (first adopted by the Company at a General Meeting held on 12 June 2000) incorporated in the Massmart Holdings Limited Employee Share Trust (the Trust ) by the substitution in their entirety of the existing terms of the Trust with the amended and restated terms of the Trust. The amended and restated terms of the Trust will be tabled at this annual general meeting and initialled by the Chairman for identification, the salient terms and conditions of which are as set out in the Notice of Amendment to the Massmart Holdings Limited Employee Share Scheme annexed to this notice of annual general meeting. Definitions Related party means f a material shareholder f any person that is, or within the 12 months preceding the date of the transaction was, a director of the issuer or of any subsidiary of its holding company f any advisor to the issuer that has, or within the 12 months preceding the date of the transaction had, a beneficial interest, whether direct or indirect, in the listed company or any of its associates f any person that is, or within the 12 months preceding the date of the transaction was, a principal executive officer of the issuer, by whatever position he may be, or may have been, designated and whether or not he is, or was, a director f the asset manager or management company of a property entity including anyone whose assets they manage or administer f the controlling shareholder of the above asset manager/management company f an associate of any of the persons mentioned above Read more Details of the Schedule 14 changes to the Trust and a summary of the principal terms of the Trust can be found on page 247 Shareholder Information Pursuant to the JSE Listings Requirements, the Company will only be entitled to effect the amendments to the terms of the Trust if this Ordinary Resolution Number 12 is passed by a majority of 75% (seventy-five percent) or more of the votes cast by all Massmart shareholders present or represented by proxy at the annual general meeting, excluding all the votes attaching to all shares held by the Trust. In compliance with Schedules 14.6 and 14.7 of the JSE Listings Requirements, a summary of the principal terms of the Trust has been circulated together with this notice of annual general meeting and the amended and restated 242 Massmart Annual Report 2010

244 Shareholder Information terms (both in marked-up format showing the exact changes to the current terms and in clean format) will be made available for inspection by shareholders during normal business hours at the registered office of the Company for a period of not less than 14 (fourteen) days prior to the annual general meeting. SPECIAL RESOLUTIONS Provided shareholders holding in the aggregate not less than 25% (twenty-five percent) of the total votes of all shareholders entitled to vote at the annual general meeting are present in person or by proxy, the approval of a 75% (seventy-five percent) majority of the votes cast by shareholders present or represented by proxy at the annual general meeting and entitled to vote is required for the special resolutions to become effective: Special Resolution Number 1 Resolved that the Company and/or its subsidiaries be and are hereby authorised in terms of sections 85(2) and 85(3) of the Companies Act, No. 61 of 1973, as amended (the Act ), and the JSE Limited ( JSE ) Listings Requirements ( JSE Listings Requirements ), from time to time to acquire the ordinary and/or preference shares in the issued share capital of the Company from such shareholder/s, at such price, in such manner and subject to such terms and conditions as the directors may deem fit, but subject to the Articles of Association of the Company, the Act and the JSE Listings Requirements, and provided that: 1.1 the authority hereby granted will be valid until the Company s next annual general meeting, provided that it will not extend to beyond 15 (fifteen) months from the date of registration of this special resolution; 1.2 acquisitions may not be made at a price greater than 10% (ten percent) above the weighted average of the market value for the shares determined over the 5 (five) business days prior to the date that the price for the acquisition is effected; 1.3 acquisitions in the aggregate in any one financial year shall not exceed 15% (fifteen percent) of that class of the Company s issued share capital; 1.4 the repurchase of shares will be effected through the order book operated by the JSE trading system and will be done without any prior understanding or arrangement between the Company and the counterparty; Insight Buybacks in the 2010 financial year Total Number Share transaction Date of shares price value (Rm) 16-Mar , April , April-10 30, May-10 18, May-10 50, May-10 50, May-10 50, May-10 50, May , May-10 50, May-10 50, May-10 50, May-10 50, May-10 50, May , May-10 50, May-10 50, May-10 50, May-10 50, the Company may only appoint one agent, at any point in time, to effect the repurchases on the Company s behalf; 1.6 neither the Company nor its subsidiaries may repurchase shares during a prohibited period (as defined in the JSE Listings Requirements) unless a repurchase programme is in place where the dates and quantities of shares to be traded during the relevant period are fixed (not subject to any variation) and where full details of the programme have been disclosed in an announcement over the Stock Exchange News Service prior to the commencement of the prohibited period; and 1.7 an announcement complying with paragraph of the JSE Listings Requirements will be published by the Company when the Company and/or its subsidiaries have cumulatively repurchased 3% (three percent) of the Company s issued ordinary and/or preference share capital and for each 3% (three percent) in aggregate thereafter. Statement by the Board of Directors In accordance with the JSE Listings Requirements, the directors state that: (a) the intention of the directors is to utilise the authority at a future date, provided that the cash resources of the Company are in excess of its requirements. In this regard, the directors will take into account, inter alia, an appropriate capitalisation structure for the Company and the long-term cash needs of the Company, and will ensure that any such utilisation is in the interests of the shareholders. Massmart Annual Report

245 Shareholder Information NOTICE OF ANNUAL GENERAL MEETING for the year ended 27 June 2010 (b) having considered the effect of the maximum number of ordinary and preference shares that may be acquired pursuant to the authority and the date upon which such acquisition/s will take place: f the Company and its subsidiaries (the Group ) will in the ordinary course of business be able to pay its debts for a period of twelve months after the date of this notice of annual general meeting; f the assets of the Company and the Group will be in excess of the liabilities of the Company and the Group for a period of twelve months after the date of this notice of annual general meeting, such assets and liabilities being fairly valued in accordance with International Financial Reporting Standards and in accordance with the accounting policies used in the annual financial statements of the Company and the Group for the year ended 27 June 2010; f the issued share capital and reserves of the Company and the Group will be adequate for ordinary business purposes for a period of twelve months after the date of this notice of annual general meeting; and f the working capital available to the Company and the Group will be adequate for ordinary business purposes for a period of twelve months after the date of this notice of annual general meeting. The Company will ensure that its sponsor provides the necessary sponsor letter on the adequacy of the working capital in terms of the JSE Listings Requirements, prior to the commencement of any repurchase of the Company shares on the open market. Reason and effect The reason for Special Resolution Number 1 is to give a mandate to the directors to repurchase ordinary and preference shares in the Company. The effect of Special Resolution Number 1 will be that the Company and its subsidiaries will be authorised to acquire ordinary and preference shares in the Company. Special Resolution Number 2 Resolved that Article of the Articles of Association of the Company be and is hereby amended by the replacement of the words Black Management Trust with Black Scarce Skills Trust. Reason and effect The reason for Special Resolution Number 2 is that the name of the Black Management Trust has been changed to the Black Scarce Skills Trust (the BSST ). The effect of Special Resolution Number 2 is that the Articles of Association of the Company will be rendered conformant with the new name of the BSST. Special Resolution Number 3 Resolved that Article of the Articles of Association of the Company be and is hereby deleted in its entirety and replaced with the following: A B Preference Share shall, unless it is converted into an ordinary share in the Company pursuant to the provisions of Article , be automatically redeemed at an amount equal to its par value on the date that is the 7th (seventh) anniversary of the date on which that B Preference Share was allocated to a Beneficiary in terms of the Management Trust, or if that B Preference Share has not been allocated in terms of the Management Trust, on 30 September 2016 or such later date as the board of directors of the Company may determine.. Reason and effect The reason for Special Resolution Number 3 is that it is presently provided in Article of the Articles of Association of the Company that if a B Preference Share has not been allocated to a beneficiary of the Black Scarce Skills Trust (the BSST ) by 30 September 2016, it will automatically be redeemed on such date. The amendment of this Article will introduce a degree of flexibility into the BSST. 244 Massmart Annual Report 2010

246 Shareholder Information The effect of Special Resolution Number 3 will be to permit the trustees of the BSST to continue to allocate unallocated B Preference Shares to beneficiaries of the BSST beyond 30 September 2016 if the board of directors of the Company so determines. VOTING AND PROXIES All holders of ordinary and preference shares in the share capital of the Company are entitled to attend and vote at the annual general meeting. Subject to any rights or restrictions for the time being attached to any ordinary and/or preference shares, on a show of hands, every holder of ordinary and/or preference shares who is present in person, or a proxy, or in the case of a company, the representative appointed in terms of section 188 of the Companies Act, No. 61 of 1973, as amended (the Act ), has one vote irrespective of the number of shares he/she holds or represents. On a poll, each holder of ordinary and/or preference shares or his/her proxy has so many votes for each ordinary and preference share (as the case may be) as is determined in accordance with section 195 of the Act read with the Company s Articles of Association. In terms of the JSE Limited ( JSE ) Listings Requirements ( JSE Listings Requirements ), Massmart ordinary shares held by and registered in the name of the Massmart Holdings Limited Employee Share Trust will not have their votes at the annual general meeting taken into account for JSE Listings Requirements resolution approval purposes. Voting percentages Ordinary shares A Preference shares B Preference shares Issued share capital 201,495,504 17,673,670 3,871,523, 223,040,697 However, Massmart preference shares held by the Massmart Thuthukani Empowerment Trust and the Massmart Black Scarce Skills Trust will have their votes at the annual general meeting taken into account for JSE Listings Requirements resolution approval purposes. If you hold certificated shares (ie have not dematerialised your shares in the Company) or are registered as an own name dematerialised shareholder, then: f you may attend and vote at the annual general meeting; alternatively f you may appoint a proxy to represent you at the annual general meeting by completing the attached form of proxy and returning it to the registered office of the Company to be received by no later than 48 (forty-eight) hours prior to the time appointed for the holding of the annual general meeting (excluding Saturdays, Sundays and public holidays within South Africa). If you own dematerialised shares (ie have replaced the paper share certificates representing the shares with electronic records of ownership under the electronic and clearing settlement system for transactions that take place on the JSE, Strate Limited, and are not registered as an own name dematerialised shareholder (ie you have not specifically instructed your Central Securities Depository Participant ( CSDP ) to hold your shares in your own name on the Company s sub-register), then, subject to the mandate between yourself and your CSDP or broker: f if you wish to attend the annual general meeting you must contact your CSDP or broker, as the case may be, and obtain the relevant letter of representation from it; alternatively f if you are unable to attend the annual general meeting but wish to be represented at the annual general meeting, you must contact your CSDP or broker, as the case may be, and furnish it with your voting instructions in respect of the annual general meeting. You must not complete the attached form of proxy. The instructions must be provided in accordance with the mandate between yourself and your CSDP or broker, as the case may be, within the time period required by your CSDP or broker, as the case may be. % Massmart Hldi Holdings Limited it Employee Share Trust 1.5 Massmart Thuthukani Empowerment Trust 5.8 Massmart Black Scarce Skills Trust 0.1 Public shareholders 92.6 Shares held by the employee share trust will not be taken into account for Special Resolution Number 1 CSDPs, brokers or their nominees, as the case may be, recorded in the Company s sub-register should, when authorised in terms of their mandate or instructed to do so by the owner on behalf of whom they hold dematerialised shares in the Company, vote by either appointing a duly authorised representative to attend and vote at the annual general meeting or by completing the attached form of proxy in accordance with the instructions thereon and returning it to the registered office of the Company to be received not less than 48 (forty-eight) hours prior to the time appointed for the holding of the annual general meeting. Massmart Annual Report

247 Shareholder Information NOTICE OF ANNUAL GENERAL MEETING for the year ended 27 June 2010 In terms of the JSE Listings Requirements for Special Resolution Number 1, general information is included in the annual report to which this notice of annual general meeting is attached, including: (i) Directors and management (ii) Major shareholders 225 (iii) Material changes 156 (iv) Directors interests in shares 155 (v) Share capital of the Company 192 (vi) Litigation 156 The Directors whose names appear on pages 15 to 17 of the annual report, collectively and individually, accept full responsibility for the accuracy of the information given and certify that to the best of their knowledge and belief there are no facts that have been omitted which would make any statement false or misleading, and that all reasonable enquiries to ascertain such facts have been made and that this notice of the annual general meeting contains all information required by law and the JSE Listings Requirements. By order of the Board Ilan Zwarenstein Company Secretary 6 October Massmart Annual Report 2010

248 Shareholder Information NOTICE OF AMENDMENTS TO THE MASSMART HOLDINGS LIMITED EMPLOYEE SHARE SCHEME (the TRUST or the SCHEME ) 1. INTRODUCTION AND RATIONALE On 15 October 2008, the JSE Limited ( JSE ) replaced Schedule 14 of the Listings Requirements ( JSE Listings Requirements ) in its entirety which requires all existing employee share trusts to be rendered conformant with the revised Schedule 14 by not later than 1 January The amendments to the Trust, as authorised by Ordinary Resolution Number 12, are primarily designed to render the Trust conformant with the revised Schedule 14. For convenience, the Company is proposing to substitute in their entirety the existing terms of the Trust, first adopted by the Company at the general meeting on 12 June 2000, with the amended and restated terms. The amended and restated terms are the same terms that were adopted on 12 June 2000, save for the key proposed amendments set out below. 2. SUMMARY OF THE PROPOSED AMENDMENTS TO THE TRUST Below is a summary of the key proposed amendments to the Trust: Key amendments f the back-dating of options is prohibited; f the rolling over of the scheme allocation is prohibited; f to the extent that any director may be the recipient of an award, such director shall recuse himself from the decision-making process in this regard; f a fixed maximum Scheme allocation and fixed cumulative maximum individual limit has been set. The maximum number of shares that may be allocated to the Trust shall be 39,500,000 (thirty-nine million, five hundred thousand) ordinary shares. The cumulative maximum number of shares that may be allocated in respect of any one offeree (as defined in the Trust) shall be 4,000,000 (four million) shares. It is recorded that as at the date hereof, 10,141,910 ordinary shares have already been allocated and are to be taken into account as part of the approved allocation. For clarity, in addition to whatever shares have been allocated prior to 24 November 2010, new allocations shall be permitted and limited to a cumulative maximum of 4,000,000 (four million) shares per offeree; f no executive director of the Company shall be capable of accepting an appointment as a trustee of the Trust; f trustees may not participate under the Scheme; f the Trust has been specifically empowered to acquire shares on the open market, if authorised by the directors, or otherwise for the purposes of the Scheme. Shares purchased through the open market for the purpose of the Scheme shall not be taken into account when calculating the number of shares authorised to be utilised by the Trust for offerees; f shares may only be offered to the trustees or options granted to the trustees for the purpose of this Scheme once participants or groups of participants to whom the shares will be allocated have been formally identified; f a new clause 16 has been introduced clarifying that the Trust acts as agent for the employer when it extends offers or grants options; f the time period within which to exercise options granted or to sell shares before they lapse has been extended from 6 (six) years to 10 (ten) years. The amendment extends the period in respect of all options and shares granted, and makes no distinction between options or shares granted on or before 24 November This period has been extended to increase the retention aspect of the Scheme; f the Trust provides, in the event of a sub-division or consolidation, for an adjustment to the number of shares that may be utilised and the amount payable. Such adjustment must give a participant entitlement to the same proportion of the equity capital as that to which he/she was previously entitled. The Company s auditors or other independent advisors must confirm to the JSE in writing that such adjustments are made in accordance with the provisions of the Trust. In addition, to the extent that there is a capitalisation issue, a special dividend, a rights issue or reduction of capital, the individual limits and the amounts payable should be adjusted to give a participant entitlement to the same proportion of equity capital as that to which he/she was previously entitled; Massmart Annual Report

249 Shareholder Information NOTICE OF AMENDMENTS TO THE MASSMART HOLDINGS LIMITED EMPLOYEE SHARE SCHEME (the TRUST or the SCHEME ) f the disclosure required to be given by the Company in its annual financial statements have been enhanced in accordance with the revised Schedule 14; and f allocated shares which are not subsequently issued to identified beneficiaries for any reason, will revert back to the Scheme. Save as is set out above, which amendments are required to render the Trust conformant with the revised Schedule 14, the Trust remains unchanged from that which was adopted by the Company on 12 June 2000, as amended. 3. REVISED SUMMARY OF PRINCIPAL TERMS Below is a revised updated summary of the principal terms of the Trust prepared on the assumption that the amendments proposed by Ordinary Resolution Number 12 are adopted: Establishment of the Trust The Trust, which was first adopted by the Company at the general meeting on 12 June 2000, is intended to incentivise employees (as defined in the Trust) to promote the continued successful growth of the Company by giving them an opportunity to acquire shares therein. Appointment of trustees There shall at all times be a minimum of 2 (two) and a maximum of 4 (four) trustees of the Trust. No person who is a trustee of the Trust shall be a beneficiary under the Trust. No person who is an executive director of the Company shall be a trustee. The current trustees are Stephen Anthony Lewis, David Mark Franklin and Ian Nigel Matthews. Powers of trustees In terms of the trust deed, the trustees will be conferred with the powers necessary to implement and administer the Trust. Duties of trustees Along with the other duties imposed by the trust deed, the trustees shall make offers and grant options to offerees (as defined in the Trust) as directed by the directors from time to time and shall ensure that the Trust is effected in accordance with its terms. Funding The Company shall, with the prior approval of the directors, lend and advance monies to the trustees for the purpose of carrying out their duties under the Trust to the extent that the Trust s own resources, if any, are insufficient. The Trust may also borrow money from third parties, if authorised by the Board. Eligibility Employees shall be eligible to and shall participate in the Scheme to the extent that offers are made to and accepted by them, options are granted, accepted and, to the extent specified in the Trust, exercised by them. The trustees may not participate under the Scheme. To the extent that any director may be the recipient of an award, such director shall recuse himself from the decision-making process in this regard. Beneficiaries are entitled to hold their shares in a trust established primarily for the benefit of the relevant beneficiary or his/her immediate relations or in any private company or close corporation, all of the shares of which or the entire interest in which is and continues to be held or beneficially owned by the relevant beneficiary and/or his/her immediate relations, subject to certain conditions. Continued employment is a condition of exercising the options subject to certain limited exceptions in respect of, inter alia, retirement and death. Purchase price The purchase price for any shares awarded in terms of an offer or option is the weighted average traded price per ordinary share determined over a period of 5 (five) trading days on the JSE (as evidenced by a certificate issued by the Company s then sponsor) immediately preceding the offer or option date, as the case may be, or the par value of such share, whichever is the greater. The repricing of options is prohibited. 248 Massmart Annual Report 2010

250 Shareholder Information Limitation The maximum number of shares that may be allocated to the Trust shall be 39,500,000 (thirty-nine million, five hundred thousand) ordinary shares. The cumulative maximum number of shares that may be allocated in respect of any one employee shall be 4,000,000 (four million) shares. It is recorded that as at the date hereof, 10,141,910 ordinary shares have already been allocated and are to be taken into account as part of the approved allocation. For clarity, in addition to whatever shares have been allocated prior to 24 November 2010, new allocations shall be permitted and limited to a cumulative maximum of 4,000,000 (four million) shares per employee. Upon any beneficiary paying the outstanding purchase price in respect of his/her reserved shares in full, whether pursuant to the exercise of an option or pursuant to the acceptance of an offer: 1. such shares and any rights issue and capitalisation shares and dividend capitalisation shares linked thereto shall cease to be reserved shares and any burden attaching to such shares in terms of the Trust shall cease to operate; and 2. save as may be expressly provided for to the contrary and subject to certain other relaxation of restrictions, the Company Secretary from time to time and the trustees shall upon payment of the share tax, if any, payable thereon, release such shares together with any capitalisation, dividend capitalisation and rights issue shares financed by the Trust. The trustees shall, subject to the attainment of the relevant performance criteria, if any, and subject to discharge of the share debt (as defined in the Trust), if applicable, release the shares only as to: f 25% (twenty-five percent) of the initial offer or allocation on or after the 2nd (second) anniversary as from the offer date or the option date; f 50% (fifty percent) of the initial offer or allocation on or after the 3rd (third) anniversary as from the offer date or the option date; f 75% (seventy-five percent) of the initial offer or allocation on or after the 4th (fourth) anniversary as from the offer date or the option date; and f 100% (one hundred per cent) of the initial offer or allocation on or after the 5th (fifth) anniversary as from the offer date or the option date, as the case may be, to the beneficiary, on a cumulative basis and, provided further, the directors of the Company shall be entitled to determine shorter or longer periods than those provided for above ab initio or at any time thereafter, and whether pursuant to the failure to meet performance criteria or not. Voting In terms of Schedule 14 of the JSE Listings Requirements, the shares held by a share scheme or trust will not have their votes at general/annual general meetings taken into account for purposes of determining approval of resolutions in terms of the JSE Listings Requirements. Such shares will also not be allowed to be taken into account for purposes of determining categorisations as detailed in Section 9 of the JSE Listings Requirements. Corporate events and other adjustments Where a merger, take-over or other corporate event occurs (other than acquisitions, issue of shares for cash and the issue of shares or vendor consideration placings which will not be regarded as circumstances requiring adjustment), the Company in its discretion will adjust the number of options and/or grant price in an attempt to put the employee in the same economic position in which he/she was prior to the corporate event. The Trust provides, in the event of sub-division or consolidation of shares, for an adjustment to the number and/or grant price of options so as to give the employee entitlement to the same proportion of equity capital to which he/she was previously entitled. Massmart Annual Report

251 Shareholder Information NOTICE OF AMENDMENTS TO THE MASSMART HOLDINGS LIMITED EMPLOYEE SHARE SCHEME (the TRUST or the SCHEME ) Where an offer is made to shareholders which would see control of the company pass to the offeror then, unless there is provision in the offer for a substitution of the existing offers and options which places the beneficiaries in no worse a position than that in which they are currently under, the beneficiaries are able to accept existing offers and exercise all existing options granted to them, whether vested or not, such that they may participate in any such proposed offer. Reporting and reversion of unissued shares Additional reporting obligations have been imposed on the Company in accordance with the revised Schedule 14, in particular the Company must summarise in its annual financial statements the number of shares that may be utilised for the purpose of the Trust at the beginning of the financial year, changes in such number during the accounting period and the balance of shares available for utilisation for purposes of the Trust at the end of the financial year. In addition, any adjustments made to the Trust limits in the event of sub-division or consolidation, capitalisation issues, special dividends, rights issues or reductions of capital must be reported in the annual financial statements in the year during which the adjustment is made. The Company s auditors or other independent advisors acceptable to the JSE must confirm to the JSE in writing that any adjustments made are in accordance with the provisions of the Trust at the time that any such adjustment is finalised. To the extent that any allocated shares are not subsequently issued to identified participants, same must revert back to the Trust. Termination of the Trust The Trust shall terminate as soon as all the following events have taken place: f the Trust ceases to hold any Scheme shares and the directors resolve that the Trust shall terminate; f as soon as it has received payment in full of all amounts owed to it by the beneficiaries, which are recoverable; and f as soon as the trustees have discharged all of their obligations to the beneficiaries. 250 Massmart Annual Report 2010

252 Shareholder Information FORM OF PROXY For use by certificated and own name dematerialised shareholders only Massmart Holdings Limited (Incorporated in the Republic of South Africa) Registration number 1940/014066/06 JSE share code: MSM ISIN: ZAE ( Massmart or the Company ) FOR COMPLETION ONLY BY MASSMART SHAREHOLDERS WHO HAVE NOT YET DEMATERIALISED THEIR SHARES OR WHO HAVE DEMATERIALISED SHARES WITH OWN NAME REGISTRATION. A shareholder is entitled to appoint one or more proxies (none of whom need to be shareholders of Massmart) to attend, speak and vote or abstain from voting in the place of that shareholder at the annual general meeting. I/We (Please print names in full)... of (address)... being a shareholder/shareholders of the abovementioned Company and holding... ordinary shares and/or... preference shares in the Company hereby appoint... or failing him/her,... or failing him/her, the Chairman of the annual general meeting as my/our proxy to vote for me/us on my/our behalf at the annual general meeting of the Company to be held at 08h30 on Wednesday, 24 November 2010 at Massmart House, 16 Peltier Drive, Sunninghill Ext 6, Sandton, and at every adjournment of that meeting. Signed at... this... day of Signature... Please indicate with an X in the appropriate space below how you wish your vote to be cast. If you return this form duly signed, without any specific directions, the proxy shall be entitled to vote as he/she thinks fit. Ordinary resolutions 1. Adoption of the annual financial statements 2. Re-election of Mr KD Dlamini to the Board of Directors 3. Re-election of Dr NN Gwagwa to the Board of Directors 4. Re-election of Mr MJ Lamberti to the Board of Directors 5. Re-election of Ms P Langeni to the Board of Directors 6. Re-election of Mr IN Matthews to the Board of Directors 7. Approval of the non-executive directors annual remuneration 8. Re-election of Deloitte & Touche as the Company s auditors 9. Approval of appointment of the Audit Committee members 10. Placement of the unissued ordinary share capital under the control of the directors, limited to 5% (five percent) of the shares in issue 11. Authorisation for the directors to issue ordinary shares for cash, limited to 5% (five percent) of the shares in issue 12. Amendment of the rules of The Massmart Employee Share Scheme Special resolutions 1. Authorisation for the Company and/or its subsidiaries to repurchase its own shares 2. Amendment to Article of the Articles of Association 3. Amendment to Article of the Articles of Association In favour Against Abstain of resolution resolution from voting Ordinary ry Preference Ordinary ry Preference Ordinary Preference shares s shares shares s shares shares sharess A shareholder entitled to attend and vote at this meeting is entitled to appoint one or more proxies to attend, speak and vote in his/her stead. A proxy need not be a shareholder of the Company. Proxies must be lodged at the registered office of the Company not less than 48 (forty-eight) hours before the time for holding the meeting. Massmart Annual Report

253 Shareholder Information NOTES TO THE PROXY 1. A form of proxy is only to be completed by those shareholders who are: 1.1 holding shares in certificated form; or 1.2 recorded on the sub-register of the Company in dematerialised electronic form in own name. 2. If you have already dematerialised your ordinary and/or preference shares through a Central Securities Depository Participant ( CSDP ) or broker and wish to attend the annual general meeting, you must request your CSDP or broker to provide you with a letter of representation or you must instruct your CSDP or broker to vote by proxy on your behalf in terms of the agreement entered into between yourself and your CSDP or broker. 3. A shareholder may insert the name of a proxy or the names of two alternative proxies of the shareholder s choice in the space provided. The person whose name stands first on the form of proxy and who is present at the annual general meeting of shareholders will be entitled to act as proxy to the exclusion of those whose names follow. 4. A shareholder s instructions to the proxy must be indicated by the insertion of the relevant numbers of votes exercisable by the shareholder in the space provided. Failure to comply with the above will be deemed to authorise the proxy to vote or to abstain from voting at the annual general meeting as he/she deems fit in respect of all the shareholder s votes exercisable thereat. A shareholder or the proxy is not obliged to use all the votes exercisable by the shareholder or by the proxy, but the total of the votes cast and in respect of which abstention is recorded may not exceed the total of the votes exercisable by the shareholder or by the proxy. 5. Forms of proxy must be lodged with or posted to the Company s registered office, Massmart House, 16 Peltier Drive, Sunninghill Ext 6, Sandton, 2191 (Private Bag X4, Sunninghill, 2157), to be received no later than 08h30 on Monday, 22 November The completion and lodging of this form of proxy will not preclude the relevant shareholder from attending the annual general meeting and speaking and voting in person thereat to the exclusion of any proxy appointed in terms hereof. 7. Documentary evidence establishing the authority of a person signing this form of proxy in a representative capacity or other legal capacity must be attached to this form of proxy, unless previously recorded by the transfer secretaries or waived by the Chairman of the annual general meeting. 8. Any alteration or correction made to this form of proxy must be initialled by the signatory/ies. 9. Notwithstanding the aforegoing, the Chairman of the annual general meeting may waive any formalities that would otherwise be a prerequisite for a valid proxy. 10. If any shares are jointly held, the first name appearing in the register shall, in the event of any dispute, be taken as a shareholder. 252 Massmart Annual Report 2010

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