Integrated Annual Report for the year ended December 2018 OUR COMMITMENT: OUR DIVISIONS: TO SAVE OUR CUSTOMERS MONEY SO THEY CAN LIVE BETTER COMPRISES FOUR DIVISIONS OPERATING 436 STORES IN OUR PURPOSE: 13 SUB-SAHARAN COUNTRIES To be the most trusted, high-volume, lowest cost, wholesale and retail group in sub- Saharan Africa, delivering exceptional value Through our widely-recognised, differentiated retail to mass market consumers. and wholesale formats, we have leading shares in the General Merchandise, Liquor, Home Improvement OUR BUSINESS: and Wholesale Food markets. Our key foundations Our business model is built on high-sales of high volume, low cost and operational excellence density formats, procurement scale and enable our price leadership. cost-efficient routes to market. As a result, we are able to optimise supplier distribution and obtain price leadership, which enables us to deliver on our commitment of saving our customers money so they can live better. Table of contents
Our business Transparency and Our performance 02 at a glance 04 06 accountability 18 24 49 65 87 92 Our business Our business Chief Financial Independent Our approach Board model Officer’s review auditor’s report to corporate Committee 20 governance feedback Our footprint 26 54 Our stakeholder Directors’ See more of our performance online 88 96 relationships report www.massmart.co.za/iar2018 Our Board Remuneration 22 /groupafs report Our value /companyafs creation story 57 /5yearreview Summary Consolidated Group Financial Our business Statements 03 context 22 Our value creation story 29 36 Corporate 68 Material Our strategic Addressing social and environmental challenges matters priorities 05 Accountability Introduction 33 40 Shareholder 01 Managing Divisional 67 76 84 our risks reviews Introducing Engaging our Ensuring the SDGs stakeholders high levels 07 information of consumer 04 08 safety Performance Reflections from 68 80 Addressing Empowering summary the Chairman 119 126 social and our people Notice of Annual Notes to the environmental General Meeting form of proxy 06 11 challenges About our Message from 125 127 report our CEO 36 Form of proxy Definitions Our strategic priorities and formulas
HOW TO READ OUR REPORT FOR MORE INFORMATION TO ASSIST THE STAKEHOLDERS IN MAKING AN ASSESSMENT OF OUR ABILITY TO CREATE VALUE, THE REPORT HAS BEEN NAVIGATION SYMBOLS IN OUR REPORT DESIGNED IN THE FOLLOWING STRUCTURE: Online articles 1. An introduction to Massmart outlining our business model, our stakeholder relationships and our value creation story; Further information 2. A reflection on our business context, the material risks and opportunities facing Massmart and our strategic response; 3. An evaluation of our performance and corporate accountability; and Definitions 4. A review of our governance structures and remuneration practices.
Massmart Integrated Annual Report 2018 03 Performance summary
WEAK SALES IN DIFFICULT ENVIRONMENT SUSTAINING 2.9% VALUE R90.9 billion 2017: R88.4 billion* R125m IN SAVINGS FROM A FOCUS ON GROUP-WIDE LOGISTICS EFFICIENCIES TRADING PROFIT BEFORE 2017: R100 million INTEREST AND TAX IMPACTED BY MARGIN PRESSURE INVESTED R230.2m IN EMPLOYEE TRAINING 16.8% AND DEVELOPMENT R2.1 billion 2017: R112.1 million 2017: R2.5 billion^ STAFF TURNOVER
HEADLINE EARNINGS BEFORE 20.0% RESTRUCTURE COSTS (TAXED) 2017: 10.4%
GROUP ENERGY 22.9% EFFICIENCY INCREASED R1.0 billion 3.9% 2017: R1.3 billion^ TO 204.9 KWH/M² 2017: 213.1 kWh/m2 HEADLINE EARNINGS R254m PROCURED FROM SUPPLIER 31.7% DEVELOPMENT PROGRAMME R901.2 million 2017: R200 million 2017: R1.3 billion^ 80.81 (LEVEL 4) BBBEE SCORE ACHIEVED Financial performance impacted by: 2017: 66.63 (Level 7) • Game and Masscash restructure and relocation and continued distraction at Game 45% • Commodities and Durable Goods deflation OF THE MEMBERS OF OUR • VAT increase BOARD ARE FEMALE • Negative comparable sales in November and 2017: 33.3% December 2018
• Negative adjustments for inventory and cost WE’VE SAVED OUR CUSTOMERS of sales in Massfresh, Masswarehouse’s fresh R2.5bn Food Wholesaler THROUGH OUR PROMOTIONS * Like-on-like 52-week basis 2017: R2.2 billion ^ Restated
04 Introduction Massmart Integrated Annual Report 2018 05 About our report
Scope and boundary Board approval This report aims to provide a concise assessment of To appreciate Massmart’s ability to create value, it is important uncertainties and other important factors may cause Massmart’s Board of Directors acknowledges Massmart’s strategy and business model, risks and to read our value creation story ( page 22 ) which is actual results to differ materially from our expectations. its responsibility to ensure the integrity of opportunities, performance and governance over the structured to show the relationship between Massmart’s These include factors that could adversely affect our the Integrated Annual Report. Together with 52 weeks ended December 2018. strategy, business model, operating context, and material risks business and financial performance. management, and reflecting on Massmart’s This report is primarily intended to address the and opportunities. Making an informed assessment of how The Group is not under any obligation to update operating context, strategy and value creation information requirements of long-term investors (our equity we have created value requires an appreciation of our strategy or alter any forward-looking statements publicly, model, we believe that this Integrated Annual shareholders and prospective investors). We also present ( pages 36-39), our material matters ( pages 29-32) and whether as a result of new information, future events or Report addresses all matters that have, or could information relevant to the way we create value for other key our governance practices ( pages 87-117). otherwise. Investors are cautioned not to place undue have, a material impact on Massmart’s ability stakeholders, including customers, employees, suppliers, reliance on any forward-looking statements contained to create value. We have applied our collective government and civil society. Reporting frameworks herein, as they have not been reviewed or reported on minds to the preparation and presentation of In assessing the risks, opportunities and outcomes that by the Group’s external auditors. the information in this report and believe that materially impact the Group’s ability to create value for its Our integrated reporting process, as well as the contents this report has been prepared in accordance stakeholders, the boundary has been extended beyond the of this report, is guided by the principles and requirements Combined assurance with the IIRC’s International
Susan Muigai
36 Enrique Ostalé Our strategic priorities JP Suarez
06 Introduction Massmart Integrated Annual Report 2018 07 REFLECTIONS FROM THE CHAIRMAN was held in Johannesburg in October 2018, where President Efforts to sustain cost discipline continued and resulted in Ramaphosa announced a combined amount of R290 billion expense increases being limited to 5.0%, whilst comparable in investment in South Africa. This was in addition to the expenses increased by only 2.3%. Staying on course in trying times R400 billion received from the investment drive ahead of We continued with our strategy to pursue new revenue that conference. These investments are a positive sign that streams and a competitive range of Financial Services is investors are warming up to President Ramaphosa and his now available across our business. Massmart recorded a message that South Africa is open for business. 61% growth across the Value-Added Service (VAS) product Announcements regarding visa requirements, energy portfolio including money transfers, Lotto sales, RCS credit supply, land reform and that land expropriation will be product sales and extended warranties. Massmart will undertaken in a responsible way that does not affect food continue to pursue this offering with a view of adding security or agribusiness, are supportive of Ramaphosa’s call further services. to investors. Our omnichannel focus, designed to improve customer Commitment has also been shown to uncovering choice and experience, saw aggregate online sales increase corruption in South Africa – within nine months of his by 56%. Massmart’s four ecommerce points of presence presidency, President Ramaphosa had set up a total of four (Makro, Game, DionWired and Builders Warehouse) commissions of inquiry all related to the abuse and ‘capture’ registered impressive growth of 74% in online traffic, a of state resources in South Africa. Urgent action is however positive indication that we are meeting our customers’ required with regards to the challenges facing State-Owned needs. We will continue to invest in driving online sales. Enterprises (SOEs), in particular Eskom, and towards regaining In our efforts to achieve Group supply chain efficiencies an investment grade rating for the country. As leaders we and increase product velocity, the Massdiscounters and need to unite around national interests, look ahead and ask Masswarehouse Distribution Centres (DCs) were transitioned what needs to be done to ensure a ratings upgrade. into Massmart Logistics during the period and will be used Kuseni Dlamini, Chairman Given that democracy has been entrenched over the past as a Group asset to support future growth. 25 years, I believe that South Africa’s national elections, to be In February 2018, we announced the restructuring of held on 8 May 2019, will be free and fair. I am optimistic that some of the business functions within Massdiscounters with a strong and efficient government, policy certainty and and Masscash and the relocation of both head offices In what was a difficult and challenging year for Massmart and our primary better functioning SOEs, South Africa’s fortunes will turn. from Durban to Johannesburg. The restructures and office market, South Africa, we reported a 2.9% total sales growth during the period. moves were completed in late 2018 and caused business We remain committed to delivering on our strategy and to ensuring that we Africa disruption and uncertainty amongst staff and management. We however believe that access to the Johannesburg talent Massmart is an Africa optimist and our ex-SA growth plans position the business for growth in a changing and increasingly challenging remain on track. Our strategy has always been deliberately pool will enhance the business in the future. Overall we are focusing on ensuring a customer-centric retail market. This requires us to constantly drive innovation, improve customer cautious and measured because we believe in the long- term proposition of the continent. Africa’s growth, while culture across all of our businesses, growing market share service and enable our customers to save money so they can live better. tempered, is on a gradual upward trajectory. Average GDP and enhancing competitiveness. growth was 3.5% in 2018 and Africa is anticipated to grow We are making deliberate efforts to improve customer by 4% in 2019 and by 4.1% in 2020. Mild commodity price experience by focusing on our customer service offering, store layouts and ensuring that we respond to customer Our operating environment improvement and improved macro-economic stability is expected, yet structural transformation constraints remain concerns effectively. We are leveraging off Walmart’s best In South Africa, which accounts for 91.3% of the Group’s total The strengthening of dialogue that is evident between a challenge. practice to enhance the culture of customer service that sales, the year was characterised by volatility in the political, business and government encourages us as we recognise I am encouraged by the results achieved by our African makes us unique. regulatory and economic environment. This had a negative that it will take a combined effort between government, businesses. Total sales from the Group’s stores outside South effect on consumer and business confidence, impacting labour and business to urgently grow South Africa’s Africa grew by 3.9% in constant currencies, while in Rands Corporate accountability discretionary spend and, as a result, Massmart’s sales. economy, create jobs and position South Africa as a valued total ex-SA sales increased by 3.7%. The Group added over Massmart is in a unique position because we serve investment destination. 13,000m2 of trading space outside of South Africa during For Massmart to succeed, we need the South African all consumer segments from LSM 1 to LSM 10 and our We are supportive of President Ramaphosa’s investment the period. In the next three years we anticipate opening 13 economy to succeed. Key to this will be rebuilding trust in merchandise assortment is comprised 44% Durables and programme, which has a target of attracting R1.2 trillion in new stores ex-SA, representing a 7.8% compounded annual our institutions, creating a culture of execution, ensuring 56% Food & Liquor. As such, persistently high levels of new foreign investment over five years. Economists have growth rate of new space, concentrated specifically in Kenya we have world-class infrastructure, and developing South unemployment (27.1%), limited GDP growth (0.8%) and low hailed this initiative, which is part of a bigger programme to and Zambia. Africa’s human capital, particularly through education and consumer confidence and spending weighed down on revive the economy, as the beginning of the ‘new dawn’ for by building competent and capable managers and leaders. our business. The hike in fuel prices negatively impacted South Africa after years of low growth and policy uncertainty. Our response In line with this, a top priority for us will always be consumer spending, as did the decision by the South African Phumzile Langeni, who sits on our Board, together with investing in our people, ensuring we have motivated and government to increase the Value-Added Tax (VAT) rate for Trevor Manuel, Mcebisi Jonas and Jacko Maree are part While the external environment was beyond Massmart’s capable staff and equipping them with skills for the future. the first time in 25 years. of the President’s special envoys on investment tasked control, our management team worked tirelessly to respond In 2018 we rolled out the TalentPrint system to employees The appointment of a new president, Cyril Ramaphosa, with engaging domestic and foreign investors around to issues within their control. In our efforts to grow our core and their managers. Employees were given an opportunity in February 2018 unleashed a sense of optimism in South economic opportunities in the country. I personally business, we have launched a number of initiatives to reduce to update their individual talent profiles thereby improving Africa. However, 2018 remained a year of political uncertainty attended the investment roundtable held in New York in operational costs, leverage Group efficiencies and pursue the quality and accuracy of talent reporting. as new leadership found its feet. September 2018 ahead of the investment conference that new revenue streams.
08 Introduction Massmart Integrated Annual Report 2018 09 REFLECTIONS FROM THE CHAIRMAN
MESSAGE FROM OUR CEO Our human capital commitments extend beyond our Board and Executive changes existing staff and include creating opportunities for young unemployed people. Once again we gave training and On 25 May 2018 we announced Olufunke (Funke) Ighodaro’s 2.9% total sales growth in difficult work experience to over 1,000 young people through our appointment as an Independent non-Executive Director learnership and cadetship programmes. and a member of the Massmart Audit and Risk Committees. We also seek to make a positive impact where it matters, On 23 August 2018 shareholders were informed that Chris economic environment and our CSI programme focuses primarily on school Seabrooke had agreed to continue to serve on the Board nutrition, Early Childhood Development and school sports as Lead Independent non-Executive Director and Deputy infrastructure and maintenance. Chairman but would cease to be a member of Board This year, we improved our BBBEE score and achieved a Committees and step down as Chairman of the Audit, Risk Level 4 BBBEE contributor status, the highest score in the and Remuneration Committees. Funke succeeded Chris retail sector. This reflects our commitment to implementing as the Chairman of the Audit and Risk Committees, while meaningful and sustainable transformation. Phumzile Langeni was nominated and assumed the role of Overall we also want to create a sustainable business, and Chairman of the Remuneration Committee. I believe we are leading the charge in this regard through On 28 February 2019 we announced the appointment of some of our environmental initiatives. Our solar panels Lindiwe Mthimunye to the Board as an Independent non- generated 3.6 million kWh of renewable energy in 2018, Executive Director. Lindiwe was further nominated to serve the highest in the South African retail sector. Through our on the Audit and Risk Committees. We also announced the efforts to reduce our water usage, 22 million litres of water appointment of JP Suarez as a non-Executive Director in was conserved through onsite water harvesting. We were place of Roger Burnley, both Walmart appointees. On the also rated by FTSE in the top five companies globally for same day we informed shareholders that Chris Seabrooke’s Environmental, Social and Governance (ESG) performance in retirement will become effective on 23 May 2019, from the Broadline Retail sub-sector. which date Chris will step down as the Deputy Chairman Guy Hayward, Group CEO and Lead Independent non-Executive Director of the Governance Board. The Board, Executive Committee and management extend their sincere appreciation and thank Chris and Roger In the face of recent corporate governance failures in the for their significant and invaluable contribution to the PERFORMANCE Explanation of accounting changes South African business landscape, we have continued to Massmart business. * strengthen our efforts to ensure that Massmart’s business Johannes van Lierop, Massmart’s Chief Financial Officer, SUMMARY This year‘s accounting for the adoption of IFRS 9 and IFRS 15, which in particular practices are guided by and comply with requirements of has indicated that for personal reasons he is not available to includes Shield’s sales on a net basis in the current 2018 year, complicates applicable regulatory frameworks, including the Companies extend his tenure in South Africa after the formal conclusion performance comparisons between the results for the current and prior years. Act of 2008, the JSE Listings Requirements and the King IV of his South African work visa in February 2020. He has 2.9% To provide a more meaningful assessment of the current year‘s performance, and Code on Corporate Governance for South Africa, 2016 (King IV). therefore given the Board early notice of this development Sales unless otherwise stated, my commentary has been provided on a like-on-like The Board ultimately endorses and accepts collective and a formal Executive search process to identify and R90.9 billion basis, i.e. reflecting the impact of IFRS 9 and IFRS 15 in both the current and prior responsibility for achieving the values underpinning appoint a successor has commenced. This process will likely 2017: R88.4 billion years. In addition, the commentary below reflects Massmart’s performance for good governance advocated by King IV, namely: integrity; take between three to six months. Further announcements the current and prior years’ 52-week periods. competence; fairness; responsibility; transparency; and will be made when there are any material developments in accountability. It further embraces the concept of integrated this regard. 16.8% This year in review thinking encapsulated in King IV, which underpins corporate Trading profit before The 2018 financial year was exceptionally difficult for the South African economy, citizenship, stakeholder inclusivity, sustainable development Appreciation interest and taxation in particular, and also for several of the sub-Saharan countries where we have and integrated reporting. The Board and its Committees R2.1 billion stores. The economic recession recorded in the first half of 2018 caused severe regularly reviews Massmart’s governance structures and On behalf of the Board I would like to express our appreciation 2017: R2.5 billion^ trading and expense pressures in most retail businesses, including our own. processes to ensure that the Board exercises effective and to Guy Hayward, the Executive team and all of the Massmart Compounding the sales pressure for much of the year was unusually low Food ethical leadership, conducts its affairs as a responsible employees for their continued hard work and commitment. price-inflation, caused by commodities deflation. corporate citizen and makes appropriate decisions to I would also like to thank our business partners, shareholders Total sales from our South African stores grew by 2.9% and comparable sales ensure sustainability. In the period we deliberated on key and other stakeholders for their ongoing engagement and 31.7% by 1.5%. Group sales in November and December 2018 were unexpectedly soft, issues such as strategy; structure; operational and financial support. Headline earnings resulting in comparable sales declining by 0.9% over this crucial two-month performance; corporate citizenship; diversity; stakeholder R901.2 million period. This marked slowdown was seen subsequently in the StatsSA national engagement; ethics and compliance; risk; governance; and 2017: R1.3 billion^ sales figures for December 2018. any other key activities of the Group. Total Rand sales from our ex-SA stores grew by 3.7%, while in constant Massmart is privileged to have a talented Board of Kuseni Dlamini currencies these grew by 3.9% and comparable stores grew by 0.5%. Ex-SA Rand Directors that have the necessary depth and diversity in skills, Chairman 4 April 2019 40.1% sales growth improved in the second half of the financial year due to positive experience and perspective to hold the Executive team to Total dividend currency movements. account on the development and execution of its strategy. per share I am pleased to report that, for the year ended 208.00 cents December 2018, the Board is satisfied that it has fulfilled its * Like-on-like 52-week basis 2017: 347.00 cents ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect responsibilities in accordance with its Charter, King IV and adjustments made. Refer to the restatement note on page 64. other applicable regulatory and legislative requirements.
10 Introduction Massmart Integrated Annual Report 2018 11 MESSAGE FROM OUR CEO
In the Group’s major categories, Food sales grew by 0.7% Our response (with product deflation of 1.1%), Liquor sales by 11.8% (with product inflation of 2.2%), Durable Goods sales by 0.7% (with Later in this letter, I describe the three strategic priorities product deflation of 1.7%) and Home Improvement sales by we are pursuing – improving and growing the core South 5.9% (with product inflation of 0.9%). African business over the medium term; sub-Saharan African The ongoing deflation in food benefits constrained expansion through opening new Builders Warehouse, Game customers, but causes pressure on profitability from deflated and Masscash stores; and expanding, improving and refining sales growth being below expense growth. Similarly, Durable our online/ecommerce offering in Game, DionWired, Makro, Goods deflation is benefiting customers, who nevertheless and Builders Warehouse. remain cautious and time many of their purchases around We are driving towards a Group services business model our promotional activities. that encompasses logistics, supply chain and part of our IT Black Friday has become a firm fixture on the South capabilities. This has been one of our strategic priorities and African retail calendar, our various businesses developed the remaining long-term strategic goals are outlined below: different tactical plans to satisfy our customers’ expectations • Improving the profitability of Game and Masscash; and also to cope with the extreme volumes sold over this • Delivering structurally lower operating costs by period. Customers have demonstrably changed their improving Group resource utilisation; shopping behaviour with reduced purchases in the month • Achieving supply chain efficiency through optimisation or two prior to Black Friday and then they selectively target of our regional Distribution Centres (DCs) and vehicles the promotional offerings. The Group’s total sales from the by increasing the volume of product moved through the Black Friday period (Friday to Sunday) of R1.8 billion were supply chain network thereby reducing costs and stock 16% higher than the same period in the prior year. holding; The Group’s gross margins declined slightly from 19.63% • Opening about 43 new stores between 2019 and 2021, DionWired and Builders Warehouse grew by 74% A new store layout for Game has been rolled out into six to 19.45%, caused primarily by margin pressure in Game representing a 2.5% compounded annual growth rate • We continue to hold strong market shares across a stores in South Africa and six in ex-SA countries and has and negative stock adjustments in Massfresh, which were (CAGR) of new space. 25.9% of this new space will be number of our Durable Goods categories, including: attracted positive customer comments and we are seeing partially offset by the higher sales participation of higher- outside South Africa, concentrated specifically in Kenya large and small domestic appliances; Hi-tech; and most improved store sales densities. margin retail customers in Massbuild. More detail is provided and Zambia; DIY and hardware categories Game and now DionWired use the SAP Hybris online in the Divisional operational review. • Investing capital in omnichannel capabilities, which now • We improved our Group Private Label offering to our shopping platform. The SAP ERP system implementation In February 2018, we announced the restructuring of represent 1.1% sales participation of those categories customers, resulting in Private Label sales representing go-live date is scheduled for the second half of 2019. some of the business functions within Massdiscounters that are online; 9.0% of Group sales Our Fresh roll-out continues, with 68 Game stores in and Masscash and the relocation of those head offices from • Improving our Value-Added Services (VAS), customer South Africa and 20 in other African countries now offering Durban to Johannesburg. Expected annual savings will be offering across the Group by adding to the portfolio of Divisional operational review this category, resulting in Food & Liquor sales participation approximately R52.0 million. The restructures and office services offered; and of 22.6%. moves were completed in late 2018 and caused business • Improving our Private Label execution to offer customers Massdiscounters Three DionWired stores and five Game stores (including disruption and uncertainty amongst staff and management. good quality products at affordable value. Massdiscounters comprises the 146-store General two in Ghana and one in Kenya) were opened during the Growth in total expenses, excluding restructuring costs, Merchandise and Food discounter Game, which trades in year, while one Game store and two DionWired stores were was a creditable 5.0% while comparable expense increases Operational highlights South Africa and 11 other African countries (22 stores); and closed (all in South Africa). Massdiscounters’ trading space were limited to 2.3%. This good performance was however the 25-store Hi-tech retailer DionWired in South Africa. increased by 2.2% to 560,828m2. insufficient to neutralise the pressure from soft sales and • The Massdiscounters and Makro DCs were transitioned Massdiscounters total sales decreased by 1.2% and from slightly lower gross margins. Occupancy costs saw the into the Massmart Logistics business unit and will be comparable sales were down 1.5%, both of these were Masswarehouse highest increase of 10.1% which mainly came from new stores utilised as a Group asset, resulting in improved DC cost- impacted by product deflation of 2.9% for the year. In Masswarehouse comprises the 21-store Makro warehouse- that added 2.2% to trading space and the rental annualisation recoveries and transport efficiencies Game’s South African stores total sales declined by 0.1% club trading in Food, General Merchandise and Liquor in of the Makro Riversands store which opened in late 2017. • The continued focus on new revenue streams saw a 61% and comparable sales increased by 0.1%, which masks South Africa; and Massfresh, which houses the Group’s Fresh Disappointingly, the combination of low sales growth growth in our VAS business which was achieved through an improved sales performance in the second half of the produce and Fresh meat operations including The Fruitspot. and higher expense growth caused Group trading growth across money transfers, Lotto sales, cash-backs, financial year. Game Africa’s total sales in constant currencies Total sales increased by 5.4% and comparable sales grew profit excluding foreign exchange movements, interest, RCS credit product sales and extended warranties increased by 1.5%, but declined by 0.9% in Rands, with by 3.7%. Product deflation was 0.2%, caused by deflation in impairments and restructure costs to decline by 16.8% to • Our omnichannel focus, improving our customers’ trading conditions particularly difficult in Nigeria and Durable Goods and Food commodities. Total sales growth R2.1 billion. Headline earnings excluding restructure costs choice and experience, resulted in the Group’s total Mozambique. General Merchandise sales grew by 0.3% over in Food & Liquor was 3.3% – a good performance given the decreased by 22.9% to R1.0 billion, while Headline earnings online sales growing by 56%. This was achieved through the prior year and Game maintained strong market shares consumer environment. General Merchandise sales growth decreased by 31.7% to R901.2 million. our four ecommerce points of presence – Makro, Game, in the domestic large appliances and Hi-tech categories. was a pleasing 4.5% despite deflation and pressure on During the year 19 stores were opened and six were DionWired and Builders Warehouse – all of which now DionWired sales were below the prior year as low consumer discretionary spending. use the SAP Hybris platform. In February 2019 Makro confidence affected sales of high price-ticket electronic closed, resulting in a net trading space increase of 2.2% Additional commentary on Divisional switched from its legacy online platform to Hybris and items. Declining customer traffic into major shopping malls to 1,648,718m2. Our African growth plans remain on track performance is included in the we are managing the usual challenges with this type of where some of our larger DionWired stores are based, also and we added 13,409m2 of ex-SA trading space in the year, Chief Financial Officer’s review p49-53 representing 5.8% new space. transition. Combined, online traffic across Makro, Game, impacted sales.
12 Introduction Massmart Integrated Annual Report 2018 13 MESSAGE FROM OUR CEO
Masscash total sales increased by 2.1% while comparable Growth into sub-Saharan Africa sales decreased by 0.2%. During the year product inflation We believe that over the long term several sub-Saharan increased slightly to 0.3% as commodities deflation eased. African countries are expected to record strong real Cambridge and Rhino performed well in this difficult economic growth (i.e. above 4% per annum). This growth consumer environment, growing total sales at 1.8%. will be accompanied by a burgeoning middle-class and During the year our focus on improving in-stock service increased participation and penetration of modern retail levels and KVI pricing in the Wholesale stores improved sales – we feel that both trends will support strong retail sales and customer retention. In the Retail business, we have seen growth over the longer term. an improvement in sales and store profitability when we At R167.8 million, our average sales per ex-SA store is convert and rebrand a Rhino to a Cambridge store, and will up to three times higher than those of many other South therefore be doing more of these conversions where practical. African competitors. This allows us to build relatively fewer We are very supportive of the South African government’s stores but still attract large market shares and, importantly, intention to address general tax compliance and enforcement also allows us to keep low operating costs (as a % of sales) as this will improve our longer-term competitive positioning in those stores, enabling us to be very price-competitive. in the South African cash & carry industry which is afflicted In the next three years we anticipate adding 13 new by VAT evasion and trading in illicit or grey goods. ex-SA stores, representing a 7.8% CAGR of new space, Two Retail stores were opened in South Africa, resulting concentrated specifically in Kenya and Zambia. Ex-SA sales in a net trading space increase of 3.1% to 388,714m2 from currently represent 19% of Massdiscounters total sales, 8% of December 2017. Massbuild and 11% of Masscash Wholesale.
Strategic priorities Ecommerce We remain focused on the growing presence of online Improve and grow the core South African business shopping and digital activation in our customers’ lives There are two broad dimensions to this objective: one, to and the effect it has on their shopping behaviour and improve the profitability of, and to continually seek new needs. Similarly, we are clear that international trends see From good margin management and expense control, Massbuild grew total sales for the year by 5.9% with growth avenues for, each of the divisions; and two, to ensure that customers’ purchases of certain General Merchandise Makro managed to grow trading profit slightly above last comparable sales increasing by 3.4% and product inflation that we collaborate across the Divisions, i.e. intra-Group to categories are increasingly migrating to online platforms. year. In Massfresh however an unexpectedly weak control of 2.7%. In the latter part of the financial year Massbuild saw reduce cost duplication and inefficiency. Our collaboration South African online sales represent only 1.5% to 2.0% environment resulted in negative adjustments to inventory a softening trend in contractor sales which has continued efforts are overseen by our Group Commercial Executive, of sales and we see similar participation rates in those and cost of sales in the second half of the financial year. These into 2019. Retail sales have however remained positive. Total Llewellyn Steeneveldt, and involve core functional areas categories we sell online. This participation will definitely negative adjustments were recorded in gross margin and sales growth in Massbuild’s ex-SA stores was 14.1% in Rands across each Division – like Real Estate, Merchandise and grow with the Group’s aggregate online sales growing by caused the Division’s trading profit to be 12% below last year. but this figure was bolstered by new stores opened in the Private Label – working together. Collaboration takes many 56% in 2018. This was achieved through our four ecommerce Online sales grew by 22.4% and margins improved current and prior year, and so comparable sales growth was forms: negotiating with a single supplier across the Group points of presence (Makro, Game, DionWired and Builders through better logistics, fulfilment and product mix. Makro’s slightly negative. for best price and service; aligning around a single instance Warehouse). The Group continues to invest considerable new SAP Hybris platform was launched in early February We continually seek new sales channels and, in of the product master-data; or expanding the skills and capital in driving online sales and all four of these platforms 2019, replacing the original third party-hosted platform. The conjunction with a major financial institution, have recently experience of our Private Label team. are now currently using SAP Hybris. migration has experienced the usual difficulties associated successfully piloted the supply of Building Materials and We continue to drive towards Group services that Linked to ecommerce and digital is the provision of a with this type of IT process and for two months caused Hardware to customers who are replacing an insured loss. encompass logistics, supply chain and part of our broad array of financial services to our retail customers. customer frustration as the refunds functionality was initially The product range on the Builders Warehouse online Information Technology (IT) capabilities. The Group Supply Gerhard Hayes, Group Financial Services Executive, has been clumsy. Commercial customers contribute 32% to Makro’s platform has been expanded to 35,000 items and sales Chain Executive, Richard Inskip, has been mandated to tasked with the expansion and improvement of our offering online sales. growth remains high with strong customer support. Click- achieve supply chain efficiency through optimisation of including the roll-out of kiosks across our store network We continue to improve the customer experience in and-collect is available in all South African metropolitan regional DCs and vehicles by increasing the volume of providing financial services such as money transfers, gift Makro by, for example, refining our rewards programme, stores and will soon be launched in our stores in Zambia and product moved through the supply chain network, thereby cards, airtime, prepaid electricity, Lotto tickets and airtime mCard, and having hand-held payment devices to faster Botswana. reducing costs and stock holding. In 2018 our supply chain purchases. The continued focus on new revenue streams process queuing customers. In South Africa, one Builders Warehouse store, four community performed exceptionally and delivered an saw a 61% growth in our VAS business. There were no new stores opened in 2018, which resulted Builders Superstores, and three Builders Express stores were improved financial performance. The Massdiscounters and in trading space remaining at 231,021m2. In late March 2019 opened, while two Builders Trade Depot stores and one Makro DCs were transitioned into the Massmart Logistics we opened a new Makro store in Cornubia, north of Durban, Builders Express store were closed. One Builders Express business unit and will be utilised as a Group asset, resulting which has recorded strong sales and positive customer store opened in Maputo, Mozambique, resulting in a net in improved DC cost recoveries and transport efficiencies. support. trading space increase of 2.6% to 468,155m². Richard is also the Chief Information Officer (CIO) and has been tasked to leverage scale by establishing Group Massbuild Masscash IT services to reduce IT operating expenses in the longer- Massbuild comprises 106 stores, trading in DIY, Home Masscash comprises 54 Wholesale Cash & Carry stores, and run and sharing scarce skills. This includes building IT skills Improvement and Building Materials, under the Builders 63 Retail stores trading in South Africa; 13 Cash & Carry stores and capacity in key focus areas, migrating to integrated Read more about our Warehouse, Builders Express, Builders Trade Depot and in Botswana, Lesotho, Mozambique, Namibia, Swaziland and standardised SAP systems across the Division and improving strategic priorities p36-39 Builders Superstore brands in South Africa; and eight Builders Zambia; and Shield, a voluntary buying association. IT governance and security. Warehouse stores across Botswana, Mozambique and Zambia.
14 Introduction Massmart Integrated Annual Report 2018 15 MESSAGE FROM OUR CEO
The Board and Executive Committee Outlook Elsewhere in this report we have formally noted the recent For the 13 weeks to 31 March 2019, total sales amounted to Board changes. In brief, in May 2019 after 19 years of R21.8 billion, representing an increase of 5.8% over the prior service to the Board where he made a huge and invaluable year. Comparable store sales increased by 4.0% with product contribution to many material aspects of Massmart’s inflation estimated at 1.7%. Recent sales trends are difficult development and evolution, Chris Seabrooke is retiring. In to interpret meaningfully as we annualise the prior year’s his place Funke Ighodaro, who joined us in early 2018, will be Easter period which commenced on 30 March 2018. chairing the Audit and Risk Committees. Walmart-appointee Despite this slightly improved sales performance, we Roger Burnley was replaced in February 2019 by JP Suarez remain cautious about the outlook for the South African who returns to the Board after having initially served from consumer economy for the first half of the 2019 financial 2011 to 2015. The Board, Executive Committee, management year. The financial information on which this outlook and I extend our sincere appreciation to Chris and Roger for statement is based has not been reviewed and reported on 02 their contributions to Massmart. In February 2019 we also by the Company’s external auditors. welcomed Lindiwe Mthimunye to the Board. Given the Group’s 2018 financial performance; our Johannes (Hans) van Lierop, Massmart’s Chief Financial increased IT capital expenditure programme over the Officer, has indicated that for personal reasons he is not next few years; the likely muted South African economic Our business available to extend his tenure in South Africa after the growth over the same period; and the possibility of negative formal conclusion of his South African work visa in February movements in future key South African macro-economic 2020. He has therefore given the Board early notice of this variables, the Group has begun to selectively curtail new at a glance development and a formal executive search process to store growth and to focus on reducing working capital levels identify and appoint a successor has commenced. This in order to reduce our cash and capital demands. Another process will likely take between three to six months. Further aspect of this focus was to recently offer shareholders the announcements will be made when there are any material choice of a cash or scrip dividend. developments in this regard. Conclusion Our people and transformation Our appreciation and gratitude is due to all our stakeholders The contribution of our 48,500 colleagues across for their support for, and contribution and commitment to, sub-Saharan Africa remains remarkable and is always Massmart during this period. appreciated, especially in the current environment where many of them and their own families may be feeling the adverse consequences of the weak economy and high unemployment. We acknowledge and thank our colleagues in all our stores, offices, DCs and call centres for their contribution, service and support. Guy Hayward For a business to be sustainable it must reflect, and be Chief Executive Officer responsive to, the needs, nature and direction of the society 4 April 2019 within which it operates. We believe that diversity and transformation make a business stronger, more resilient and 18 24 more responsive. As a major South African corporate, we Our business Our business continue to focus on the transformation of our senior and model Executive Management. 20 Our footprint 26 Our stakeholder 22 relationships Our value creation story
16 Introduction Our business
MASSMART HAS FOUR DIVISIONS EACH COMPRISING WIDELY RECOGNISED, DIFFERENTIATED RETAIL AND WHOLESALE FORMATS
SALES OMNICHANNEL 560,828 GENERAL MERCHANDISE 171 2 STORES M OF TRADING SPACE AND FOOD DISCOUNTER 2 (2017: 166 stores) (2017: 548,544m ) 4 in South Africa, Botswana, R90.9bn ECOMMERCE POINTS Ghana, Kenya, Lesotho, 11,730 TOTAL GROUP SALES OF PRESENCE 1,648,718 Malawi, Mozambique, R19.7bn R32.6m (2017: R88.4bn*) Makro, Game, DionWired 2 Namibia, Nigeria, FULL-TIME EMPLOYEE M OF TOTAL TRADING SPACE SALES TRADING PROFIT and Builders Tanzania, Uganda, Zambia EQUIVALENTS R50.9bn (2017: R20.0bn*) (2017: R373.5m*) (2017: 11,356) FOOD & LIQUOR SALES 436 (2017: R49.3bn*) 56% STORES ONLINE SALES GROWTH 13 231,021 SUB-SAHARAN COUNTRIES 261 WAREHOUSE CLUB M2 OF TRADING SPACE UNIQUE CUSTOMER 21 (2017: 231,021m2) COLLECTION POINTS STORES 48,500 (2017: 21 stores) 10,646 R40.0bn 74% in South Africa TOTAL FULL-TIME EMPLOYEE R28.8bn R1.1bn DURABLES SALES FULL-TIME EMPLOYEE ONLINE TRAFFIC GROWTH EQUIVALENTS (2017: R39.1bn*) SALES TRADING PROFIT EQUIVALENTS (2017: R27.3bn*) (2017: R1.3bn*) (2017: 11,605)
468,155 OWNERSHIP OUR FORMATS COVER ALMOST ALL LSM GROUPS HOME IMPROVEMENT M2 OF TRADING SPACE RETAILER AND BUILDING 114 (2017: 456,313m2) STORES MATERIALS SUPPLIER LSM 1 2 3 4 5 6 7 8 9 10 (2017: 108 stores) in South Africa, Botswana, FOOD & 10,421 Mozambique, Zambia R13.8bn R749.1m LIQUOR FULL-TIME EMPLOYEE SALES TRADING PROFIT EQUIVALENTS (2017: R13.0bn*) (2017: R735.5m*) ELECTRICAL (2017: 9,695) Walmart subsidiary** 52% GOODS AND APPLIANCES Standard Life Aberdeen 14% PIC (ZA) 5% HOMEWARE AND 388,714 Investec Asset 4% HOUSEHOLD Management GOODS FOOD WHOLESALER, 130 M2 OF TRADING SPACE RETAILER AND BUYING STORES (2017: 377,038m2) Other (holding <3%) 25% BUILDING ASSOCIATION (2017: 128 stores) MATERIALS in South Africa, Botswana, Lesotho, Mozambique, R28.7bn R188.6m 14,984 WHOLESALE SHIELD Namibia, Swaziland, THE GIANT OF AFRICA THE GIANT OF AFRICA FULL-TIME EMPLOYEE WE ARE STRONGLY REPRESENTED IN LSMS 6-8 Zambia SALES TRADING PROFIT EQUIVALENTS (2017: R28.1bn*) (2017: R127.1m*) (2017: 15,017)
* Like-on-like 52-week basis ** Walmart subsidiary: Main Street 830 Proprietary Limited
18 Our business at a glance Massmart Integrated Annual Report 2018 19 Our footprint
SUB-SAHARAN AFRICA SOUTH AFRICA EX-SA AT A GLANCE 261 SA AT A GLANCE TOTAL CLICK-AND- COLLECT 12 POINTS GAUTENG 133 COUNTRIES 110 CITIES NORTH LIMPOPO 47 WEST 6 389 STORES 10 STORES 229,269 FREE STATE 1,419,449 M2 OF RETAIL SPACE 10 M2 OF RETAIL SPACE NIGERIA LIMPOPO GHANA
UGANDA NORTH WEST GAUTENG MPUMA KENYA PROVINCE LANGA 14% 86% TANZANIA OF TOTAL SPACE FREE OF TOTAL SPACE STATE KWAZULU NATAL NORTHERN R7.9bn CAPE R83.0bn ZAMBIA SALES SALES MOZAMBIQUE 2017: R7.6bn* 2017: R80.8bn*
NAMIBIA EASTERN MPUMALANGA BOTSWANA CAPE WESTERN 10 CAPE SWAZILAND SOUTH AFRICA LESOTHO KWAZULU- 8.7% WESTERN NATAL 91.3% OF GROUP SALES CAPE 42 OF GROUP SALES 51 EASTERN R167.8m CAPE R213.5m AVERAGE SALES AVERAGE SALES PER STORE 22 PER STORE
* Like-on-like 52-week basis
STORE TRADING FORECAST +43 +14 +1 +11 +17 SPACE +7.6% +7.0% +5.3% +8.0% +9.4% 2021 Up from 436 to 479 Up from 171 to 185 Up from 21 to 22 Up from 114 to 125 Up from 130 to 147 FORECAST Up from 1,648,718m2 Up from 560,828m2 Up from 231,021m2 Up from 468,155m2 Up from 388,714m2 2 2 2 2 2 +30 IN SA +7 IN SA +1 IN SA +9 IN SA +13 IN SA 2021 to 1,774,263m to 600,225m to 243,328m to 505,466m to 425,244m +13 EX-SA +7 EX-SA +2 EX-SA +4 EX-SA
20 Our business at a glance Massmart Integrated Annual Report 2018 21 Our value creation story
How we create value What impacts our ability to create value
WHO WE ARE OUR STRATEGY OUR REVENUES OUR MATERIAL MATTERS OUR COMPETITORS BUYING BEHAVIOUR
Massmart is an African retail group with Our areas of Our revenues are generated from the sale of: The matters impacting our Our competitor landscape is characterised by: The key factors impacting General Merchandise, Liquor, Home strategic focus • Food & Liquor operating context are: • Large market shares in a low-growth market consumer buying behaviour are: Improvement and Food offerings. remain unchanged: • Durable Goods • Constrained consumer • Retailers cutting costs to support price • Prolonged Commodities and • Home Improvement environment leadership Durables deflation Our competitive differentiation lies in our: • Value-Added Services (VAS) • Economic volatility and • Expansion of footprint and focus on • Adverse financial pressures • Ability to exceed expectations of value political uncertainty capturing more of the informal market experienced by lower- and amongst the widest consumer market Our key revenue differentiators are: • IT and digitisation of business • Increased Private Label participation as middle-income consumers in sub-Saharan Africa • Working closely with key suppliers to ensure • Talent availability consumers seek more value • More customers prioritising • High sales density formats and cost- investment in areas of common interest • Transformation and BBBEE • Expansion of express formats providing value – subsidisation and efficient routes to market which drive • Private Label product development and • Corporate accountability convenience shopping switching price leadership innovation driving sales growth and product • Increased focus on loyalty programmes • Spending shifts between brands • Procurement scale, which optimises leadership • Increased consolidation of players in the create opportunities to grow IMPROVE AND supplier distribution and price • Developing new income streams like VAS Material matters liquor and DIY markets Private Label GROW OUR CORE p29-32 efficiencies BUSINESS • Maintaining a competitive price-gap against • Customers seeking convenience • Exceptional partnerships and our major competitors across Known Value – ‘on-the-go’ shopping stakeholder loyalty enabling long-term Items (KVIs) Our strategic priorities • Modernisation of retail in Africa p36-39 relationships • Investing in online and omnichannel OUR CHALLENGES • Cyclical nature of retail means that higher revenues and Our financial performance was operating profits are expected THE RESOURCES WE RELY ON OUR COSTS negatively impacted by: OUR RISKS in the second half of the year • Game and Masscash restructure due to increased demand for our Our top ten risks are: • Our loyal customer base – the heart of Our costs comprise: and relocation and continued non-Food categories leading up • Non-adherence to business model or our business • Employment costs distraction at Game to the Christmas holiday period inability to adapt our strategy to changing • Our employees – just under 48,500 • Occupancy costs • Commodities and Durable GROW INTO market conditions full-time equivalents (FTEs) and an • Depreciation and amortisation Goods deflation SUB-SAHARAN • Talent retention and succession experienced leadership team • Other operating costs – include the • VAT increase AFRICA • Threat of cyber security breach • Our wide footprint non-capital costs of upgrading our IT • Negative comparable sales in • Insufficient progress with transformation • The 436 stores across our 13 sub- infrastructure and pre-opening costs November and December 2018 • Inability to innovate in response to a Saharan Africa markets • Negative adjustments for changing competitive landscape • Our 18 DCs How we manage our costs: inventory and cost of sales in • Poor consumer environment impact on • Our increasing digital presence and • Leveraging supply chain and logistics Massfresh potential growth the 261 unique customer collection efficiencies • Failure to address health and safety issues points • Reducing store construction costs across our facilities • Our effective merchandising and • Optimising store space and reducing in- • IT systems’ capability and capacity to planning, which ensures we have the store operating costs support operations and future growth right products in the right place at • Favourable lease re-negotiation and • Increase in cost of goods and operating optimum quantities and the right price improved management of municipal and expenses undermining our low-cost • Our strong partnerships with our key energy costs foundation suppliers and service providers • Effective scheduling of our store employees • Inefficient or ineffective supply chain or a • Our growing Group-wide transport, GROW ONLINE/ • Reduction of shrinkage through effective failure in the supply chain logistics, planning and storage OMNICHANNEL data management, education and tight capabilities store processes and standards
Managing our risks p33-35 Our business model Our strategic priorities Chief Financial Officer’s review p24-25 p36-39 p49-53
22 Our business at a glance Massmart Integrated Annual Report 2018 23 Our business model
THE RESOURCES MASSMART RELIES ON HOW WE DO BUSINESS HOW WE CREATE VALUE Inputs Our activities across the value chain Outcomes Our business is built on high volume, low cost and FINANCIAL CAPITAL operational excellence which enables our price leadership. FINANCIAL CAPITAL The funds available to be utilised by the Group 2.9% increase in sales • Equity of R6.5 billion 33.9% decrease in profit before tax • R9.1 billion funding facilities We operate 436 stores in 13 14.1% return on equity • Cash generated from operations of R2.9 billion Through our supply chain we operate countries effectively through 31.7% decrease in headline earnings cost-efficient routes to market which labour efficiency, store process MANUFACTURED CAPITAL include warehousing, transportation optimisation and digitisation, MANUFACTURED CAPITAL The physical infrastructure and information technology and DCs that replenish our stores. and further we extend our reach through our online platforms. 13 net stores opened systems through which we sell our products and services OUTPUT • 436 stores covering 1,648,718m² trading space 2.2% increase in trading space • Efficient supply chain which ensures high OUTPUT Increased ecommerce collection points • Our 18 DCs customer fulfilment • Cost savings passed on to our R1.6 billion capital expenditure • Four ecommerce points of presence and • Reduced inventory days that optimise customers 261 customer collection points inventory service levels • Improved customer experience service levels INTELLECTUAL CAPITAL INTELLECTUAL CAPITAL SAP ERP implementation in The innovation through which we save our customers money progress in Massdiscounters • The Private Label brands within our portfolio 136 Private Label brands in our • Sophisticated merchandise and distribution systems and portfolio processes We focus on category management, >90% voting outcome for all • Sound compliance and governance processes and rely on strategic relationships with resolutions at AGM suppliers to maintain our low-cost HUMAN CAPITAL promise, assortment optimisation, The unique set of skills, experiences and perspectives of HUMAN CAPITAL Private Label, merchandising, product our people placement and space allocation. R230.2 million invested in upskilling staff • 48,500 FTEs R7.6 billion paid in salaries • Experienced Executive leadership team OUTPUT Staff turnover of 20% We maximise marketing • Skilled and experienced retail professionals • Widest range of quality Morale impacted by restructure and sales through pricing, • Market-leading corporate university branded products at the best price promotional activity, • New and enticing communication and channel SOCIAL AND RELATIONSHIP CAPITAL SOCIAL AND RELATIONSHIP CAPITAL Private Label range management. The value added to our business through our relationships BBBEE Level 4 (up from Level 7 in 2017) with our stakeholders OUTPUT R25.4 million invested in CSI initiatives • Approximately 4,900 merchandise suppliers across the Group • Increased sales volumes Employment equity and gender diversity among top management remains • Strong reputation with our customers • Strengthened wholesale and We provide support services challenging • Informed engagement with regulators retail brands to all our Divisions including R254 million procured from Supplier • Trust from our communities technology development, Development Programme suppliers human resource management, NATURAL CAPITAL general management, planning The natural resources our business, directly or through our and finance. NATURAL CAPITAL supply chain, is dependent on OUTPUT Generated 3.6 million kWh of • 204.9 kWh/m2 store-purchased energy intensity • Operational excellence that solar energy • Water consumption supports a low cost base Diverted 15,354 tonnes of waste from • Waste generated from our stores and DCs • Efficiency in the management landfill of capital, space and people 0.56 kL/m² estimated water consumption intensity, up from 0.55 kL/m²
24 Our business at a glance Massmart Integrated Annual Report 2018 25 EMPLOYEES Engagement with our employees occurs through: • Regular interactions, performance review and career planning discussions, CEO roadshows and the annual employee engagement survey
The 48,500 What matters to them: Our stakeholder relationships employees who work • Competitive remuneration and benefits across our business • Career development and growth opportunities • Equal opportunity We create value by: Empowering our people • Delivering fair and responsible remuneration Massmart is committed to saving customers money so they can live better. p80-83 Remuneration report • Offering an authentic retail experience and developing the skills necessary to be Our ability to fulfil this commitment is dependent on the transparent p96-117 successful in retail • Promoting a diverse and inclusive environment through employment equity and gender trust-based relationships we build with our customers, suppliers, employees, equality regulators, shareholders and the communities in which we operate. In 2018, we: • Undertook a review of fairness of remuneration across the Group • Invested R230.2 million in the development of our people • Reviewed the Massmart Corporate University offering
CUSTOMERS We seek opinions from our customers through: GOVERNMENT AND We engage government and civil society representatives through: • Intercept and advocacy surveys as needed throughout the year CIVIL SOCIETY • Public policy discussions and engagement with consumer interest groups What matters to them: What matters to them: The people who choose • Price competitiveness • Broad-Based Black Economic Empowerment (BBBEE) to shop online and • Product availability, quality and safety The government • Contribution to economic development • Responsible sourcing of priority products in our 436 stores in 13 We create value by: departments, regulatory countries across sub- • Maintaining a low cost-to-sales ratio, which enables us to compete aggressively on price bodies, local authorities We create value by: Saharan Africa • Improving customers in-store experience through investing in technology and civil society groups • Contributing to fiscal revenue through the payment of taxes • Providing responsibly sourced products in the communities in • Investing in education-focused socio-economic development initiatives which we operate • Improving our resource efficiency (energy, water, waste) Our strategic priorities In 2018, we: p36-39 • Limited expense growth to 5.0% In 2018, we: • Made 136 brands available in our Private Label portfolio Corporate accountability • Notably improved Massmart’s BBBEE status from Level 7 to Level 4 • Grew online by 56% p67-85 • Spent R25.8 million on supplier development through our Supplier Development • Completed GK-POS roll-out across all Game and DionWired stores Reflections from the Chairman Programme p08-10 • Were rated in the top five companies globally for ESG within the FTSE Broadline Retail sub-sector SUPPLIERS We seek opinions from our suppliers through: • Intercept and advocacy surveys as needed throughout the year We engage shareholders through: What matters to them: SHAREHOLDERS • Investor presentations, meetings and roadshows, and the Annual General Meeting The 4,900 suppliers and • Brand custodianship service providers that • Fair pricing and transparent negotiation What matters to them: enable us to carry out • Transformation and supplier development The 4,234 institutional • An improved and sustainable return on their investment our business activities We create value by: and private investors • Our strategic response to a changing operating environment • Supply chain efficiencies to ensure products reach desired markets cost effectively who have shares in • Good corporate citizenship • Building fair and mutually beneficial business relationships our business, the fund We create value by: Message from our CEO • Supporting small local manufacturers through our Supplier Development Programme (SDP) managers and analysts p11-16 • Maintaining a consistent performance and by paying dividends who support our Addressing social and In 2018, we: • Delivering a consistent return on equity shareholders environmental challenges • Procured more than R254 million from our SDP suppliers • Ensuring responsible corporate governance practices p68-75 • Made progress in providing reliable and cost effective availability of products by In 2018, we: leveraging Group scale Message from our CEO • Delivered structurally lower operating costs with comparable expenses only • Increased the number of suppliers in Massmart’s distribution network p11-16 increasing by 2.3% Chief Financial Officer’s review • Focused on growing online by 56% and VAS by 61% p49-53 Transparency and accountability • Ensured ethical and effective leadership by the Board p87-117
26 Our business at a glance Massmart Integrated Annual Report 2018 27 Material matters
03 Our material matters are those The following key material matters impacted our ability to create value in 2018: Our business issues that could substantially affect Massmart’s ability to create value in A CONSTRAINED CONSUMER context the short, medium or long term. In ENVIRONMENT determining these issues The impact of a higher VAT rate, higher fuel prices, consideration is given to the the interest rate hike and ongoing high levels of Group’s long-term strategy, its unemployment in 2018 has eroded consumer spending. After a year of deflation in many Food categories, there operating context, the interests of is now a rising trend in Food inflation, most notably in commodity products. key stakeholders, media coverage or The Massmart businesses together serve all consumer segments from LSM 1 to LSM 10 and our product mix public concern, and key risks and comprises 44% Durables and 56% Food & Liquor. Our opportunities facing the business. relatively high exposure to Durable sales categories means that parts of our business are the first to feel the impact of any slowdown in consumer spending. Material matters are reviewed Our risks: annually by Executive management, • Non-adherence to our business model or poor strategic execution by the Divisions the Risk Committee and the Board. • Inability to innovate in response to a changing competitive landscape 29 36 • Weak consumer environment impacting on growth Material matters Our strategic and profitability priorities 33 Our opportunities: Managing 40 • Maintaining a positive price-gap against competitors our risks Divisional across KVIs reviews • Innovating through the effective use of analytics and data insights • Growing Retail Food and Fresh categories • Leveraging the integrated supply chain
Massmart Integrated Annual Report 2018 29 MATERIAL MATTERS
TALENT AVAILABILITY TRANSFORMATION AND BBBEE
In an environment characterised by turbulent economic Racial transformation and the economic empowerment conditions and changing consumer demands, Massmart’s of previously disadvantaged South Africans remains a relevance depends on our ability to attract, develop, cornerstone of government policy. These are also key motivate and retain the right people. long-term focus areas for Massmart, not only because it is Securing the skills required to drive the Massmart of policy but also because it is the correct thing to do from the future, and having to find these skills amidst intense a corporate responsibility perspective and that it will competition for talent, is challenging. Developments in result in a more inclusive and sustainable South African our operating environment have necessitated that we economy. Despite having the highest BBBEE score in South secure digital, IT, ecommerce, analytics, supply chain and African retail, there remains the possibility of Massmart merchandising skills. being perceived to be making insufficient progress with To ensure operational efficiencies, during 2018 Massmart transformation. relocated Massdiscounters and Masscash head offices from Durban to Johannesburg. Over time the Divisions are Our risk: expected to benefit from being geographically closer to • Insufficient progress with transformation suppliers, Massmart and other Group operating Divisions, as well as being in the country’s key economic- and talent- Our opportunities: hub. In the short term, the relocation adversely impacted • Driving transformation within our management and those Divisions’ productivity, capacity and corporate workforce and broadening our supplier pool through ECONOMIC VOLATILITY memory. the SDP Our risk: • Investment in community store CSI programmes AND POLITICAL UNCERTAINTY IT AND DIGITISATION OF BUSINESS through the training of local entrepreneurs and the • Talent retention and succession employment of graduates The dampened South African consumer sentiment is Our customers expect a seamless omnichannel Our opportunity: unlikely to sustainably improve unless there is positive experience when dealing with our stores. Developments momentum in some key macro-economic factors in artificial intelligence and big data analytics are • By implementing an integrated talent management including: economic growth, the Rand exchange rate, disrupting traditional retail models, presenting a business programme we are ensuring that we have the right business and consumer confidence, interest rates, risk, as well as new opportunities for value creation. skills to deliver on our strategy and serve the customer the efficiency of SOEs and the national and municipal Digitally-connected consumers are becoming more of the future infrastructure, and unemployment. Much of this will activist, increasing their use of data and expecting highly- likely turn on the outcome of the South African national personalised interactions. elections in May 2019. The significant advances in the processing power, In addition, six of the 13 markets in which Massmart flexibility and affordability of mainstream IT software operates (Botswana, Malawi, Mozambique, Namibia, and hardware, enable us to consider these applications Nigeria and South Africa) are scheduled to hold elections in some of our lower-cost retail and wholesale formats. in 2019 which is likely to affect economic activity in those Rather than have several independent IT development and countries. implementation programmes, we are developing a Group IT strategy and plan to capitalise on technology platforms Our risks: to create a differentiated advantage through technical • Volatility of the Group’s African operations innovation and operational excellence. • Increase in cost of goods and operating expenses undermining the low-cost foundation of our business Our risks: • IT systems’ capability and capacity to support Our opportunities: operations and future growth • Massmart is well-positioned to provide a high quality • Inability to innovate as a mitigation against existing, merchandise offering to the sub-Saharan continent new and changing competitors which has a young and growing population; rapid • Threat of a cyber security breach urbanisation; and widespread mobile technology adoption Our opportunities: • A positive outcome to the elections may create an • Modernisation of IT systems opportunity for improved consumer confidence • Effectively utilising analytics and data insights • Responding to changing customer requirements by digitising in-store processes • Improving our omnichannel offering
30 Our business context MATERIAL MATTERS Managing our risks
In determining the key risks and opportunities facing Massmart, consideration is given to the Group’s long-term strategy, its operating context and the key resources and relationships on which it relies.
Risk is defined as any issue that could impact Massmart’s ability to achieve its objectives of protecting shareholder value, protecting business reputation, ensuring compliance and safeguarding its operations. We aim to deal with our operating uncertainty by not only minimising the downside, but by seeking to capitalise the upside potential to achieve our strategy. Risk management is an integral part of the Board’s decision-making process and is applied in strategy setting. The Risk Committee assesses Massmart’s risk appetite and tolerance on a bi-annual basis. The Board, through the Risk Committee, defines risk appetite as the nature and extent of risk that Massmart is willing to take in order to meet its strategic objectives. In reviewing Massmart’s risk appetite and tolerance, the Risk Committee considers the severity of the potential impact of key risks and the controls or management actions in place to mitigate such impacts within appropriate tolerance levels. The Risk Committee is accountable 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 Massmart’s Executive Committee and Divisional Executives. Each Division has developed a risk and loss prevention process. The Risk Committee tables a Group risk register to the Board, in February and August, which is Sifiso Gumede, an artist aggregated from the risk registers prepared by the Divisions and the Massmart Executive Committee. CORPORATE ACCOUNTABILITY commissioned by Massmart for the Massmart-sponsored Alexandra Urban Bookshelf, The United Nations Sustainable Development Goals (SDGs) a permanent outdoor library Residual risk ratings set a long-term agenda to end poverty, protect the planet accessible to local residents, and ensure prosperity for all by 2030. We believe that, as a erected with the aim of RARE UNLIKELY POSSIBLE LIKELY ALMOST CERTAIN promoting literacy. retailer, Massmart can play a pivotal role in the attainment of 1 these goals by advocating responsible business practices to HIGH our suppliers and responsible consumerism to our customers, 8 2 6 recognising that a prerequisite for doing this credibly requires MEDIUM TO HIGH that we embrace the principles of responsible corporate 4 citizenship. Our core purpose is to save customers money 7 3 MEDIUM 9 5 so they can live better. We make a contribution to national and global developmental objectives by delivering on We make a contribution to global and national development 10 LOW TO MEDIUM our purpose in a way that creates economic opportunity, through the SDGs. enhances the sustainability of our operations and value chain POTENTIAL IMPACT and strengthens local communities. Massmart has identified LOW and prioritised 14 SDGs, where we believe we can have the most meaningful impact. ESTIMATED LIKELIHOOD Our risks: • Failure to meet expected standards of responsible The risk movement from prior year for each principal risk has been assessed and is presented as: business conduct • Failure to meet Food safety and hygiene at stores and NO CHANGE INCREASED RISK EXPOSURE DECREASED RISK EXPOSURE NEW NEW RISK manufacturing facilities • Failure to address health and safety issues across our 1 Non-adherence to business model or inability to adapt our strategy to changing market conditions facilities 2 Talent retention and succession • Ineffective management of labour/union relationships 3 Threat of cyber security breach Our opportunities: 4 Insufficient progress with transformation • Contributing to national and global developmental 5 Inability to innovate in response to a changing competitive landscape objectives • Investing in communities through the training of local 6 Poor consumer environment impact on potential growth entrepreneurs and the employment of graduates 7 Failure to address health and safety issues across our facilities 8 IT systems’ capability and capacity to support operations and future growth 9 Increase in cost of goods and operating expenses undermining our low-cost foundation 10 Inefficient or ineffective supply chain or a failure in the supply chain
32 Our business context Massmart Integrated Annual Report 2018 33 MANAGING OUR RISKS BELOW ARE THE KEY RISKS FACING THE GROUP:
Risk Context Mitigation Risk Context Mitigation
Non-adherence to The current economic environment has resulted in The Group insists on strategic clarity at the Failure to address Concerns around the safety of Food and non-food The Food Safety Management and Health and business model or an increasingly competitive retail environment with Divisions and at Massmart Corporate. Divisional health and safety products that we source or that we prepare and Safety programmes are continuously reviewed 1 inability to adapt intensified price and promotional activity. Massmart’s and Group strategies are formally documented 7 issues across our then sell, could result in reputational damage. and improved by the Massmart Group Subject ability to successfully and sustainably execute on and reviewed annually. Divisional strategies dictate Lost confidence would be difficult and costly to Matter Expert. We measure the effectiveness our strategy to strategy is dependent on adherence to the Group’s management’s operational priorities and progress facilities re-establish. of our programmes by tracking and measuring changing market business model. Non-adherence could impact the against these strategies is monitored on a monthly Failure to comply with the Occupational Health key performance indicators and by relying on conditions Group’s longer-term financial performance, and our and quarterly basis. and Safety Act, regulations and by-laws relating to independent ongoing monitoring by external competitive positioning could be compromised. store fires, poses a risk to the business and the safety service providers and Massmart Audit Services. of its employees and customers and could impact Talent retention Given the scarcity of retail-specific skills, there is a As part of the ongoing talent retention and our reputation and/or have legal consequences. and succession risk of an inadequate pipeline of the skills required to development project, we have implemented The significant size of our stores and DCs means 2 sustain current operations and achieve Massmart’s quarterly Group talent risk reviews focusing on potentially large insurance claims in the case of long-term strategic objectives. Further, there may succession planning for mission critical roles. fire damage. Unsafe storage or racking of product be an over-dependence on key leaders in the Group. This includes the identification of emerging/ increases the risk of injury. There is therefore a need for a managed leadership next generation talent and clarifying the succession pipeline. This creates a need to develop Massmart DNA and the competencies relevant IT systems’ The significant IT implementations underway may All major IT projects are approved by the Chief and retain sufficient business and leadership skills. to Massmart’s strategy. capability present a major risk to operational continuity if any Information Officer (CIO) after review by the 8 and capacity of these were delayed or failed. Lengthy downtime CIO Forum. It is critical that these important IT Threat of cyber As cyber threats evolve and become more difficult Chief Technology Officer and Chief Security Officer may impact the ability of the businesses to transact systems are seamlessly implemented, support the to support security breach to detect and defend, failure to maintain the security roles have been created to address and manage and operate, particularly in the omnichannel achievement of our business strategy and drive 3 information could damage our reputation, result in information security risks, including cyber security operations and environment. Failure to integrate and update our and improve our omnichannel strategy. We are litigation or other legal action causing substantial risks. We draw on resources and methodologies future growth information systems and processes timeously may minimising our dependence on external service costs. Given that we receive and store customers', from Walmart’s IT Security Division. In addition, result in us failing to realise the anticipated cost providers by establishing an internal SAP centre of employees' and suppliers' personal information in cyber security assessments have been undertaken savings from these initiatives. An over-reliance excellence and are finding new service providers our systems there is reputational risk associated with and intrusion detection and prevention systems on external service providers may also impact and hiring key IT staff, in response to the issue lost data and compromised systems. In addition, our have been implemented. operations. In late 2018, a key IT service provider mentioned in the context column alongside. online operations depend on the secure transmission began its own restructure and this has already of confidential information over public networks. impacted its service levels to the Group.
Insufficient In the broader national context, it is clear that retailers Clear quantitative and qualitative targets exist for Increase in An increase in cost of product and our operating We remain focused on our low-cost business progress with need to be invested in impactful initiatives that BBBEE performance. Emphasis has been placed on cost of goods expenses may undermine our low-cost foundation. model by reducing store construction and in-store 4 transformation improve economic inclusivity in both supply chain management and Executive succession planning 9 and operating Our business model is premised on high volumes operating costs, effective labour scheduling of our and management. and supplier and enterprise development. with low operating costs, thereby enabling the sale store employees, and negotiating favourable lease Inadequate transformation across Massmart Part of the Executive incentivisation is linked expenses of merchandise at the lowest possible price. High renewals. We continue to emphasise maintaining may result in adverse reputational and commercial to transformation. Our active Employment undermining cost inflation and inefficiency are potential threats a competitive price gap against our major risk. This may include limited access to business-to- Equity Committee has representation from all the low-cost to this approach. The success of our business model competitors across KVIs. business (B2B)/commercial business opportunities. organisational levels in order to identify barriers to foundation of the is dependent on cost of goods sold efficiencies and employment equity and to determine initiatives in business working capital productivity. support of diversity and inclusion. It is essential that we have the lowest possible We continually improve processes and systems The digitalisation of retail means that we operate Through our low cost and efficient operations, Inefficient or Inability to cost to serve for the movement and storage of our to ensure the efficiency of our supply chain. in an ever-changing competitive environment. We we maintain a relevant and competitive offering ineffective supply innovate in inventory, with the appropriate stock availability. Our supply chain team engages across planning, face strong competition from other retailers in terms that provides our customers with affordable value. chain or a failure 5 response to 10 An inefficient supply chain may result in sub-optimal buying, replenishment, logistics and store of price, merchandise selection and availability, We are careful about our new store locations and in the supply inventory management, with cost inefficiencies operations. We optimise the utilisation of our a changing and our store formats and locations. A failure to ensure regular store refurbishments and format chain and/or over- or under-stocking affecting holding regional DCs by increasing product volumes competitive respond effectively to competitive pressures and renewal. Our investments in our omnichannel costs and sales. A failure in the supply chain could through the supply chain network. We have changes in retail could adversely affect our financial capabilities ensure that we are the preferred online landscape cause products to be out of stock, which causes a business continuity plans for regional DCs, performance. destination for our customers. loss in sales and reputational damage. The risk is transport and systems. compounded when there is a slowdown in sales The business continues to feel the impact of low We continue to monitor key economic indicators Poor consumer resulting in an over-stock position. environment South African GDP growth, low consumer confidence, in all our markets. We focus intensely on operating 6 impact on volatile exchange rates, higher inflation and increased efficiency in an effort to ensure that operating cost fuel prices. Policy and political uncertainty in the run- growth is below sales growth. We work closely potential growth up to the May 2019 national elections will compound with key suppliers to ensure that we invest energy this situation. and resources into areas of common interest, Our ex-SA businesses expose Massmart to including supply chain efficiency, to ensure their currency volatility, in-country currency regulation and products reach our target markets cost-effectively. availability of currency which may result in material All direct foreign exchange import liabilities forex gains/losses. are forward covered. We repatriate cash profits frequently and settle cross-border liabilities timeously.
34 Our business context Massmart Integrated Annual Report 2018 35 Our strategic priorities
IMPROVE AND GROW OUR CORE BUSINESS: To drive the growth and profitability of the core The customer and retail landscapes in Massmart’s strategic focus areas remain to: South African business over the medium term our target markets are evolving rapidly. In South Africa, most retailers have Progress: Opportunities: large market shares (more than 10%) IMPROVE AND GROW • Operating expenses were well managed and increased • Leveraging further opportunities to achieve supply but are facing a low-growth market OUR CORE BUSINESS by only 5.0% (excluding restructure costs) chain and logistics efficiencies resulting in improved cost • Unfortunately, sales growth was lower than expense recoveries and stock holdings at the stores and DCs which is causing increased category growth which caused Group trading profit excluding • Improving Game profitability through reducing foreign exchange movements, interest, impairments and operating costs (smaller store footprints, optimising DC and format innovation but also price restructure costs to decline by 16.8% to R2.1 billion utilisation and more efficient in-store processes) and competition. Retailers are experiencing • Continuing the strategy to pursue new revenue streams, increasing sales and margin from improved marketing, we recorded growth of 61% across the VAS product promotions and new product categories margin pressure as operating costs portfolio including money transfers, Lotto sales, RCS • Leveraging scale by establishing Group IT services to credit product sales and extended warranties reduce IT operating expenses over the longer-run and increase above selling prices. Retailers • The Massdiscounters and Masswarehouse DCs were sharing scarce skills. This includes: building IT skills and transitioned into Massmart Logistics during the year and capacity in key focus areas; migrating to integrated across the board are cutting costs to will be used as a Group asset standardised SAP systems across the Divisions; and support price leadership, driven by • We continue to hold strong market shares across a improving IT governance and security GROW AFRICA number of our Durable Goods categories, including: • Driving our VAS (financial services) customer offering new capabilities in digital and analytics. large and small domestic appliances; Hi-tech; and most across the Group by adding to the portfolio of services DIY and hardware categories offered through working with third parties and building Continued success in the current retail environment requires our own bespoke platforms that Massmart: fully leverages Group scale and achieves • Improving Group Private Label sourcing and branding market-leading efficiency in order to support potentially to offer customers good quality products at competitive lower gross margins; innovates and expands into new price points value pools (whether retail formats, new market channels or product categories) to capture market share and create growth opportunities; builds distinctive, new capabilities Key trade-offs: • In February 2018, we announced the restructuring of in digital and analytics to allow better commercial and • Most large and business-wide IT changes and some of the business functions within Massdiscounters operational efficiency and becomes increasingly customer implementations can initially bring uncertainty and and Masscash and the relocation of both head offices centric; and leverages its knowledge of consumers to build a complexity. To mitigate these will require the recruitment from Durban to Johannesburg. The restructures and distinctive customer value proposition. GROW ONLINE of IT skills and the development of core systems’ office moves were completed in late 2018 and caused capability, which will increase capex costs and the business disruption and uncertainty amongst staff associated depreciation and amortisation of our IT assets. and management. The relocation however saw all the Divisional buying functions now based in Johannesburg HUMAN AND FINANCIAL and improved procurement activities across the Group INTELLECTUAL CAPITAL CAPITAL and brought those two businesses closer to the key supplier base.
SOCIAL AND INTELLECTUAL RELATIONSHIP CAPITAL CAPITAL
36 Our business context Massmart Integrated Annual Report 2018 37 OUR STRATEGIC PRIORITIES
GROW AFRICA GROW ONLINE Growth into selected sub-Saharan African To expand, improve and refine our online/ countries through opening Builders omnichannel offering in Game, DionWired, Warehouse, Game and Masscash stores Makro and Massbuild
Progress: Progress: Opportunities: • Our African growth plan remains on track and we added • Over several years Massmart has been aggressive in • Using our extensive, well-dispersed store network 13,409m2 (representing a 5.8% growth) of ex-SA trading space its approach to ecommerce and is now experiencing to boost customer convenience at a lower cost and during the period good, profitable online sales growth across our formats leverage our large-scale warehouse and logistics • Total Rand sales from our ex-SA stores grew by 3.7%, while in and has robust internal capabilities. We are successfully footprint to maximise economies of scale for the Group constant currencies these grew by 3.9% and comparable stores leveraging our existing • Migrating all four of our ecommerce points of presence by 0.5%. Ex-SA Rand sales growth improved in the second half of assets – stores and store to the SAP Hybris module which seamlessly integrates the financial year due to positive currency movements network, supply chain, with the great SAP retail systems including customer- • Our strong sales performance per store (R167.8 million average marketing, and retail management and retention modules sales per ex-SA store) is three times higher than many of our brands – to retain and • Expanding our VAS online offering by adding specific South African competitors. This allows us to build relatively fewer grow customer loyalty and bundled services to the VAS portfolio stores but still attract large market shares and, importantly, also to disrupt competition • Engaging a large section of the under-served economy allows us to keep operating costs as a percentage of sales low in • The Group’s omnichannel focus, designed to improve with digitally-enabled relevant product offers those stores, which enables price competitiveness customer choice and experience, saw aggregate online • Utilising customer data to better personalise our • We recruited dedicated real estate originators to focus on the key sales increase by 56%. This was achieved through our customer engagement and boost loyalty regions of SADC, East and West Africa four ecommerce points of presence (Makro, Game, DionWired and Builders Warehouse), which combined Opportunities: registered growth of 74% in online traffic • The Group expects to add 13 new stores ex-SA between 2019 • The Group continues to invest considerable capital in and 2021 representing a 7.8% compounded annual growth rate driving online sales and all four of these platforms are (CAGR) of new space, concentrated specifically in Kenya and currently using SAP Hybris Zambia • Massmart, through Makro, is also operating a • Over the long term several sub-Saharan African countries are marketplace and is leveraging the platform to learn the expected to record strong real economic growth (i.e. above 4% benefits and challenges of this opportunity per annum). This growth will be accompanied by a burgeoning middle-class and increased participation and penetration of modern retail – we feel that both trends will support strong retail sales growth over the longer term Key trade-offs: • At the same time we will leverage our South African wholesale • While the use of data analytics and the digitisation of • Although small, ecommerce in South Africa is growing Food skills to supply the informal retail markets in selected African our business allows us to analyse customer behaviour, rapidly and has resulted in consumers' needs and countries by supplying to smaller, local retail outlets and traders it creates an increased need for data governance to expectations also changing, necessitating regular
protect our customers’ personal information and upgrades of websites and their capabilities. Further, to mitigate cyber security risk. A major breach of speed and accuracy of time-sensitive fulfilment has Key trade-off: information security could have a major negative proved to be expensive and difficult to achieve. Growing An upturn in commodity prices and positive winds of political financial and reputational impact on Massmart. The risk our online/omnichannel offering will result in a financial change bode well for our long-term view to steadily but cautiously is further exasperated by the deliberate acts of cyber investment in skills and systems. continue to open new stores in selected Africa countries. However, crime on the rise. HUMAN AND the economies of some of the countries in which we operate have FINANCIAL SOCIAL AND INTELLECTUAL INTELLECTUAL CAPITAL previously suffered from high rates of inflation, currency devaluations RELATIONSHIP CAPITAL CAPITAL and a lack of foreign reserves to repatriate funds, which could pose a CAPITAL risk in terms of financial capital.
MANUFACTURING FINANCIAL CAPITAL CAPITAL
38 Our business context Massmart Integrated Annual Report 2018 39 DIVISIONAL REVIEWS
Massdiscounters
Massdiscounters operates through two retail formats: Game and DionWired. Game is a discount multi-category 2018 strategy Roll out our new operating retailer of General Merchandise, model and category Groceries, Fresh Food and Liquor, management structure to enhance the customer value operating throughout South Africa and proposition in 21 cities in sub-Saharan Africa. DionWired sells technology and Simplify our systems and processes and continue technological solutions in Multimedia with our investment in and Hi-tech in South Africa. best-in-class IT The progress we made Our strategic focus for 2019 Focus on operating • Rolled out 100 in-store Money Centres with the • Increasing market share across all our major categories efficiencies in order to capability to offer our customers money transfers, • Continuing to improve our Customer Value Proposition reduce operating costs as prepaid utilities, bill payments, bus and Lotto tickets (CVP) a % of sales • Successfully rolled out 12 new layout stores. Reduced the • Expanding our store footprint in key locations outside trading space of five stores to 2,800m2 to optimise store South Africa Optimise store trading sizes trading density while making it easier for customers to • Simplifying our systems and processes as we continue to and introduce new navigate our stores and find products invest in best-in-class IT layout stores to improve • Significant progress has been made in the development • A successful roll-out implementation of the new SAP ERP trading density of the new ERP system (SAP S/4HANA) which is expected system in the second half of 2019 to deliver improved customer-centric marketing; • Leveraging the benefits of our new management merchandising; sourcing and procurement; better structures and skills Expand our store footprint in informed inventory management decisions; and will • Continuing optimisation of store trading density for new key locations in South Africa offer a simplified omnichannel customer experience and existing layouts and elsewhere in Africa • Building strong and strategic partnerships with our vendors • Opened five new stores in South Africa and three Future outlook Focus on and develop outside South Africa. After closing three stores, our our business readiness trading space increased by 2.2% Massdiscounters will continue to improve the quality of for the new SAP ERP IT • In November 2018 Game launched a Loyalty App, business through leveraging new management structures implementation which leverages GK-POS to provide our customers with and capabilities. We will improve our CVP across all channels coupons, vouchers, unique offers and digital receipts with a clear focus on aspirational younger families in LSMs 5 to 8. We remain focused on improving gross profit margins The challenges we faced as well as optimising working capital levels. We will continue with the SAP ERP implementation and the go-live date is • Our core middle-income customer in South Africa was scheduled for the second half of 2019. impacted by the high unemployment rate, the April South African consumer confidence remains low and so 2018 VAT increase, hikes in fuel prices and low consumer we anticipate a difficult sales environment in 2019, although confidence we are confident that our improved execution capability will • Slowing economies outside South Africa manifest in slightly stronger sales growth. Outside South • Product deflation of 2.9%, mostly from Durable Goods Africa our stores perform well in local currencies but our • The challenge of the mid-2018 management restructure Rand performance depends upon the currency exchange and relocation of the head office and commercial rate at different times throughout the year. business units to Johannesburg caused staff uncertainty • Skills shortages and staff retention in specialised areas of retail • DionWired’s sales were below 2017 from a combination of factors including limited product innovation and severe stock supply challenges, especially in laptops
40 Our business context Massmart Integrated Annual Report 2018 41 DIVISIONAL REVIEWS
Masswarehouse
Masswarehouse comprises Makro and 2018 strategy The Fruitspot. Makro sells the Food, Makro saves customers time and money so they can fulfil their Liquor and General Merchandise aspirations of living better lives and categories, catering for personal, running better businesses. commercial and trading customers. We will therefore: The Fruitspot is a Wholesaler and The progress we made Our strategic focus for 2019 distributor of fresh and cut fruit and • In 2018 we made good progress in the three key • Together with the existing strategic priorities (being strategic pillars of delivering organic growth, with strong good organic growth, with strong foundations and vegetables in Gauteng, KwaZulu-Natal foundations and through low-cost operations through lowest costs) we will focus on simplifying the and the Western Cape. • Maintained strong market shares in Durable Goods, Food business to improve speed and reduce waste and Liquor • Successfully open our 22nd South African store in • Makro enjoyed strong sales performances from themed Cornubia, north of Durban in late March 2019 promotions, and enjoyed double-digit growth from our • The new Hybris web and fulfilment platform was Easter, Black Friday and Festive Gifting promotions launched in early February 2019. This will significantly • The Gross Merchandise Value of online sales grew improve our online offering and fulfilment but came by 26%, supported by strong growth in sales on our with the expected early teething troubles Grow our market shares in the Marketplace seller portal • Make use of technology in the areas of analytics, store General Merchandise retail and • The Makro online platform is now the highest operations and ecommerce to support our strategic commercial channels, and in contributing sales site in a number of our product goals, and to support our people to better serve our the Food and Liquor retail and categories customers hospitality channels • Reduced our cost-base through improved operations, • We will continue to grow our retail market shares and lower costs and less waste maintain market shares in the Wholesale channels by Implement SAP Hybris ecommerce • Increased our mRewards loyalty programme offering a clear customer value proposition comprised and fulfilment platforms membership base by 58% of a combination of value, range and availability, to accelerate our growth • Expanded locker network by 160% to 191 sites nationwide and by allowing customers to shop with us in a true in ecommerce to retail and • Created permanent jobs for nearly 2,000 temporary staff, omnichannel manner commercial customers bringing the total number of new permanent jobs created to 4,500 over the last four years (including new stores) Future outlook Retain our focus on the customer The challenges we faced Makro remains focused on making life easier for our customers. value proposition by offering We will do this by offering products and brands that our the best balance between price, • Economic uncertainty in South Africa impacted weak customers know and trust, at prices that save them money so quality and quantity consumer demand that they can fulfil their aspirations of living better lives and • Severe price deflation in commodities like maize, wheat, running better businesses, across multiple channels and in a Continue to invest in our oil, sugar and rice for the majority of the year way that saves them time. At The Fruitspot, we will stabilise people, through training and • The incomplete national road infrastructure in and grow the business by ensuring it becomes a supplier of development, and by offering the vicinity of our new Riversands store (north of choice to the retail and hospitality industry, and within the leadership opportunities and Johannesburg) impacted that store’s performance Massmart Group. talent acquisition • The April 2018 VAT increase caused a significant drag on South African retail and wholesale consumer confidence consumption demand remains low and so we anticipate a difficult sales environment • Poor consistency and reliability of supply of some goods, in 2019. The impact of no product deflation will positively particularly in Food and Liquor, resulted in lost sales impact sales, as will sales from the new store. opportunities and higher than optimal working capital investments mitigation • Our gross margin was impacted by negative adjustments for inventory and cost of sales in Massfresh. This unsatisfactory development came to light in November 2018
42 Our business context Massmart Integrated Annual Report 2018 43 DIVISIONAL REVIEWS
Massbuild
Massbuild is the Southern African leader in Home Improvement, DIY and 2018 strategy Building Materials. The four Builders’ Expand our ex-SA retail store formats – Builders Warehouse, footprint by opening new stores in Mozambique Builders Express, Trade Depot and and Zambia Superstore – cater to different markets Focus on optimisation with their own personalised feel and initiatives, including space service offering and are complimented planning, store specification, customer journey, by our new online platform. Builders’ innovation, assortment stores offer exceptional value, a optimisation, workforce The progress we made • Policy uncertainty around land expropriation affecting scheduling and improving new building plans • Opened nine new stores, including one in Maputo, comprehensive range of competitively energy efficiency • Regulatory changes in some African countries impacting priced products, with helpful service. Mozambique and another in Makeni, Zambia, and closed stock availability three in South Africa as part of a longer-term store • An increasingly competitive environment Digitise the in-store retail rationalisation programme experience in order to be the • Contained operating costs through strict store operating Our strategic focus for 2019 most remarkable and reliable specifications, improved workforce scheduling and a DIY retailer focused Goods Not for Resale (GNFR) team • Opening of our first store in Nairobi, Kenya • We constantly invest in our people by providing them • Continuing to grow the Private Label sales participation Streamline the processes in with learning and knowledge sharing opportunities. In • Widening our service offering, including VAS and project the building trade business 2018 we made great strides in providing most of our design, estimation and installations to ensure we are truly the learning and development initiatives through a digital • Continue to digitise the in-store retail experience in order store of the community platform. This allowed our staff to upskill themselves at to be the most remarkable and reliable DIY retailer a time and place convenient to them instead of being • Improving omnichannel fulfilment to be more reliable Grow our Private Label confined to a classroom with on-time collections and deliveries sales participation • Grew our Private Label sales participation to 19.7% and • Aggressively growing ecommerce by expanding the expanded the number of products in the Private Label range range to cover everything available in-store and more • Digitised the in-store retail experience in new and revamped stores Future outlook • Improved our online offering by increasing the number of products available online, offering ‘how to’ videos and Massbuild will continue to build a leading interconnected DIY services retail business. We remain committed to growth through • Expanded our online delivery options to include priority extending our store footprint, opening new stores in South express which enables same-day deliveries Africa and Southern Africa, and by growing sales through our • The product range on the Builders Warehouse online online platform. We aim to increase our South African market platform has been expanded to 35,000 items and sales penetration in rural areas through the Builders Superstore growth remains very high with strong customer support format and by filling the market gaps in cities and towns with • Click-and-collect capability is available in all South African the appropriate Builders format. Massbuild’s overall objective metropolitan stores and will soon be launched in our remains to be Southern Africa’s market leader in Home stores in Zambia and Botswana Improvement, DIY and building products and services. South African consumer and contractor confidence remains The challenges we faced low and so we anticipate a difficult sales environment in 2019. Outside South Africa our stores perform well in local currencies • A slowing South African economy and a low builders’ but our Rand performance depends upon the currency confidence index exchange rate at different times throughout the year. • Local authority ineffectiveness in rezoning and plan approvals for new stores
44 Our business context Massmart Integrated Annual Report 2018 45 DIVISIONAL REVIEWS
Masscash
Masscash consists of Wholesale with 2018 strategy Cash & Carry Food, cosmetics and Drive and improve the Wholesale customer value Buying Association businesses, and proposition through Retail, which comprises Food outlets improved in-stock service levels, KVI pricing and further targeting lower LSM groups. Our investment in sales capability Wholesale business includes the brands CBW, Jumbo Cash & Carry, Implement a standard set of administrative processes Sunshine, Trident, Eureka, Saverite and supporting one common Shield (a voluntary buying association), retail system nationally while the Retail business consists of Streamline and rationalise The progress we made Our strategic focus for 2019 the Cambridge Food and the Rhino brand and store portfolio Cash & Carry brands. across the Wholesale and • Invested in refurbishing selected Wholesale stores • Grow the current Cambridge Food Retail store format by Retail businesses which has contributed to better in-store standards thus opening eight South African stores in 2019 improving our customer experience • Define and develop a hybrid store format for Africa • Maintained a positive price-perception in an increasingly supported by site acquisitions Improve trading densities WHOLESALE SHIELD competitive environment • Continue our focus on the Wholesale stores by driving THE GIANT OF AFRICA THE GIANT OF AFRICA in new Retail stores, whilst • Successfully rolled out SAP in all Retail stores in Free State, profitable sales, maintaining in-stock service levels and increasing profitability of Cape and KwaZulu-Natal regions restoring credibility with customers and suppliers mature stores • Commenced rebranding Rhino stores to Cambridge Food • Continue with the conversion of Rhino stores to with two stores completed in 2018 Cambridge Food stores Ensure our Fresh departments • Opened a new Cambridge Food store in Carletonville • Roll out VAS (airtime, bill payments, money transfers, Lotto, remain a strategic • VAS (airtime, bill payments, money transfer, Lotto, etc.) rolled etc.) into Wholesale stores and then VAS phase II (tickets, differentiator in Retail stores out in all Cambridge Food stores and two Rhino stores insurance, etc.) into both Retail and Wholesale stores • Successful consolidation and relocation of several • Expand our Private Label penetration to improve regional and head offices to Johannesburg competitiveness • Ensure our Fresh departments remain a strategic The challenges we faced differentiator in our Retail stores • The challenging South African economy has resulted in Future outlook poor consumer confidence that negatively impacted on sales performance Masscash will grow through expanding our Cambridge • Severe price deflation in commodities like maize, wheat, Food Retail store format by opening eight new stores and oil, sugar and rice for the majority of the year converting the remaining Rhino stores to Cambridge Food • Our management and corporate restructure and systems stores. We will define and develop a hybrid format for Africa integration posed significant challenges and caused supported by aggressive site establishment. uncertainty for our people South African retail and wholesale consumer confidence Create awareness of VAS, • Implementation of sugar tax impacted the soft-drinks remains low and so we anticipate a difficult sales environment now available in our stores market in 2019, although we are confident that our improved • The April 2018 VAT increase execution capability will manifest in slightly stronger sales • The listeriosis outbreak caused a severe decline in growth. The impact of no product deflation will also positively Optimise the merged processed meat sales impact sales. Outside South Africa our stores perform well in management team and local currencies but our Rand performance depends upon the associated support structures currency exchange rate at different times throughout the year.
46 Our business context Massmart Integrated Annual Report 2018 47 CHIEF FINANCIAL OFFICER’S REVIEW Sustained cost discipline in tough environment
04 Our performance
Johannes van Lierop, Group CFO
PERFORMANCE Our 2018 performance * SUMMARY Total sales for the year grew 2.9% against a back-drop of a difficult economic environment, characterised by low GDP growth and constrained consumer confidence. Notwithstanding the difficult environment, Massmart maintained 2.9% strong market shares and continued to resolutely focus on those factors Sales within our control. Once again, expense management remained effective with 49 57 R90.9 billion comparable expenses, excluding restructuring costs, increasing by 2.3%. Chief Financial Summary 2017: R88.4 billion Massmart’s performance in 2018 was impacted by deflation in commodities Officer’s review Consolidated and Durable Goods; margin pressure in Game; and negative adjustments for Group Financial inventory and cost of sales in Massfresh. Growth in total expenses, excluding Statements restructuring costs, was limited to a creditable 5.0% (a comparable increase 54 16.8% of 2.3%). This good performance was however insufficient to neutralise the Directors’ report Trading profit before pressure from soft sales, particularly over the crucial November and December 65 interest and taxation 2018 period, and from slightly lower gross margins. Independent R2.1 billion As noted in recent announcements, for statutory reporting purposes auditor’s Report ^ 2017: R2.5 billion Massmart has adopted IFRS 15 using the ‘modified retrospective approach’, which has the unfortunate consequence in this financial year of complicating the ability to make useful comparisons with the prior period, particularly as 31.7% Shield’s sales are included in revenue on a gross basis during 2017 and a net basis Headline earnings during 2018. To provide a more meaningful assessment of the current period’s R901.2 million performance, and unless otherwise stated, the commentary below has been 2017: R1.3 billion^ provided on a like-on-like basis to reflect the material impact of IFRS 9 and IFRS 15 as though it was in effect for the period 26 December 2016 to 31 December 2017. In addition, the commentary below reflects Massmart’s performance for 40.1% the current and prior years’ 52-week periods. Total dividend See more of our performance online per share * Like-on-like 52-week basis www.massmart.co.za/iar2018 208.00 cents ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect /groupafs 2017: 347.00 cents adjustments made. Refer to the restatement note on page 64. /companyafs /5yearreview
Massmart Integrated Annual Report 2018 49 CHIEF FINANCIAL OFFICER’S REVIEW
Sales Like-on-like Divisional operational review Massmart’s total sales for the 52 weeks ended December 2018 increased by 2.9% and comparable store sales increased by 1.2%. In the Group’s major categories, Food & Liquor sales grew by 3.3%, 52 WEEKS RESTATED^ 52 WEEKS RESTATED^ SALES Durable Goods sales by 0.7% (with product deflation of 1.7%) and Home Improvement sales by 5.9%. DECEMBER 52 WEEKS 52 WEEKS COMPARABLE ESTIMATED 53 WEEKS Product deflation was 0.2%. Inflation in Food & Liquor and Home Improvements increased 2018 % OF DECEMBER 2017 % OF LIKE-ON-LIKE % SALES % SALES DECEMBER 2017 % OF Rm (AUDITED) SALES (LIKE-ON-LIKE)* SALES % GROWTH* GROWTH INFLATION# (LIKE-ON-LIKE)* SALES By category slightly to 1.1% and 0.9% respectively, while Durable Goods went into further deflation of 2.1%. Our ex-SA businesses represent 8.7% (2017: 8.6%) of total sales and increased by 3.7% in Rands Sales 90,941.6 88,356.0 2.9 1.2 (0.2) 89,869.7 (3.9% increase in constant currencies). Comparable sales in Rands declined by 1.9%. Massdiscounters 19,729.4 19,971.7 (1.2) (1.5) (2.9) 20,330.6 The 2017 financial year was a 53-week period. Using the modified retrospective method per Masswarehouse 28,778.2 27,311.9 5.4 3.7 (0.2) 27,748.9 IFRS 15, relative to the 2017 53-week period, total sales for the 2018 52-week period of R90.9 billion represent a decline of 3.0%, with comparable store sales also declining by 4.7%. Massbuild 13,756.1 12,993.6 5.9 3.4 2.7 13,191.9 Masscash 28,677.9 28,078.8 2.1 (0.2) 0.3 28,598.3 Margin Trading profit** 2,071.1 2.3 2,492.8 2.8 (16.9) 2,744.1 3.1 Food & Liquor 56.0% The Group’s 52-week like-on-like gross margin of 19.45% is marginally lower than that of the Massdiscounters 32.6 0.2 373.5 1.9 (91.3) 454.3 2.2 prior year (2017: 19.63%), caused primarily by margin pressure in Game and Massfresh, which Durable Goods 28.9% Masswarehouse 1,100.8 3.8 1,256.7 4.6 (12.4) 1,313.3 4.7 was partially offset by the increased sales participation of higher-margin retail customers in Home Improvement 15.1% Massbuild 749.1 5.4 735.5 5.7 1.8 797.5 6.0 Massbuild. Margin was adversely impacted by negative adjustments for inventory and cost of sales in Massfresh. Masscash 188.6 0.7 127.1 0.5 48.4 179.0 0.6 By geography ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64. Other income * Refer to note 44 in the audited consolidated Group Annual Financial Statements. Other income decreased by 1.7% to R231.0 million, mainly due to the decrease in dividends ** The ‘trading profit before interest and tax’ above is the amount per the summary consolidated Income Statement less the BBBEE transaction IFRS 2 charge and excludes restructure costs. received from our cell captives. Other items in other income are financial services’ income, fair # Group Sales inflation is a weighted inflation. value adjustments on the cell captives and insurance proceeds on non-property, plant and equipment (PP&E) items.
Operating expenses South Africa 91.3% Expenses were well managed and increased by only 5.0% (excluding restructure costs), while Divisional operational review Ex-SA 8.7% comparable expense increases were limited to 2.3%. Expenses as a % of sales were 17.4% (2017: 17.1%). Employment costs, the Group’s biggest cost category, were limited to an increase of 2.7%, due Massdiscounters saw year-to-date product deflation of of 2.3%), caused by deflation in General Merchandise and to a combination of improved staff scheduling in stores and DCs and a selective replacement of 2.9% in December 2018 (2017: deflation of 2.5%), while total Food commodities. Comparable sales growth in Food & vacancies which resulted in full-time equivalent employees at just under 48,500. The opening of sales decreased by 1.2% and comparable sales were down Liquor was 3.3%, while General Merchandise sales growth a net 13 new stores and the rental annualisation of Makro Riversands resulted in occupancy costs 1.5%. In South Africa, Game’s total sales declined by 0.1% grew by 4.5%. increasing by 10.1% (a comparable increase of 6.4%). Depreciation and amortisation increased while comparable sales increased by 0.1%, an improved Makro’s operating margin was well managed but the by 3.2% over the prior year while other operating expenses increased by 5.8%. The non-capital second half sales performance showing positive volume Masswarehouse result in the second-half was severely costs of upgrading our IT infrastructure, as well as pre-opening store expenses of R57.8 million growth. Game Africa’s total sales in constant currencies impacted by negative adjustments for inventory and cost (2017: R43.5 million), are included in the other operating expense category. increased by 1.5%, but declined by 0.9% in Rands, with of sales in Massfresh. This unsatisfactory development trading conditions particularly difficult in Nigeria and first came to light in November 2018 and more than 20 Foreign exchange loss Mozambique. DionWired’s sales were below those of the management and staff have already been replaced. Included in operating profit are net realised and unrealised foreign exchange losses of R2.7 million prior year from a combination of factors including limited Expense growth of 9.2% (a 5.7% comparable increase) (2017: R39.9 million loss), the majority of which arose as a result of the strengthening of the average product innovation and severe stock supply challenges, was higher than sales growth, partly as a result of the new basket of ex-SA currencies. The impact was most noticeable in the strengthening of the Nigerian especially in laptops. Makro store opened in late 2017. Including the negative Naira and Mozambican Meticals during the year. The organisational restructure and relocation of the Massfresh adjustments, trading profit before interest and Game head office incurred a cost of R116.1 million, with tax decreased by 12.4% to R1.1 billion. Net finance costs expected annual savings of approximately R30.0 million. Massbuild grew total sales by 5.9% to R13.8 billion, Cash interest paid to the banks grew R31.7 million (a 6.2% increase), resulting in net finance costs Following the February 2018 announcement, the restructure with comparable sales increasing by 3.4% and product growing by 10.0% to R623.7 million (2017: R566.8 million), largely due to the impact of a finance and relocation took about nine months to settle. One inflation of 2.7%. In the second half of 2018 the South lease capitalised at the end of 2017 and net working capital increases. disappointing consequence was that trading disciplines African business saw a decline in growth of contractor sales were not robust and about 1% of annual trading margin was even as retail sales grew slightly – this trend has thus far Taxation foregone. This will be recovered during 2019. continued into 2019. Assisted by new stores opened in 2017 Expenses were well managed and were only 1.6% higher and 2018, total Rand sales growth in our ex-SA stores was The Group’s effective tax rate of 31.5% (2017: 29.9%) increased mainly due to assessed losses not than the prior year (a comparable increase of 0.6%). The 14.1% while comparable sales growth was slightly negative. utilised. softer trading margin and lower than expected December The increased participation of higher-margin retail sales DECEMBER 2018 DECEMBER 2017 % (AUDITED) (AUDITED) sales caused pressure on overall profitability resulting improved Massbuild’s gross margins. As a result of the net in Massdiscounters’ trading profit before interest and six new stores, total expenses grew by 8.1% but comparable Standard tax rate 28.0 28.0 tax decreasing by 91.3% (excluding restructure costs) to expenses grew by only 3.6%. Trading profit before interest Non-taxable income and disallowable expenses (3.1) 0.8 R32.6 million. and tax of R749.1 million grew by 1.8%. Assessed loss not utilised 6.9 3.2 Masswarehouse benefited from the Division’s defensive Masscash increased total sales by 2.1% to R28.7 billion, product mix as total sales of R28.8 billion increased by 5.4% while comparable sales decreased by 0.2%. Product Other – including foreign tax adjustments (0.3) (2.1) and comparable sales grew by 3.7%. The Division had inflation increased from June 2018 to 0.3% as price deflation Group tax rate 31.5 29.9 product deflation of 0.2% in December 2018 (2017: inflation eased in commodities like maize, wheat, oil, sugar and rice.
50 Our performance Massmart Integrated Annual Report 2018 51 CHIEF FINANCIAL OFFICER’S REVIEW
Sales in our Wholesale business grew by 2.3% and in our During the post balance sheet period the Group concluded tax (EBIT) to increase by approximately R697.0 million, due Retail business (Cambridge and Rhino) grew by 1.8%. a medium-term loan facility agreement to replace a previous to the reduction of the operating lease charge in occupancy The organisational restructure and relocation of regional medium-term loan. In terms of this agreement, R600.0 million costs, being less than the increased depreciation charge for offices to Johannesburg was completed at a cost of was advanced to the Group on 27 February 2019 and the loan the ROU asset, and a decrease of approximately R369.0 million R44.9 million in the current year, with annual savings will mature in two years at an interest rate of 8.27%. in profit before tax (PBT) as a result of the increased finance expected of R22.0 million. The trading benefits of this The Group’s gearing ratio (debt: equity) decreased to charges on the leased liability. The overall decrease in earnings restructure began to show in the second half of 2018. 39.1% (2017: 52.4%) at the end of the current year. Return would primarily be a result of the relatively younger lease Expense growth was limited to 0.6% and good margin on average shareholders’ equity for the year decreased to portfolio at the 2018 year-end. management resulted in trading profit before interest and 14.1% (2017: 22.1%). Stakeholders are advised to exercise caution in the tax increasing by 48.4% to R188.6 million. interpretation of the new leases standard and to refer to Dividend note 3 in the audited consolidated Group Annual Financial Statements. Financial position Headline earnings before restructure costs decreased by 22.9% to R1.0 billion, while headline earnings decreased by Non-current assets 31.7% to R901.2 million. Restatement During the past few years, investment spending has been Massmart’s current dividend policy is to declare and pay focused on new Information Technology (IT) infrastructure, During the IFRS 16 implementation project, an error in an interim and final cash dividend representing a 2.0 times store openings, and the refurbishment of existing stores. The accounting was identified relating to a long-term lease of dividend cover unless circumstances dictate otherwise. For net book value of property, plant and equipment increased land. This 99-year lease arrangement that was entered into the final dividend, Massmart’s Board has elected to declare by 3.0% over the prior year. Intangible assets increased by in 1994 (for the land on which the Makro Woodmead store and issue a scrip dividend or as an alternative, an election to 8.2% as a result of investments in IT. is situated) was incorrectly accounted for as an operating receive a cash dividend. The Board has resolved to declare a The expansionary expenditure of R833.6 million included lease and should have been accounted for as a finance distribution of fully paid Massmart ordinary shares with a par investments in IT systems and new store openings. lease together with an adjustment on the purchase price value of R0.01 each to ordinary shareholders. Alternatively, allocation of the 2013 acquisition of the Makro store on that Replacement expenditure was R772.4 million and included shareholders are entitled to elect to receive a cash dividend land. As a consequence of this error, our lease commitment store refurbishments. of 140 cents per ordinary share. disclosure relating to the remaining non-cancellable lease A gross final cash dividend of 208.0 cents per share payments has been updated in our results to include an Working capital management (2017: 347.0) was thus declared out of income reserves as additional R15.1 billion for both the 2018 and 2017 period, Operating cash before working capital movements defined in the Income Tax Act, 1962, and the cash dividend representing the lease commitments for the remaining amounted to R3.4 billion, 14.1% lower than the corresponding will, unless exempt, be subject to the South African dividend 74 years on the lease. Between 2019 and 2033 R131.4 million prior year and slightly better than the decline in earnings withholding tax (DWT) rate of 20%. is payable on these leases whereas the remaining 60 years before interest, tax, depreciation and amortisation (EBITDA). post 2033 represents R15,015.6 million. The present value Cash from working capital movements saw an outflow of the lease payments is R251.9 million. The error has been of R545.8 million compared to an inflow of R705.8 million Impact of IFRS16 corrected by restating the comparative 2017 and 2016. Refer in 2017, partly due to higher inventory levels in 2018 but The Group anticipates a material impact as a result of the to the notes on page 64 for further detail. also from the 2018 year-end calendar cut-off date being adoption of IFRS 16 using the modified retrospective a day earlier. The inventory balance increased by 10.9% to approach. The material impact relates to the capitalising Appreciation R12.2 billion and inventory days increased by five days to of leased stores onto the Statement of Financial Position 61 days compared to December 2017. Inventory has been together with the corresponding lease liability. Whilst the I would like to extend my gratitude to the finance teams across raised in Masscash from a deliberate focus on improving impact on our numbers is material, business will continue the Group, both at the Divisions and the corporate office, service-levels and is slightly higher in Massbuild and Game as usual, as leasing of stores will continue as part of our for their dedication, commitment and support especially from lower than expected sales in December. Debtors’ business operations. Whilst there is a classification change in the current environment where many of them and their days increased by one day to 10 days and creditors’ days between net operating and net financing cash flows, there own families may be feeling the adverse consequences of increased by three days to 81 days. is no impact on overall cash flow and the net cash position the weak economy and high unemployment. Their hard will remain neutral. work has enabled us to deliver quality financial results to Capital management The new standard will not impact how we choose to our stakeholders. I am proud and privileged to have the Interest-bearing borrowings, including bank overdrafts, finance our business nor will it distract us from our strategic opportunity to work with such an excellent team. have increased by R558.2 million since December 2017. This priorities. Based on the current leases in the system, had movement is a result of the settlement of the R600.0 million we reported IFRS 16 in the 2018 52-week period we would medium-term loan with Walmart, as well as the R604.9 million have included a right-of-use (ROU) asset and lease liability settlement of our bank medium-term loans, offset by new of approximately R7.0 billion and R9.0 billion respectively on finance leases. These term loans were replaced by an overnight the Statement of Financial Position. For the same 52-week Johannes van Lierop bank overdraft facility due to more favourable terms and are period, in our Income Statement for the 12-month period, Chief Financial Officer included in our financing activities for the year. we would have expected our earnings before interest and 4 April 2019
52 Our performance Massmart Integrated Annual Report 2018 53 Directors’ report
Shares in issue Please find the movement in ordinary and preference shares for the financial year under review below: The Company Secretary provides a central
source of guidance and advice to the Board, ORDINARY SHARES and within the Company, on matters of ethics Joe Ralebepa and good governance. Balance at December 2016 217,136,334 COMPANY SECRETARY Converted preference shares* 9,155 Balance at December 2017 217,145,489 Converted preference shares* 33,653 Directors’ responsibilities Ordinary shares in issue at December 2018 217,179,142
The Directors acknowledge responsibility for the addresses are the same as that of the Company, and he was PREFERENCE SHARES preparation of the audited consolidated Group Annual appointed in November 2016. Financial Statements, which, in their opinion, fairly present A number of non-Executive Director changes took place Balance at December 2016 2,840,483 the results and cash flows for the year ended December in 2018. On 25 May 2018, we announced the appointment Converted to ordinary shares (9,155) 2018 and the state of affairs of Massmart Holdings Limited of Olufunke (Funke) Ighodaro as an Independent non- Balance at December 2017 2,831,328 and its subsidiaries at the end of the financial year. The Executive Director and a member of the Massmart Risk Converted to ordinary shares (33,653) external auditors are responsible for reporting on the fair and Audit Committees. On 23 August 2018, shareholders Preference shares in issue at December 2018 2,797,675 presentation of these financial statements. were informed that Chris Seabrooke had agreed to The Company and its subsidiaries have maintained continue as Lead Independent non-Executive Director * The preference shares above relate to Massmart’s Black Scarce Skills Trust satisfactory accounting records and an effective system of and Deputy Chairman but would cease to be a member of internal controls to ensure the integrity of the underlying the Board Committees and step down as Chairman of the information. Appropriate accounting policies, supported by Remuneration, Audit and Risk Committees. Funke succeeded Interests of Directors in the Company’s shares sound and prudent managerial judgements and estimates, Chris as the Chairman of the Audit and Risk Committees and have been consistently applied. Phumzile Langeni assumed the role of Chairman of the At December 2018, Directors owned, directly or indirectly, ordinary shares or options over ordinary shares The Board’s Audit Committee reviews the financial Remuneration Committee. in the Company. These holdings were all beneficial and are aggregated in the table below: information presented and ensures that there has been On 28 February 2019 we announced the appointment adherence to International Financial Reporting Standards of Lindiwe Mthimunye to the Board as an Independent DECEMBER 2018 DECEMBER 2017 and the Companies Act of South Africa. Internal and external non-Executive Director. Lindiwe was further nominated to OPTIONS/SHARE OPTIONS/SHARE auditors of Group companies have unrestricted access to the serve on the Audit and Risk Committees. We announced Non-Executive Directors SHARES AWARDS SHARES AWARDS Committee. the appointment of JP Suarez as a Walmart-appointed K Dlamini 9,800 - 9,800 - non-Executive Director in place of Roger Burnley. On the NN Gwagwa 9,800 - 9,800 - Group financial results same day we informed shareholders that Chris Seabrooke’s Executive Directors retirement will become effective on 23 May 2019, from GRC Hayward 208,183 545,435 235,771 596,853 The financial results of the Group are set out in the Income which date Chris will step down as the Deputy Chairman JJM van Lierop 2,511 150,706 - 200,924 Statement, Statement of Comprehensive Income, the and Lead Independent non-Executive Director of the Board. Statement of Cash Flows and the Statement of Changes in Equity. The financial position of the Group is set out in the At least one-third of the non-Executive Directors are At the date of this report , the Directors’ beneficial holdings were as follows: Statement of Financial Position and accompanying notes. required to retire every year and Massmart Executive APRIL 2019 MARCH 2018 Directors have elected to also retire on this basis. Accordingly, OPTIONS/SHARE OPTIONS/SHARE all Directors retire by rotation at least every three years Non-Executive Directors SHARES AWARDS SHARES AWARDS Directorate and secretary and, if eligible and available, their names are submitted K Dlamini 9,800 - 9,800 - The current Directorate of the Company is shown on for re-election by the shareholders at the ensuing AGM. In NN Gwagwa 9,800 - 9,800 - page 88. The Board comprises 11 Directors at the time addition, shareholders must ratify the initial appointment Executive Directors of this report, of whom three are non-Independent non- of each Director at the first AGM following that Director’s GRC Hayward 223,118 510,641 249,754 568,879 Executive, two are Executive and six are Independent non- appointment. As a result of these requirements, at the JJM van Lierop 23,798 108,449 - 120,411 Executive. In addition, each Board Committee is chaired by 23 May 2019 AGM, Olufunke Ighodaro, Lindiwe Mthimunye an Independent non-Executive Director. and JP Suarez are nominated for election having been The Company Secretary provides a central source of appointed during the reporting period and Enrique Ostalé, guidance and advice to the Board, and within the Company, Susan Muigai and Kuseni Dlamini retire by rotation. Being on matters of ethics and good governance. The Company eligible, they all offer themselves for election or re-election, Secretary is Joe Ralebepa, whose business and postal as applicable.
54 Our performance Massmart Integrated Annual Report 2018 55 DIRECTORS’ REPORT Summary Consolidated Group Financial Statements
Subsidiaries The principal subsidiaries on the left are determined based on the Group’s cross- Like-on-like summary consolidated income statement surety arrangement. These subsidiaries represent the Group for which lender 52 WEEKS RESTATED^ RESTATED^ As at the date hereof, covenants shall be maintained. Details of the Company’s interests in material DECEMBER 52 WEEKS 53 WEEKS the following companies 2018 DECEMBER 2017 LIKE-ON-LIKE* DECEMBER 2017 subsidiaries are set out in note 35 of the audited consolidated Group Annual Rm (AUDITED) (LIKE-ON-LIKE)* % CHANGE (LIKE-ON-LIKE)* are material subsidiaries of Financial Statements. the Company: Revenue 91,180.6 88,649.7 2.9 90,163.6 Borrowing powers Sales 90,941.6 88,356.0 2.9 89,869.7 Massbuild Proprietary Cost of sales (73,250.4) (71,007.5) (3.2) (72,219.1) Limited In terms of the Memorandum of Incorporation, the Group has unlimited borrowing Gross profit 17,691.2 17,348.5 2.0 17,650.6 powers. At December 2018, borrowings were R4.7 billion (2017: R4.1 billion). 2004/035206/07 Other income 231.0 234.9 (1.7) 235.1 Depreciation and amortisation (1,134.6) (1,099.6) (3.2) (1,099.6) Masscash Holdings Going concern Employment costs (7,582.9) (7,381.9) (2.7) (7,402.9) Proprietary Limited The Directors are of the opinion that the business will be a going concern in the 1997/014716/07 Occupancy costs (3,491.3) (3,170.0) (10.1) (3,182.6) year ahead. In reaching this opinion, the Directors considered the following factors: Other operating costs (3,644.5) (3,445.8) (5.8) (3,463.3) • Strong positive cash flows from trading; Massmart International Trading profit before interest • No recurring operating losses at Divisional and Group level; Holdings Limited and taxation 2,068.9 2,486.1 (16.8) 2,737.3 • Well-controlled working capital and good quality inventory; (incorporated in Mauritius) Restructuring cost (note 7) (161.0) - - - • Approved short- and long-term financing, with sufficient additional short- 47902 C1/GBL term borrowing capacity if required; Impairment of assets (21.4) (18.9) (13.2) (18.9) • Key Executive management in place; Insurance proceeds on items in PP&E 8.0 58.8 (86.4) 58.8 Massmart Management • There have been no material changes that may affect the Group in any of its Operating profit before foreign exchange movements and interest 1,894.5 2,526.0 (25.0) 2,777.2 and Finance Company customer, product or geographic markets; and Proprietary Limited Foreign exchange loss (2.7) (39.9) 93.2 (47.2) • Budgets to December 2019 reflect a continuation of the above positive factors. 1992/004084/07 Operating profit before interest 1,891.8 2,486.1 (23.9) 2,730.0 – Finance costs (648.8) (592.7) (9.5) (603.5) Masstores Proprietary Direct and ultimate holding companies – Finance income 25.1 25.9 (3.1) 26.4 Limited The Company’s direct holding company is Main Street 830 Proprietary Limited, Net finance costs (623.7) (566.8) (10.0) (577.1) 1991/006805/07 incorporated in South Africa, and the Company’s ultimate holding company is Profit before taxation 1,268.1 1,919.3 (33.9) 2,152.9 Wal-Mart Stores, Inc., incorporated in the United States. Taxation (399.4) (574.2) 30.4 (644.0) Wild Developments Proprietary Limited Profit for the year 868.7 1,345.1 (35.4) 1,508.9 1973/000178/07 Company Secretary certificate Profit attributable to: In terms of section 88(e) of the Companies Act No. 71 of 2008, as amended – Owners of the parent 888.6 1,332.6 (33.3) 1,494.9 (‘Companies Act’), I, Joe Ralebepa, in my capacity as Company Secretary of – Non–controlling interests (19.9) 12.5 (100.0) 14.0 Massmart address Massmart Holdings Limited, confirm that, to the best of my knowledge and belief, Profit for the year 868.7 1,345.1 (35.4) 1,508.9 The Company’s registered in respect of the year under review, Massmart Holdings Limited has filed with the office and postal address are Companies and Intellectual Property Commission all such returns and notices as Basic EPS (cents) 410.6 619.0 (33.7) 694.4 as follows: are required of a public company in terms of the Companies Act and that all such Diluted basic EPS (cents) 401.9 607.5 (33.8) 681.5 Registered office: returns and notices appear to be true, correct and up to date. Dividend (cents): Massmart House, 16 Peltier Drive, Sunninghill Ext 6, On behalf of the Board – Interim 68.0 76.0 (10.5) 76.0 Sandton, 2157, South Africa – Final 140.0 271.0 (48.3) 271.0 Postal address: – Total 208.0 347.0 (40.1) 347.0 Private Bag X4, Sunninghill, 2157, South Africa * To provide a more meaningful assessment of the current year's performance, the financial tables have been prepared on a like-on-like basis which includes the Joe Ralebepa material impact of IFRS 15 in the current and prior financial year. Refer to note 44 of the audited consolidated Group Annual Financial Statements for detail on the impact of the new accounting standards using the modified retrospective approach. Company Secretary ^ Refer to the restatement note on page 64. 4 April 2019 The like-on-like financial effects on sales, for which the Directors of Massmart are responsible, are provided for illustrative purposes only to show the effect that IFRS 15 'Revenue from contracts with customers' would have had on the 31 December 2017 sales amount, allowing for a like-on-like comparison to December 2018. The Group’s external auditor has issued a reporting accountants’ report on the December 2017 sales amount. A copy of their procedures report is available at the Group’s registered office.
56 Our performance Massmart Integrated Annual Report 2018 57 SUMMARY CONSOLIDATED GROUP FINANCIAL STATEMENTS
Summary consolidated income statement Headline earnings RESTATED^ RESTATED^ RESTATED^ RESTATED^ 52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 2018 IFRS 9 AND 15 DECEMBER 2018 DECEMBER 2017 ADJUSTED DECEMBER 2017 2018 IFRS 9 AND 15 2018 2017 ADJUSTED 2017 Rm (AUDITED) ADJUSTMENT* (ADJUSTED)* (PRO FORMA) % CHANGE % CHANGE* (AUDITED) Rm (AUDITED) ADJUSTMENT* (ADJUSTED)* (PRO FORMA) % CHANGE % CHANGE* (AUDITED)
Revenue 91,180.6 4,419.9 95,600.5 92,442.3 (1.4) 3.4 94,029.1 Reconciliation of profit for the year to Sales 90,941.6 4,415.6 95,357.2 92,148.6 (1.3) 3.5 93,735.2 headline earnings Cost of sales (73,250.4) (4,432.3) (77,682.7) (74,800.1) 2.1 (3.9) (76,084.6) Profit for the year attributable to owners of the parent 888.6 (8.0) 880.6 1,332.6 (33.3) (33.9) 1,494.9 Gross profit 17,691.2 (16.7) 17,674.5 17,348.5 2.0 1.9 17,650.6 Impairment of assets 24.0 - 24.0 18.9 27.0 27.0 18.9 Other income 231.0 4.3 235.3 234.9 (1.7) 0.2 235.1 Net loss on disposal of tangible and intangible assets 9.5 - 9.5 23.3 (59.2) (59.2) 23.3 Depreciation and amortisation (1,134.6) - (1,134.6) (1,099.6) (3.2) (3.2) (1,099.6) Profit on sale of non-current assets classified as held for sale (15.9) - (15.9) (2.3) (100.0) (100.0) (2.3) Employment costs (7,582.9) - (7,582.9) (7,381.9) (2.7) (2.7) (7,402.9) Insurance proceeds on items of PP&E (8.0) - (8.0) (58.8) 86.4 86.4 (58.8) Occupancy costs (3,491.3) - (3,491.3) (3,170.0) (10.1) (10.1) (3,182.6) Available for sale reserve re-classified to the Income Statement - - - 1.1 (100.0) (100.0) 1.1 Other operating costs (3,644.5) 1.6 (3,642.9) (3,445.8) (5.8) (5.7) (3,463.3) Total tax effects of adjustments 3.0 - 3.0 4.4 (31.8) (31.8) 4.4 Trading profit before interest and taxation 2,068.9 (10.8) 2,058.1 2,486.1 (16.8) (17.2) 2,737.3 Headline earnings 901.2 (8.0) 893.2 1,319.2 (31.7) (32.3) 1,481.5 Restructuring cost (note 7) (161.0) - (161.0) - - - - Restructure costs after taxation 115.9 - 115.9 - - - - Impairment of assets (21.4) - (21.4) (18.9) (13.2) (13.2) (18.9) Headline earnings before restructure costs (taxed) 1,017.1 (8.0) 1,009.1 1,319.2 (22.9) (23.5) 1,481.5 Insurance proceeds on items in PP&E 8.0 - 8.0 58.8 (86.4) (86.4) 58.8 Operating profit before foreign exchange movements and interest 1,894.5 (10.8) 1,883.7 2,526.0 (25.0) (25.4) 2,777.2 Headline EPS (cents) 416.5 (3.7) 412.8 612.8 (32.6) (23.9) 688.2 Foreign exchange loss (2.7) - (2.7) (39.9) 93.2 93.2 (47.2) Headline EPS before restructure costs (taxed) (cents) 470.0 (3.7) 466.3 612.8 (23.3) (23.9) 688.2 Operating profit before interest 1,891.8 (10.8) 1,881.0 2,486.1 (23.9) (24.3) 2,730.0 Diluted headline EPS (cents) 407.6 (3.6) 404.0 601.4 (32.2) (32.8) 675.4 - Finance costs (648.8) - (648.8) (592.7) (9.5) (9.5) (603.5) Diluted headline EPS before restructure costs (taxed) (cents) 460.1 (3.6) 456.5 601.4 (23.5) (24.1) 675.4
- Finance income 25.1 - 25.1 25.9 (3.1) (3.1) 26.4 * Refer to note 44 in the audited consolidated Group Annual Financial Statements. Net finance costs (623.7) - (623.7) (566.8) (10.0) (10.0) (577.1) ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64. Profit before taxation 1,268.1 (10.8) 1,257.3 1,919.3 (33.9) (34.5) 2,152.9 Taxation (399.4) 2.8 (396.6) (574.2) 30.4 30.9 (644.0) Profit for the year 868.7 (8.0) 860.7 1,345.1 (35.4) (36.0) 1,508.9 Summary consolidated statement of comprehensive income
Profit attributable to: RESTATED^ RESTATED^ 52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS - Owners of the parent 888.6 (8.0) 880.6 1,332.6 (33.3) (33.9) 1,494.9 DECEMBER DECEMBER DECEMBER DECEMBER 2018 IFRS 9 AND 15 2018 2017 ADJUSTED 2017 - Non-controlling interests (19.9) - (19.9) 12.5 (100.0) (100.0) 14.0 Rm (AUDITED) ADJUSTMENT* (ADJUSTED)* (PRO FORMA) % CHANGE % CHANGE* (AUDITED) Profit for the year 868.7 (8.0) 860.7 1,345.1 (35.4) (36.0) 1,508.9 Profit for the year 868.7 (8.0) 860.7 1,345.1 (35.4) (36.0) 1,508.9 Basic EPS (cents) 410.6 (3.7) 406.9 619.0 (33.7) (34.3) 694.4 Items that will not subsequently be re-classified to the Income Statement: 13.3 - 13.3 15.1 (11.9) (11.9) 15.1 Diluted basic EPS (cents) 401.9 (3.6) 398.3 607.5 (33.8) (34.4) 681.5 Net post retirement medical aid actuarial profit 13.4 - 13.4 15.1 (11.3) (11.3) 15.1 Dividend (cents): Fair value movement on OCI financial assets (0.1) - (0.1) - - - - – Interim 68.0 - 68.0 76.0 (10.5) (10.5) 76.0 Items that will subsequently be re-classified to the – Final 140.0 - 140.0 271.0 (48.3) (48.3) 271.0 income statement: 90.6 - 90.6 (99.8) 100.0 100.0 (99.8) - Total 208.0 - 208.0 347.0 (40.1) (40.1) 347.0 Foreign currency translation reserve 85.6 - 85.6 (109.7) 100.0 100.0 (109.7) * Refer to note 44 in the audited consolidated Group Annual Financial Statements. Cash flow hedges – effective portion of changes in fair value 20.8 - 20.8 (14.2) 100.0 100.0 (14.2) ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64. Fair value movement on available-for-sale financial assets - - - 0.4 (100.0) (100.0) 0.4 Income tax relating to components of other comprehensive income (15.8) - (15.8) 23.7 (100.0) (100.0) 23.7
Total other comprehensive profit for the year, net of tax 103.9 - 103.9 (84.7) 100.0 100.0 (84.7) Total comprehensive income for the year 972.6 (8.0) 964.6 1,260.4 (22.8) (23.5) 1,424.2 Total comprehensive income attributable to: - Owners of the parent 992.5 (8.0) 984.5 1,247.9 (20.5) (21.1) 1,410.2 - Non-controlling interests (19.9) - (19.9) 12.5 (100.0) (100.0) 14.0 Total comprehensive income for the year 972.6 (8.0) 964.6 1,260.4 (22.8) (23.5) 1,424.2
* Refer to note 44 in the audited consolidated Group Annual Financial Statements. ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64.
58 Our performance Massmart Integrated Annual Report 2018 59 SUMMARY CONSOLIDATED GROUP FINANCIAL STATEMENTS
Summary consolidated statement of financial position Summary consolidated statement of cash flows
RESTATED^ RESTATED^ RESTATED^ DECEMBER 2018 IFRS 9 AND 15 DECEMBER 2018 DECEMBER 2017 % ADJUSTED* DECEMBER 2016 % DECEMBER 2018 IFRS 9 AND 15* DECEMBER 2018 DECEMBER 2017 Rm (AUDITED) ADJUSTMENT* (ADJUSTED)* (AUDITED) CHANGE % CHANGE (AUDITED) CHANGE Rm (AUDITED) ADJUSTMENT (ADJUSTED)* (AUDITED)
ASSETS Operating cash before working capital movements 3,409.6 (10.8) 3,398.8 3,969.1 Non-current assets 14,165.8 - 14,165.8 13,575.1 4.4 4.4 12,687.3 7.0 Working capital movements (545.8) 10.8 (535.0) 705.8 Property, plant and equipment 9,647.2 - 9,647.2 9,368.1 3.0 3.0 8,627.8 8.6 Cash generated from operations 2,863.8 - 2,863.8 4,674.9 Goodwill and other intangible assets 3,656.3 - 3,656.3 3,378.9 8.2 8.2 3,159.0 7.0 Taxation paid (322.9) - (322.9) (795.0) Investments and other financial assets 119.2 - 119.2 156.2 (23.7) (23.7) 164.2 (4.9) Net interest paid (482.9) - (482.9) (593.6) Deferred taxation 743.1 - 743.1 671.9 10.6 10.6 736.3 (8.7) Dividends received 34.0 - 34.0 80.0 Current assets 20,605.2 (83.3) 20,521.9 18,893.8 9.1 8.6 18,905.9 (0.1) Dividends paid (750.0) - (750.0) (689.9) Inventories 12,180.9 (77.8) 12,103.1 10,984.6 10.9 10.2 11,210.2 (2.0) Cash inflow from operating activities 1,342.0 - 1,342.0 2,676.4 Trade, other receivables Investment to maintain operations (772.4) - (772.4) (678.5) and prepayments 5,693.2 (4.0) 5,689.2 5,119.1 11.2 11.1 4,684.7 9.3 Investment to expand operations (833.6) - (833.6) (1,138.3) Taxation 361.3 (1.5) 359.8 396.5 (8.9) (9.3) 208.7 90.0 Investment in subsidiaries - - - (6.5) Cash on hand and bank balances 2,369.8 - 2,369.8 2,393.6 (1.0) (1.0) 2,802.3 (14.6) Proceeds on disposal of property, plant and equipment 20.4 - 20.4 12.9 Non-current assets classified as held Proceeds on disposal of assets classified as held for sale 32.8 - 32.8 9.4 for sale 11.6 - 11.6 19.9 (41.7) (41.7) 17.7 12.4 Other net investing activities 5.9 - 5.9 (5.7) Total assets 34,782.6 (83.3) 34,699.3 32,488.8 7.1 6.8 31,610.9 2.8 Cash outflow from investing activities (1,546.9) - (1,546.9) (1,806.7) Decrease in non-current liabilities (583.7) - (583.7) (403.3) EQUITY AND LIABILITIES Increase/(decrease) in current liabilities 1,043.5 - 1,043.5 (437.6) Total equity 6,528.6 (44.9) 6,483.7 6,341.7 2.9 2.2 5,719.0 10.9 Non-controlling interests acquired - - - (112.6) Equity attributable to owners Net acquisition of treasury shares (221.1) - (221.1) (193.1) of the parent 6,514.0 (44.9) 6,469.1 6,298.5 3.4 2.7 5,644.5 11.6 Cash inflow/(outflow) from financing activities 238.7 - 238.7 (1,146.6)
Non-controlling interests 14.6 - 14.6 43.2 (66.2) (66.2) 74.5 (42.0) Net increase/(decrease) in cash and cash equivalents 33.8 - 33.8 (276.9) Non-current liabilities 3,694.5 (20.3) 3,674.2 4,142.4 (10.8) (11.3) 4,917.2 (15.8) Foreign exchange movements on cash and cash equivalents 29.9 - 29.9 (38.7) Interest-bearing borrowings (note 6) 2,254.1 - 2,254.1 2,760.8 (18.4) (18.4) 3,496.7 (21.0) Opening cash and cash equivalents 2,306.1 - 2,306.1 2,621.7 Deferred taxation 76.7 (20.3) 56.4 66.3 15.7 (14.9) 73.9 (10.3) Closing cash and cash equivalents 2,369.8 - 2,369.8 2,306.1
Other non-current liabilities and * Refer to note 44 in the audited consolidated Group Annual Financial Statements. provisions 1,363.7 - 1,363.7 1,315.3 3.7 3.7 1,346.6 (2.3) ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64. Current liabilities 24,559.5 (18.1) 24,541.4 22,004.7 11.6 11.5 20,974.7 4.9 Trade, other payables and provisions 21,925.1 (18.1) 21,907.0 20,581.4 6.5 6.4 19,634.2 4.8 Divisional Trading Review Taxation 205.3 - 205.3 59.1 100.0 100.0 121.6 (51.4) 52 WEEKS 52 WEEKS RESTATED^ RESTATED^ Bank overdrafts and debt facilities 1,744.0 - 1,744.0 87.5 100.0 100.0 180.6 (51.6) DECEMBER DECEMBER 52 WEEKS 53 WEEKS 2018 IFRS15 & 9 2018 DECEMBER 2017 DECEMBER 2017 Interest-bearing borrowings (note 6) 685.1 - 685.1 1,276.7 (46.3) (46.3) 1,038.3 22.9 Rm (AUDITED) ADJUSTMENT* (ADJUSTED)* (PRO FORMA) (AUDITED)
Sales 90,941.6 4,415.6 95,357.2 92,148.6 93,735.2 Total equity and liabilities 34,782.6 (83.3) 34,699.3 32,488.8 7.1 6.8 31,610.9 2.8 Massdiscounters 19,729.4 68.5 19,797.9 19,971.7 20,330.6 * Refer to note 44 in the audited consolidated Group Annual Financial Statements. Masswarehouse 28,778.2 63.9 28,842.1 27,311.9 27,748.9 ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64. Massbuild 13,756.1 - 13,756.1 12,993.6 13,191.9 Masscash 28,677.9 4,283.2 32,961.1 31,871.4 32,463.8 Trading profit before interest and taxation** 2,071.1 (10.8) 2,060.3 2,492.9 2,744.1 Massdiscounters 32.6 (9.6) 23.0 373.5 454.3 Masswarehouse 1,100.8 (2.2) 1,098.6 1,256.8 1,313.3 Massbuild 749.1 (0.8) 748.3 735.5 797.5 Masscash 188.6 1.8 190.4 127.1 179.0
* Refer to note 44 in the audited consolidated Group Annual Financial Statements. ** The 'trading profit before interest and tax' above is the amount per the summary consolidated Income Statement less the BBBEE transaction IFRS 2 charge and excludes restructure costs. ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64.
60 Our performance Massmart Integrated Annual Report 2018 61 SUMMARY CONSOLIDATED GROUP FINANCIAL STATEMENTS
Summary consolidated statement of changes in equity Notes EQUITY 1. These summary consolidated Group Financial of shares held. A net amount of R2.3 million remains ATTRIBUTABLE NON- SHARE SHARE OTHER RETAINED TO OWNERS CONTROLLING Statements have been prepared in accordance with due from Walmart, which has been accounted for in Rm CAPITAL PREMIUM RESERVES PROFIT OF THE PARENT INTERESTS TOTAL the framework concepts and the measurement and ‘trade, other payables and provisions’ and trade, other Balance as at December 2016 (Audited) as previously recognition requirements of International Financial receivables and prepayments’. stated 2.2 569.0 437.7 4,672.4 5,681.3 74.5 5,755.8 Reporting Standards (IFRS), its interpretations 4. The constant currency information included in these issued by the IFRS Interpretations Committee, the Effect of error^ - - - (36.8) (36.8) - (36.8) summary consolidated Group Financial Statements SAICA Financial Reporting Guides as issued by the has been presented to illustrate the Group’s Balance at December 2016 (Audited) Restated 2.2 569.0 437.7 4,635.6 5,644.5 74.5 5,719.0 Accounting Practices Committee and Financial underlying ex-SA business performance excluding the Dividends declared - - - (653.2) (653.2) (35.4) (688.6) Pronouncements as issued by the Financial Reporting effect of foreign currency fluctuations. In determining Total comprehensive income - - (84.7) 1,494.8 1,410.1 14.0 1,424.1 Standards Council, presentation and disclosure as the application of constant currency, sales for the prior Total comprehensive income – as previously stated - - (84.7) 1,507.7 1,423.0 14.0 1,437.0 required by International Accounting Standard (IAS) comparable financial reporting period have been Effect of error^ - - - (12.9) (12.9) - (12.9) 34 ‘Interim financial reporting’, the JSE Limited Listings adjusted to take into account the average monthly Changes in non-controlling interests - - (103.2) - (103.2) (9.9) (113.1) Requirements and the requirements of the Companies exchange rate for the current period. The table below Act 71 of 2008 of South Africa. The accounting policies IFRS 2 charge and Share Trust transactions - (193.1) 203.7 (35.5) (24.9) - (24.9) depicts the percentage change in sales in both and methods of computation used in the preparation reported currency and constant currency for the given Treasury shares acquired - 25.3 (0.1) - 25.2 - 25.2 of the summary consolidated Group Financial material currencies. The constant currency information Balance as at December 2017 (Audited) Restated 2.2 401.2 453.4 5,441.7 6,298.5 43.2 6,341.7 Statements are in terms of IFRS and are consistent in incorporated in these summary consolidated Group Effect of adoption of new accounting standards (IFRS 9 all material respects with those applied in the most Financial Statements has not been audited or reviewed and IFRS 15)* - - (0.7) 36.4 35.7 - 35.7 recent Annual Financial Statements. or otherwise reported on by our external auditors. The Balance as at December 2017 (Audited) Restated 2.2 401.2 452.7 5,478.1 6,334.2 43.2 6,377.4 2. The Group has applied both IFRS 9 ‘Financial constant currency information is the responsibility Dividends declared - - - (735.6) (735.6) (8.4) (744.0) instruments’ and IFRS 15 ‘Revenue from contracts with of the Directors of Massmart. It has been prepared customers’ using the modified retrospective approach, Total comprehensive income - - 103.9 888.6 992.5 (19.9) 972.6 for illustrative purposes only and due to its nature, by recognising the cumulative effect of initially Changes in non-controlling interests - - - 0.3 0.3 (0.3) - may not fairly present Massmart’s financial position, applying IFRS 9 and IFRS 15 as an adjustment to the changes in equity, results of operations or cash flows. IFRS 2 charge and Share Trust transactions - (221.1) 173.0 11.7 (36.4) - (36.4) opening balance of equity at 1 January 2018. Therefore Treasury shares acquired - (41.0) - - (41.0) - (41.0) (with the exception of the Like-on-like consolidated Sales growth in: REPORTED CURRENCY CONSTANT CURRENCY income statement on page 57 and the Divisional Year ended December 2018 (Audited) 2.2 139.1 729.6 5,643.1 6,514.0 14.6 6,528.6 operational review) the comparative information has Mozambican Metical 8.2% 4.9% not been restated and continues to be reported under Malawian Kwacha (7.8%) (6.1%) Zambian Kwacha 13.9% 23.0% * Refer to note 44 in the audited consolidated Group Annual Financial Statements. IAS 18 ‘Revenue’ and IAS 39 ‘Financial instruments‘. ^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to the restatement note on page 64. IFRS 9 has had an insignificant impact for the Group Total ex-SA 8.5% 11.8% due to the low-value short-term nature of debtors. IFRS 15 key areas of impact are the changes in the 5. In late February 2018 the Group announced, Fair value hierarchy principal versus agent recognition of sales in parts of internally, the decision to relocate major sections of Massdiscounters and Masscash head offices from The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments identified below. the Masscash Division, particularly Shield, where sales are now recognised on a net basis and the recognition Durban to Johannesburg during the current year and The table below reflects 'Financial instruments' and 'Non-current assets classified as held for sale' carried at fair value, and those to embark on a formal organisational restructure under 'Financial instruments' and 'Non-current assets classified as held for sale' that have carrying amounts that differ from their fair of the right of return liability and related right of return s189 of the LRA in both Massdiscounters and Masscash. values, in the Statement of Financial Position. asset now recognised on a gross basis. Revenue can be further disaggregated for the current year between This process has now been substantially completed DECEMBER DECEMBER 2018 2017 South Africa R83.1 billion (2017: R86.0 billion) and ex-SA and resulted in restructure costs of R161.0 million. Rm (AUDITED) LEVEL 1 LEVEL 2 LEVEL 3 (AUDITED) LEVEL 1 LEVEL 2 LEVEL 3 R7.8 billion (2017: R7.7 billion). The quantitative impact These restructures will produce annual savings of of the changes are illustrated on pages 58-62. R52.0 million (unaudited). Financial assets 3. Massmart and its Divisions enter into certain transactions 6. Interest-bearing borrowings, including bank Financial assets at fair value through profit or loss 124.3 - 124.3 - 134.9 - 134.9 - with related parties in the normal course of business. At overdrafts, have increased by R558.2 million since Financial asset designated as a cash flow hedging December 2018, the Supplier Development Fund had a December 2017. This movement is a result of the instrument - - - - 1.1 - 1.1 - closing balance of R10.8 million (2017: R34.6 million). In settlement of the R600.0 million medium-term loan Loans and receivables 9.6 - 9.6 - 13.1 - 13.1 - April 2018, the Group repaid its R600.0 million medium- with Walmart, as well as the R604.9 million settlement OCI/Available-for-sale financial assets 1.1 1.1 - - 1.1 1.1 - - term loan with Walmart, on which it had an interest rate of our bank medium-term loans, offset by new finance Non-current assets classified as held for sale 11.6 - - 11.6 19.9 - - 19.9 of 7.46%, paid quarterly. As a 52.4% shareholder, Main leases. These term loans were replaced by an overnight Financial assets 146.6 1.1 133.9 11.6 170.1 1.1 149.1 19.9 Street 830 Proprietary Limited, a subsidiary of Walmart, bank overdraft facility due to more favourable terms will be receiving a dividend based on their number and are included in our financing activities for the year. Financial liabilities Financial liabilities at amortised cost 2,342.2 - 2,342.2 - 3,259.5 - 3,259.5 - Financial liabilities at fair value through profit or loss 24.8 - 24.8 - 28.7 - 28.7 - Financial liability designated as a cash flow hedging instrument - - - - 23.8 - 23.8 - Financial liabilities 2,367.0 - 2,367.0 - 3,312.0 - 3,312.0 -
There were no transfers of financial instruments between Level 1, Level 2 and Level 3 fair value measurements during the year ended December 2018. The financial assets and financial liabilities have been presented based on an analysis of their respective natures, characteristics and risks. Refer to the 2017 Group Financial Statements, note 39 for the valuation techniques applied.
62 Our performance Massmart Integrated Annual Report 2018 63 SUMMARY CONSOLIDATED GROUP FINANCIAL STATEMENTS Independent auditor’s report 7. During the IFRS 16 implementation project, an error in accounting was identified relating to a long-term lease of land. This 99-year lease arrangement that was entered into in 1994 (for the Makro Woodmead store) was incorrectly accounted for on a month-to-month basis as an operating lease and should have been accounted for as a finance lease. The error has been corrected by restating the comparative 2017 and 2016 figures as follows: on summary consolidated Group Financial Statements for the
DECEMBER 2017 DECEMBER 2016 year ended December 2018 53 WEEKS 52 WEEKS Rm AUDITED IMPACT RESTATED AUDITED IMPACT RESTATED Statement of financial position Property, plant and equipment 9,214.7 153.4 9,368.1 8,470.2 157.6 8,627.8 Deferred Taxation 652.6 19.3 671.9 722.0 14.3 736.3 To the shareholders of Massmart Holdings Limited Total assets 9,867.3 172.7 10,040.0 9,192.2 171.9 9,364.1 Non-current Interest-bearing borrowings 2,553.0 207.8 2,760.8 3,301.9 194.8 3,496.7 Opinion Current interest bearing borrowings 1,262.0 14.7 1,276.7 1,024.5 13.8 1,038.3 Total liabilities 3,815.0 222.4 4,037.4 4,326.4 208.6 4,535.0 The summary consolidated Group Financial Statements The audited consolidated Group Annual Net impact on total equity (49.7) (36.8) of Massmart Holdings Limited, incorporated in the ‘Our Financial Statements and our report thereon performance’ section of this Integrated Annual Report, Income statement which comprise the summary consolidated statement of We expressed an unmodified audit opinion on the audited Depreciation and amortisation (1,095.4) (4.2) (1,099.6) financial position as at 30 December 2018, the summary consolidated Group Annual Financial Statements of Occupancy costs (3,187.0) 4.4 (3,182.6) consolidated income statement, the summary consolidated Massmart Holdings Limited in our report dated 4 April 2019. Trading profit before interest and taxation 2,737.1 0.2 2,737.3 statement of comprehensive income and summary That report included the communication of other key audit Finance costs (585.4) (18.1) (603.5) consolidated statement of changes in equity, and the matters. Key audit matters are those matters that, in our Profit before taxation 2,170.8 (17.9) 2,152.9 summarised consolidated statement of cash flows for the professional judgement, were of most significance in our Taxation (649.1) 5.0 (644.0) year then ended, on pages 58-62, the related notes to the audit of the financial statements of the current period. Profit for the year (12.9) summarised consolidated Group Financial Statements on Profit attributable to: pages 62-64, the like-on-like Divisional operational review Directors’ responsibility for the summary (excluding the December 2017 like-on-like information on - Owners of the parent 1,507.7 (12.9) 1,494.9 consolidated Group Financial Statements - Non-controlling interests 14.0 - 14.0 page 51), as well as the capital management and impact of (12.9) IFRS 16 disclosure on page 52 are derived from the audited The Directors are responsible for the preparation of the consolidated Group Annual Financial Statements of Massmart summary consolidated Group Financial Statements in Basic EPS (cents) 700.3 (6.0) 694.3 Holdings Limited for the year ended 30 December 2018. accordance with the requirements of the JSE Limited Diluted basic EPS (cents) 687.3 (5.9) 681.4 In our opinion, the accompanying summary consolidated Listings Requirements for abridged reports, set out in the Headline EPS (cents) 694.1 (6.0) 688.1 Group Financial Statements are consistent, in all material ‘Board approval’ on page 7, and the requirements of the Diluted headline EPS (cents) 681.2 (5.9) 675.3 respects, with the audited consolidated Group Annual Companies Act of South Africa as applicable to summary Financial Statements of Massmart Holdings Limited for financial statements. Statement of cash flows the year ended 30 December 2018, in accordance with the Operating cash before working capital movements 3,964.7 4.4 3,969.1 requirements of the JSE Limited Listings Requirements for Auditor’s responsibility Decrease in current liabilities (433.2) (4.4) (437.6) abridged reports, set out in the ‘Board approval’ on page 7, and the requirements of the Companies Act of South Africa as Our responsibility is to express an opinion on whether The impact for the 52nd week has been assessed as immaterial, thus the same impact has been applied for both 52 and 53 weeks. applicable to summary financial statements. the summary consolidated Group Financial Statements RESTATED are consistent, in all material respects, with the audited DECEMBER 2018 DECEMBER 2017 (AUDITED) (AUDITED) Summary Financial Statements consolidated Group Annual Financial Statements based 8. Leases on properties are normally contracted for Net operating lease on our procedures, which were conducted in accordance periods of between three and 12 years with renewal The summary consolidated Group Financial Statements commitments (2019 – 2033) 16,253.8 15,015.3 with International Standard on Auditing (ISA) 810 (Revised), options averaging a further three to 10 years. Rental do not contain all the disclosures required by International Masswarehouse lease 15,147.0 15,151.7 Engagements to Report on Summary Financial Statements. comprises minimum monthly payments and in some Financial Reporting Standards and the requirements of cases, contingent payments based on turnover levels. Non-real estate 120.4 43.7 the Companies Act of South Africa as applicable to annual Turnover rentals, where applicable, average 1.1% of 31,521.2 30,210.7 financial statements. Reading the summary consolidated turnover. Rental escalations vary, but are between 0 and Group Financial Statements and the auditor’s report Director: Roger Hillen 10% per annum. 9. The summary consolidated Group Financial Statements thereon, therefore, is not a substitute for reading the audited Registered Auditor The December 2017 net operating lease commitments have been audited by independent external auditors, consolidated Group Annual Financial Statements of Massmart Chartered Accountant (SA) have been restated to include the Makro Woodmead a Ernst & Young Inc. Any reference to future financial Holdings Limited and the auditor’s report thereon. The 99-year long-term lease of land which had previously performance included in this report has not been summary consolidated Group Financial Statements and the Date: 4 April 2019 been identified as a variable lease arrangement. The reviewed or reported on by the Group’s external audited consolidated Group Annual Financial Statements do basic rental escalation is set at 7.5%. The present value auditors. The preparation of the summary consolidated not reflect the effect of events that occurred subsequent to of the minimum lease payments is R251,9 million. Group Financial Statements was supervised by the the date of our report on the audited consolidated Group This is the only finance lease included in the net lease Chief Financial Officer, Johannes van Lierop, Bachelor of Annual Financial Statements. commitments. Business Economics, RA (Netherlands).
64 Our performance Massmart Integrated Annual Report 2018 65 Introducing the SDGs 05 As a responsible corporate citizen, we believe that we have Corporate an important role to play in the achievement of the United Nations Sustainable Development Goals (SDGs). accountability Our continued success is dependent on the sustainable and responsible way we conduct our business.
With corporate accountability being a material matter for us, we aim to advocate for responsible business practices in all spheres of the Group, including how we address social and environmental challenges, engage our communities, ensure high levels of consumer safety and empower our people.
We have identified below the 14 SDGs as those we believe we are able to have the most meaningful impact on:
67 76 Introducing Engaging our the SDGs stakeholders
68 80 Addressing Empowering our social and people environmental challenges 84 Ensuring high levels of consumer safety
Massmart Integrated Annual Report 2018 67 Addressing social and environmental challenges
FOOD SECURITY CLEAN WATER AND EDUCATION AND SANITATION By 2030, substantially increase water-use efficiency across all sectors and ensure sustainable withdrawals and supply of freshwater to address water scarcity and substantially reduce the number of people suffering from water scarcity Water scarcity and supply insecurity in sub-Saharan Africa necessitates By 2030, ensure that all girls businesses to take a more active role in conserving water resources and and boys have access to driving water-use savings. Through the continued implementation of quality early childhood water-harvesting infrastructure to capture rainwater and refrigerant condensate, we have reduced our municipal water use by an estimated development, care and 22 million litres across 88 Makro and Builders stores in 2018. pre-primary education so In response to the Day Zero crisis we also invested in 17 atmospheric that they are ready for water-generating plants to help reduce water consumption at facilities primary education based in the Western Cape. These plants enable us to produce up to 20,000 litres of potable water a day, which is supplied directly to stores. Our Corporate Social Investment (CSI) Stemming from the water insecurity challenges we observed in programme focuses primarily on school Build and upgrade education 2018, an analysis of existing real-time water metering has highlighted By 2030, end hunger and ensure access by all nutrition, Early Childhood Development facilities that are child, additional opportunities to drive water savings through early leak people, in particular the poor and people in (ECD) and school sports infrastructure disability and gender detection and stricter water management practices. To capitalise on and maintenance. During 2018 we these opportunities, we will be accelerating the installation of real-time vulnerable situations, including infants, to safe, sensitive and provide safe, nutritious and sufficient food all year round invested R25.4 million, representing 2.9% water monitoring systems at high usage facilities. Our objective is to of our net profit after tax, in CSI. non-violent, inclusive and install smart meters at all standalone facilities by the end of 2020. Food donations and providing nutritional support to alleviate food During 2018, Makro, through its HOPE effective learning insecurity in vulnerable communities is one of our key focus areas. Worldwide South Africa partnership, environments for all During the period we placed a further 21 fully-equipped mobile supported 138 ECD centres. These food preparation kitchens at schools in KwaZulu-Natal, Limpopo, centres assist in caring for more than Builders Warehouse continued the roll-out Mpumalanga and Gauteng. Since the projects inception in 2008, we 8,000 vulnerable learners up to the of specialised multi-sport sports facilities have placed 350 mobile kitchens at schools in all nine provinces in age of five years. The project centres through their Let’s Play partnership South Africa. We estimate that our kitchens have enabled the hygienic around training educators, renovating with SuperSport. The facilities, which preparation of nearly 400 million Department of Basic Education and repairing ECD centres and providing are designed as sports hubs serving the supplied meals over the last four years. supplementary nutritional support to broader community, were completed at During the period we worked with Gift of the Givers and Food learners. Danville Primary School in Mahikeng and Forward SA to donate 200 tonnes of food to communities in Alexandra, Beyond the infrastructural and Khanyo Primary School in the community Tembisa, KwaMashu, Umlazi and Mitchells Plain. nutritional support provided, nationally of Masiphumelele in the Western Cape. In addition, we have prioritised providing disaster relief aid in the 1,709 parents were trained through 122 Since 2015, Builders has successfully form of water, food, blankets and hygiene products to communities parent support groups. These parent completed nine multi-sport facilities that have been impacted by natural disasters. In 2018 we, together with groups, which support a further 2,000 which cater for soccer, netball, hockey the Gift of the Givers, were the first responders in providing relief aid children annually, have been established and basketball and serve approximately to community members in, amongst other areas, Alexandra, Lusaka, specifically for children whose parents 45,000 aspirant sports men and women Soweto, Mitchells Plain and the Vaal. are unable to send them to ECD centres. across the country.
68 Corporate accountability Massmart Integrated Annual Report 2018 69 ADDRESSING SOCIAL AND ENVIRONMENTAL CHALLENGES
University of Pretoria, Gordon SUPPLIER Institute of Business Science (GIBS) DEVELOPMENT Together with the Walmart Foundation and GIBS, we initiated a programme to support PROGRAMME inclusive growth in township economies through providing training in entrepreneurship Promote development-oriented and practical business development. The policies that support productive programme, which focuses on identifying and activities, decent job creation, supporting active township entrepreneurs, entrepreneurship, creativity and will be run nationally and aims to reach and empower 200 business men and women over innovation, and encourage the the next two years. formalisation and growth of micro-, small- and medium-sized enterprises, including through AFFORDABLE AND access to financial services CLEAN ENERGY We estimate that procurement from small By 2030, double the global rate of improvement businesses exceeded R3.4 billion in 2018. in energy efficiency To help provide better access to our supply chain for small businesses, we launched the We continue to drive energy efficiency across our stores and Massmart Supplier Development Programme DCs. This helps us to reduce operational costs and electricity- (SDP) in 2012, which gives preference, but BROAD-BASED related emissions, which represent a significant portion of our not exclusivity, to black- and black woman- greenhouse gas emissions. owned enterprises. The aim of the SDP is to BLACK ECONOMIC Group store energy intensity decreased by 3.9% to 204.9 kWh/m2, provide opportunities for small and medium EMPOWERMENT largely due to a drop in energy consumption across Massdiscounters manufacturing enterprises. stores. As previously reported, in 2013 we developed an energy The work of the SDP involves assisting (BBBEE) efficiency roadmap that required a 10% improvement in energy suppliers to increase overall competitiveness efficiency by 2020. As we approach our 2020 energy efficiency by meeting product quality standards, By 2030, empower and milestone we are currently performing 16% ahead of our investing in bespoke manufacturing promote the social, economic target, having avoided the consumption of 90,000 MWhs of equipment to build capacity and providing and political inclusion of all, energy in 2018 alone. We have achieved these savings through, retail and business management training. among other things: the installation of energy efficient lighting; The programme currently has a portfolio of irrespective of age, sex, refrigeration and climate control systems; refrigeration doors; 24 small businesses which manufacture a disability, race, ethnicity, daylight harvesting cells; and stricter energy management and variety of products ranging from chef wear, origin, religion or economic monitoring. As is the case with water consumption, our priority in toilet seats and seedling trays to adhesives, or other status 2019 is to accelerate the adoption of real-time energy monitoring cooler-boxes, bricks, nails and paint. Of the across stores to achieve further energy consumption savings. 24 suppliers enrolled in the programme, 13 provide Private Label products, eight are We see the advancement of BBBEE as a key driver of economic Wildlands Rural Business Development By 2030, increase substantially the share of import substitution projects and six export and social inclusivity. In 2018, we achieved a verified score of Project renewable energy in the global energy mix products to countries such as Botswana, 80.81 and Level 4 contributor status. This is up from 66.63 in Zambia, Mozambique and Chile. 2017 and was the highest among listed retailers. Massmart, together with the Walmart Foundation, supports Since our first solar photovoltaic installation in 2016, we have Total procurement from the SDP increased While our BBBEE performance improved across all a rural development programme in partnership with generated over 6.5 million kWh of renewable energy, and have by 11% to just over R254 million in 2018. This scorecard elements, the most significant improvements Wildlands Conservation Trust (Wildlands). The programme over the last three years achieved a 500% growth in renewable included cooler box sales of R23.5 million, a were made in the following areas: recognition of employees will provide an opportunity for individuals, recruited from energy contribution within the Group. In 2018 we completed 92% increase from 2017. with disabilities (+1.45 points); investment in employee Wildlands’ legacy Green-preneur networks, to establish another two plants at our Makro Springfield and Strubens Valley In 2018, we were awarded the ‘Overall training and skills development (+9.1 points); unemployed their own small businesses through training, mentorship stores, bringing our annual generating capacity to 4.5 million kWh Winner’ at the inaugural ABSA Business learnerships (+2.03 points); and preferential procurement and bridging finance. The aim of the programme, over the per annum. We have two further sites scheduled to come online Day Supplier Development Awards, which spend (+1.3 points). We also, through the SDP, exceeded next three years, is to help establish 200 sustainable small in the first half of 2019 at our Makro Silverlakes store and Gosforth attracted more than 400 entries from both the BBBEE investment targets for enterprise and supplier businesses in five of South Africa’s most underserved rural Park DC. private and public sector enterprises. development and corporate social investment. communities in Northern KwaZulu-Natal.
70 Corporate accountability Massmart Integrated Annual Report 2018 71 ADDRESSING SOCIAL AND ENVIRONMENTAL CHALLENGES
RESPONSIBLE CONSUMPTION AND PRODUCTION Encourage companies, especially By 2020, effectively regulate harvesting and end overfishing, illegal, unreported and large and transnational unregulated fishing and destructive fishing practices and implement science-based companies, to adopt sustainable management plans, in order to restore fish stocks in the shortest time feasible, at least to practices and to integrate levels that can produce maximum sustainable yield as determined by their biological sustainability information into characteristics their reporting cycle We understand that our oceans and fisheries represent a valuable resource which needs to be carefully managed in order to It is important to us that the products we ensure food security and ecosystem health. In 2011 we aligned ourselves with the WWF South African Sustainable Seafood source are responsibly and sustainably Initiative guidelines and committed to working with our vendors to drive more sustainable fishing practices and avoid manufactured and packaged. We engage with sourcing threatened, endangered or red-listed seafood species. over 450 suppliers every year to advocate for We engage with all of our seafood suppliers annually through the circulation of a seafood advocacy survey covering issues improved efficiencies and more sustainable such as by-catch mitigation, stock health, and fishery improvement programmes. In addition, we conduct site visits and supply practices. This programme involves the facilitate issue-specific seafood workshops which have previously addressed topics including, supply chain traceability, stock By 2030, substantially reduce waste deployment of an advocacy survey, from which health assessments and International Seafood Sustainability Foundation (ISSF) tuna sourcing guidelines. generation through prevention, reduction, feedback reports benchmarking individual We also screen all of our fresh and frozen seafood and have partnered with the University of the Witwatersrand School of Animal, Plant and Environmental Sciences to conduct genetic identity testing of select national and Private Label products. recycling and reuse supplier environmental performance are circulated to participating suppliers. In addition, During the period, we conducted a total of 26 tests covering 18 products. Our initial round of testing identified two issues of The rapid increase in the volume of waste produced globally, environmental site visits are conducted concern which we raised with the respective suppliers and we can confirm these have been resolved. particularly non-recyclable plastic waste, necessitates that retailers annually with top performing and selected and consumer goods companies take decisive steps to minimise high environmental risk suppliers. environmental impacts and pollution. As a retailer that generates In 2018 we observed a marked improvement a variety of waste types, we are tackling this issue by optimising in supplier environmental performance, the recyclability and resource efficiency of our Private Label specifically in the areas of energy, water and packaging; diverting operational waste from landfill; and assisting waste. Additionally, there has been a rapid in the reduction of high priority post-consumer waste, specifically increase in the proportion of suppliers more electronics and appliances. actively monitoring and managing water One good example of our efforts to introduce more sustainable usage, with 65% of suppliers implementing packaging within our Private Label brands, is the redesign of the water management programmes, up from mBrand detergents line to include 50% post-consumer recycled 50% in 2014. material in the floor and tile cleaner, thick bleach, bathroom cleaner Beyond environmental supplier advocacy, and dishwashing liquid containers. We also converted our all we support animal welfare issues in product purpose cleaner packaging from white polyethylene terephthalate categories where we have a direct influence. (PET) to white high-density polyethylene (HDPE) in order to enhance One such area is poultry egg production. its recyclability. During 2018 we facilitated a poultry welfare Since 2017, we have increased the number of facilities actively workshop with our egg suppliers to advocate sorting, separating and recycling paper, plastic and board from for the consistent adoption of welfare 72% to 93%. In addition to this, we are supporting a composting practices and standards. As an outcome of and waste-to-energy programme which has increased from this, we have contracted with an independent 33 tonnes in 2017 to 250 tonnes in 2018. Collectively, we estimate specialist poultry veterinarian to conduct that we now divert 15,354 tonnes of waste from landfill annually. on-site welfare audits at facilities that supply Our priority for 2019 is to assist in reducing plastic waste, through eggs to Massmart. We will continue to build more recyclable packaging design and piloting more impactful on this initiative in 2019 with the objective of consumer recycling labels. conducting welfare audits with all our egg As sub-Saharan Africa’s largest electronics retailer, we vendors. acknowledge our role in providing safe disposal options for our customers’ electronic waste (e-waste). To assist our customers, we have facilitated South Africa’s longest running post-consumer e-waste recycling programme at our Makro stores. This programme, now in its 10th year, has seen a total of 1,117 tonnes of e-waste collected since its commencement, with 169 tonnes collected in 2018.
72 Corporate accountability Massmart Integrated Annual Report 2018 73 ADDRESSING SOCIAL AND ENVIRONMENTAL CHALLENGES
DEVELOP EFFECTIVE, Environmental performance indicators 2015 2016 2017 2018 ACCOUNTABLE AND Estimated water consumption intensity (kL/m2) 0.4 0.5 0.55 0.56 TRANSPARENT INSTITUTIONS SA store energy intensity (kWh/m2) 215.3 194.6 213.1 204.9 Scope 1 emissions intensity (tCO2e/Rm total sales) 0.6 0.6 0.81 0.59 Scope 1 emissions intensity (tCO e/m2) 0.02 0.02 0.03 0.02 By 2020, promote the AT ALL LEVELS 2 Scope 2 emissions intensity (tCO e/Rm total sales) 4.8 5.2 5.18 5.01 implementation of sustainable 2 Scope 2 emissions intensity (tCO e/m2) 0.22 0.18 0.18 0.17 management of all types of 2 • Water has been calculated from the cost of water consumed divided by regional commercial tariff averages forests, halt deforestation, restore • Scope 1 and 2 emissions are externally verified by GCX Africa degraded forests and substantially • Scope 1 emissions relate to direct emissions resulting from Company-owned vehicles, generators and fugitive increase afforestation and emissions across the Group (SA and Africa) • Scope 2 figures are derived from Divisional electricity consumption from grid-tied sources. Energy consumption data is reforestation globally annualised and normalised. Expected margin of error is 10-15%. Eskom emissions factor updated to 0.95 • Some scope 1 data for Masscash are estimates based on historical known values Aligned to a Walmart commitment to net zero • Total Group sales are used to calculate scope 1 and 2 emissions’ intensity per Rand million (Rm) deforestation, we have concluded a source- • The square meter (m2) is reported as a function of gross lettable area (GLA) of-origin sustainability review of our Private Label pulp and paper based products. In total, our Private Label products used approximately BBBEE performance indicators 2015 2016 2017 2018 1,338 tonnes of pulp and paper fibre, 91% of Ownership 6.3 8.98 12.47 14.17 which was sustainably sourced. Develop effective, accountable and transparent Management control 4.1 8.8 9.62 11.51 During the period we continued our sustainable hardwood screening and advocacy institutions at all levels Skills development 11.4 11.1 12.15 21.25 Enterprise development 15.0 24.4 27.4 28.89 programme with our suppliers. The objective In response to reports of state capture in South Africa, we have for of this programme, which involves surveying the past three years, provided financial support to social justice Socio-economic development 5.0 5.0 5.0 5.00 suppliers annually to confirm species, country organisations whose mandate it is to advocate for stronger BBBEE score** 68.3 58.3 66.63 80.81 of origin and third party ecolabel certifications, governance within public and private institutions. Starting with ** Improved overall scorecard performance as a result of ongoing efforts to improve transformation is to bring key sustainability issues to the three organisations, we have prioritised Section27, an organisation attention of our hardwood timber suppliers and who focuses on healthcare service and basic education. Our to ensure that we do not source species that are support has taken the form of funding to assist with their legal considered to be threatened or endangered. advocacy efforts and providing access to our in-house market CSI performance indicators 2015 2016 2017 2018 Through our advocacy programme, we have research function to assist in providing civil society and brand Total Massmart Group CSI spend as a % of profit after tax 1.7% 1.8% 1.5% 2.9% identified that source-of-origin traceability positioning insights. Total Massmart Group contribution (Rm) 20.4 24.1 23.4 25.4 remains problematic and inconsistent. To Total investment in nutrition programmes (Rm) 6.3 5.8 8.8 10.2 promote greater supply chain transparency we aim to host a timber workshop with our Total investment in infrastructure and school maintenance (Rm) 5.9 2.7 3.9 4.3 vendors in 2019 to develop more consistent Beyond the initiatives aligned to the United Nations Sustainable Total investment in early childhood development (Rm) 4.0 4.1 6.4 5.0 product traceability protocols. Development Goals covered above, we engage in a range of Total investment in Divisional discretionary projects (Rm) 3.7 9.8 4.7 6.0 Although Massmart sources modest volumes additional programmes including among other things: supporting of palm oil for its Private Label products, we the Department of Basic Education Matric Top Achievers Awards; support more sustainable palm oil production assisting with the South African National Defence Force Goodwill through the purchase of Roundtable on parcel project; tracking and growing our range of renewable Sustainable Palm Oil (RSPO) PalmTrace certificates. energy and water efficient products; and increasing community We currently offset 100% of our Private Label engagement through our Urban Bookshelf and ‘Sports in a Box’ palm oil usage through this initiative. programmes.
74 Corporate accountability Massmart Integrated Annual Report 2018 75 Topics of interest in 2018 included: industry waste management plans, water scarcity in the Western Engaging our KEY STAKEHOLDER Cape, single use plastics and recycling, faux fur, labour rights, genetic identity testing, animal welfare, listeriosis, supply chain access and BBBEE reporting, food product labelling, ‘fake’ food protests, local stakeholders DISCUSSIONS product certification, Black Friday promotions, large appliance energy efficiency labelling, carbon tax and Competition Act amendments. These topics lead us to the people and organisations with whom we interact. They typically included the following stakeholder groups:
Legislators (e.g. Portfolio Providing input into proposed legislation, identifying opportunities for alignment with We are committed to making a committees) Government priorities positive contribution in the societies in State departments and (e.g. Department of Partnering on policy implementation and fostering public-private sector cooperation which we operate through ongoing ministries Trade and Industry and Department of Energy) engagement with the people whose Government agencies (e.g. National Regulator for Obtaining guidance on implementation of regulatory standards and identifying lives and livelihoods we impact. Compulsory Specifications opportunities to work together in the public interest and South African Bureau While we engage with stakeholders through a number of of Standards) structured interventions, such as workshops, surveys and one-on-one meetings, our primary objective remains to be Environmental NGOs (e.g. Conservation South Developing environmental product screening approaches, policy development and consistently accessible and transparent with the people and Africa) environmental issue prioritisation organisations with whom we come into contact. Each year we engage with a wide variety of people and organisations to identify the most significant social issues. To Small business and supplier (e.g. Fetola) Engaging on small business development and supply chain access opportunities in retail determine the relevance of these issues to Massmart, we take development agencies the following steps:
Public interest and social (e.g. Section27) Reviewing public interest issues, taking guidance on the operational disbursement of 1 sustainability NGOs social development funding, identifying opportunities to support social justice initiatives
Industry associations (e.g. Consumer Goods Industry challenges and operational responses, joint projects and proposed and existing Council of South Africa, legislation National Business Initiative) Conduct desktop research to identify topics in the 2 Suppliers Product innovation opportunities, customer engagement and cooperating on corporate broader public discourse social investment initiatives
Labour unions (e.g. SACAWU, Food and Wage negotiations, flexi-time to permanent staff appointments, staff training and 3 Allied Workers Union) development Track media coverage to understand leading public viewpoints Subject Matter Experts (SMEs) Carbon footprint consultants, animal welfare experts, genetic testing laboratories
Local communities Understanding potential operational impacts and identifying mitigation and partnership Assess the materiality of opportunities these issues to the Group through the facilitation of workshops and engagement Employees Workplace satisfaction and engagement, business objectives and strategy and career with subject matter experts development opportunities and interested parties
76 Corporate accountability Massmart Integrated Annual Report 2018 77 ENGAGING OUR STAKEHOLDERS
PROACTIVE ENGAGEMENT Stakeholder Our engagement Insights Responses WITH OUR STAKEHOLDERS activities Black Friday has seen a 9,900% Encouragingly, Game and Makro Our objective in the coming Aligned to the topics identified on page 77, we have had numerous 1,248 increase in consumer interest were cited by customers as year is to use our research engagements over the course of the year, including: in South Africa over the last five offering the best Black Friday insights to ‘win’ at Black CUSTOMERS years, the highest globally. To deals. Overall, 44% of customers Friday through promotional LSM 4-10 better understand and meet surveyed indicated that they had activities aligned to customer Stakeholder Our engagement Insights Responses our customers’ expectations for participated in Black Friday, with expectations and ultimately activities Black Friday, we surveyed 1,248 14% choosing to shop online. drive additional market share Cambridge, Game, Builders gains over this period. To better understand employee Despite the significant increase Improving overall employee Warehouse and Makro customers. perspectives and promote higher in response, overall employee loyalty through more effective To foster awareness and In 2018, we observed an Following last year’s commitment 12,093 levels of engagement, we conduct engagement remained communication and engagement advocate sustainable supply improvement in water to focus on suppliers of products EMPLOYEES an employee engagement survey unchanged. Clearer career pathing has been prioritised for 2019. 320 chain practices we profile the conservation efforts among manufactured in environmentally annually. In 2018, we obtained was highlighted as an area in need SUPPLIERS environmental practices of our responding suppliers. Not intensive industries, we feedback from more than 12,000 of improvement and overall the 2018: suppliers on, among other things, only are a greater number of completed a desktop exercise to employees, up 178% from 2017. net promoter scores (a measure of waste management, energy suppliers implementing water identify high priority suppliers. employee loyalty) were observed 1,500+ PROFILES efficiency, water conservation and use monitoring programmes, Following this review, we to be low. environmental disclosure. but there has also been a conducted exploratory meetings In response to media reports and The research revealed that The research has highlighted notable increase in the number with our three largest non- a Human Rights Commission while the frequency with an opportunity to improve of suppliers who are investing ferrous product suppliers as the 2,754 investigation into unsafe/expired which customers encountered consumer education of food in water conservation initiatives. basis for establishing benchmark LOW AND food being sold to vulnerable expired food products was product safety labelling. The Over 65% of suppliers now environmental performance MIDDLE INCOME consumers, Massmart conducted low, the majority (80%) of results have been shared with actively track and monitor their guidelines for energy and water CUSTOMERS 2,754 customer intercept surveys customers surveyed expressed our food safety department and water consumption, up from 50% intensive product categories. LSM 4-8 at Cambridge Food, Jumbo, Game confusion regarding the correct Makro completed a consumer in 2014. and Makro stores to: determine interpretation of existing food food expiry education campaign For the fifth year in succession, Vendors noted that greater Our objective going forward is the frequency with which safety labels. For example, the during Q4 of 2018. we circulated a survey to our distribution efficiency has been to prioritise strategic product customers encountered expired majority of those interviewed 580 general merchandise vendors achieved through our transition categories with a view to pin food in our stores; and gain insight incorrectly believed that products GENERAL asking them to rate us against from direct-to-store to distribution pointing areas to accelerate into our customers understanding that had past their best before MERCHANDISE competitors on the following centre deliveries. However, buyer responsiveness to new market of the various food labels currently dates were no longer safe to SUPPLIERS dimensions: distribution efficiency, responsiveness to new market opportunities and improve in use. consume. responsiveness to new market opportunities was highlighted as supply efficiencies. opportunities, business ethics and an opportunity for improvement. The importance of creating local Unprompted, only 2% of To assist with informing their brand custodianship. demand whilst reducing reliance customers surveyed showed brand and marketing strategy, We facilitated a poultry welfare During the workshop, suppliers Following a successful pilot 1,680 on imports was again reiterated a spontaneous awareness of the results of the survey have workshop with Massmart’s expressed their support of our welfare audit at one of our CUSTOMERS in this year’s State of the Nation Proudly South African. After been presented to the Proudly 9 egg suppliers to advocate the poultry welfare programme suppliers facilities in Q4 of LSM 2-10 Address. Working with Proudly prompting, 42% of customers South African Executive EGG SUPPLIERS consistent adoption of holistic and standards. It was agreed 2018, third party welfare audits South African (PSA), customer indicated that they would be Committee and Board. animal welfare practices and that suppliers would provide have been scheduled with our interviews were conducted in more inclined to purchase Proudly standards. Massmart access to conduct third remaining suppliers for March KwaZulu-Natal, Gauteng and South African labelled products, party welfare audits at selected and April 2019. the Western Cape, to determine citing job creation as the primary production facilities in 2019. the extent to which customers reason for their decision. gave preference to Proudly South Aligned to a Walmart Collectively, our Private Label We are engaging with suppliers African branded products. commitment to net zero products used approximately of uncertified virgin fibre 7 deforestation, Massmart has (for 1,338 tonnes of pulp and products to develop plans to For the second year running, Education, health care and Research findings have been PULP AND PAPER the second year running) engaged paper fibre, 91% of which was transition to sustainable sources Massmart worked with Section27 economic transformation were shared with Section27 and have PRIVATE LABEL with vendors to conduct a source- sustainably sourced. of supply. 1,641 to gauge public sentiment on key highlighted as the top three social reinforced our Corporate Social SUPPLIERS of-origin sustainability review of SOUTH AFRICAN social issues in South Africa. issues that survey participants Investment focus on primary our Private Label pulp and paper CITIZENS wished to see addressed. and foundation phase education based products. initiatives.
78 Corporate accountability Massmart Integrated Annual Report 2018 79 Empowering our people
DIGITAL MINDSET, TECHNOLOGY ENABLEMENT Provide training, tools and systems that As a Group, Massmart is faced enable ‘digital first’ ways of thinking with a turbulent economic In our dynamic operating environment, we are compelled to environment and changing leverage technology as a competitive advantage for Massmart’s growth strategy. Over the past few months Massmart has been consumer demands. Our working on developing a Group IT strategy and plan in order continued relevance depends on to capitalise on technology platforms to create a differential our ability to effectively harness advantage through technical innovation and operational the combined talent of our people excellence. Aligned to the theme of optimising our IT landscape, we identified the need to build IT skills and capacity as well as to in order to be able to continue to develop leaders with a digital mindset. meet the needs of our customers. We have thus made it a priority to provide training, tools and Determining the capabilities systems to enable a digital mindset and integrated this priority required to drive the Massmart of into all aspects of our people agenda. In delivering on our ambition, the Human Resources (HR) community continues to the future, together with the build momentum on its HR IT roadmap, achieving the following challenges we have encountered in the year under review: in securing the right talent, led to • By providing both desktop and mobile access, the talent us refining our key people eady or management system implemented in 2018 facilitated a comprehensive succession planning review of over 4,000 priorities. Our focus is on ensuring leaders; we have digitally enabled talented • Our employee self-service function, a web-based application teams with a breadth of t e uture that provides employees with access to their personal experience in a diverse and records and payroll details, was implemented in another two Divisions, growing the usage to over 5,000 across all facilities. inclusive environment. Once made available on mobile devices it is anticipated that usage will increase further; • For the first time, our employee engagement survey was Our key people priorities are: completed online by over 12,000 employees using various devices. This has built a strong business case for Wi-Fi and mobility in our stores and other facilities; Digital mindset, • We are currently building HR analytics capability to not only technology enablement provide supportive and predictive data to leadership and HR business partners, but also to highlight and measure HR data Transform our talent integrity; and • 2019 will see the implementation of a Group-wide learning Create a high-performance culture platform to take learning from the classroom and allow for accessibility through eLearning. In future, this platform will also form part of a larger integrated human capital Strengthen diversity and inclusion management system.
80 Corporate accountability Massmart Integrated Annual Report 2018 81 EMPOWERING OUR PEOPLE
TRANSFORM STRENGTHEN • An active Employment Equity Committee is being established in each business unit; OUR TALENT DIVERSITY AND • Policy reviews are conducted to ensure that there are no implicit INCLUSION barriers to diversity and inclusion; Equip leaders to transform our business through • Mentoring programmes are made available; • Accredited graduate development programmes for our rewards, environment and ways of working Embed diversity and inclusion in operations, merchant, supply chain, marketing, finance, legal and In 2018, we rolled out the TalentPrint system to approximately 4,600 everything we do, enabling a digital teams are offered; employees and their managers. Employees were given an opportunity to competitive advantage • Unconscious bias workshops are made available to leaders; update their individual talent profiles thereby improving the quality and • The Women in Leadership Councils established in each Division accuracy of talent reporting. The business intelligence generated through We have embarked on several initiatives to drive seek to increase women in operational roles. The Councils explore this process provided us with rich data, informing our decisions around diversity and inclusion in order for Massmart to possible organisational barriers to the progression of women, succession, attraction and retention. With this multifaceted knowledge of become a truly diverse company that mirrors our explore opportunities for women to expand their influence and our people we are better able to determine their aspirations and potential; customers and the communities we serve. We strive provide mentoring opportunities for women by women; their levels of engagement; their capabilities; and development needs. to create a culture that has, as its hallmark, the values • External mapping of talent in retail specific functional roles to We also refreshed our competencies as part of our ongoing effort to of mutual respect, collaboration and empowerment. ensure that we increase diversity on selection slates; modernise our approach to talent management. This in turn has informed As a company we ensure that all team members are • Incorporating unconscious bias training in learning journeys our development approach as we embarked on the Leadovate Project, CREATE A HIGH- valued for all of their various characteristics, skills and conducted through the Leadovate Project and employee a Group-wide initiative to renew our corporate learning agenda. Some abilities, so that they can achieve their full potential on-boarding; of the benefits we expect to realise from the corporate learning agenda PERFORMANCE and contribute wholeheartedly to the success of the • Participation in the ‘Bring a girl child to work’ annual day; renewal include: CULTURE Company. Our diversity and inclusion programme • Quiet rooms are available for pregnant and nursing mothers; and • Building the digital and innovative workforce of the future; includes the following initiatives: • A religious leave policy accommodates diverse religious festivals. • Linking our competencies and business objectives; • Refining our talent management programme assessment; and Elevate performance across • Ensuring a strong pipeline of inclusive, diverse and experienced the business through leaders. rewards, environment and The outcome of the project will shift us from a transactional, face-to-face, ways of working largely un-quantified impact learning function (with pockets of excellence) to an agile, digitally enabled, collaborative and facilitated learner driven Competition for talent is aggressive experience that focuses on performance and impact at scale. and requires consistent scanning of Our learning and development operating model seeks to accelerate both the internal and external talent learning and future readiness of our employees. It achieves this by environment to remain relevant in offering customised, integrated, agile, digitally-enabled learning options attracting and retaining career retailers and journeys, which enable team and business performance, innovation, and critical leadership skills. To this end culture, transformation and sustainability. This integrated approach to we have driven a pay-for-performance talent and learning has ensured that we: compensation programme aligning • Grow and develop our people year-on-year; shareholder considerations with strategy • Improve readiness, succession planning and retention of talent; implementation. • Enable business critical capabilities for strategic advantage; and Employee engagement at all levels • Build competencies to drive innovation, performance, culture, talent is monitored and addressed through a and the Customer and Employee Value Proposition (CVP and EVP). variety of initiatives. Employee performance indicators 2016 2017 2018 Total number of permanent employees 28,555 28,650 32,008 Percentage of permanent ACI employees 90.7% 91.5% 92.8% ACI management as % of all management 5.7% 6.3% 6.4% Percentage of permanent employees who are women 44.3% 45.4% 47.0% Percentage of total employees operating in South Africa 92.0% 89.4% 90.3% Unionised staff 33.2% 40.9% 44.4% Percentage of permanent employees with medical benefits 97.0% 97.0% 83.5% Employee Turnover 15.4% 10.4% 20.0% Employee Training Spend R87.1m R112.1m R230.2m Number of work related accidents that occurred in the current year 611 554 538 Paid to employees as salaries, wages and other benefits R7,346.6m R7,402.9m R7,528.9m
82 Corporate accountability Massmart Integrated Annual Report 2018 83 Ensuring high levels of consumer safety
Food safety and hygiene An effective Food Safety programme results in customer loyalty; improved customer service; and reduced chance of customer incidences, regulatory findings and product recalls. Our We continue to work closely Food Safety programme includes: food with our Private safety (external and internal) audits at store, Label suppliers manufacturing plants and supplier levels; to implement the Global Food Safety product and environmental testing, food Initiative (GFSI) fraud testing; recalls; regulatory inspection standards management; and food safety training and monitoring programmes. In 2018, the focus was on improving food safety standards in our stores, processing Consumer protection and product safety facilities and DCs. We were audited against the compliance highest global and local food safety standards, which revealed a significant improvement in The Massmart Consumer Protection and Product programmes our overall food safety results. continue to advance consumer rights advocacy, and local/global We continue to work closely with our maturity levels. For 2018, the focus was on store operations process Private Label suppliers to implement the implementation, as well as ecommerce process design that was Global Food Safety Initiative (GFSI) standards aimed at increasing customer satisfaction. and we have seen good progress with the overall compliance. In 2018 product testing Our 2018 efforts were underpinned by: was conducted by a SANAS accredited • Driving the culture of ‘doing the right thing’ all the time laboratory at both product and store levels to through thought leadership; ensure compliance to food safety standards. • Training all in-store operations management to better serve We noted an increase in the product recalls our customers; in 2018, in comparison to 2017, due to the • Maintaining and building strong regulatory relationships both listeriosis outbreak in South Africa and the in existing and future ex-SA markets; general increased awareness around food • Supporting the ecommerce supplier/seller policies aimed safety. The reduction in DC audits was due to at safe, compliant and good quality products on offer to our the consolidation of DCs across our business, customers; and which resulted in more effective supply chain • Mitigating legal and regulatory risk by improving product initiatives being implemented. levels of safety and quality. Massmart’s Product Safety programme continues to impress Food safety regulators in South Africa, with numerous acknowledgements performance Health and Safety and requests to work in advancing national Product Safety policy indicators 2015 2016 2017 2018 amidst the Fourth Industrial Revolution. Greater emphasis has also In-store food safety audits 996 1,503 825 881 We believe that Health and Safety is an integral part of the way we conduct business, this is embedded in our culture. In been placed on timeous precautionary product quarantines and Distribution Centre food 8 18 17 16 doing so our Health and Safety programme is focused on three key areas: recalls when such risk arises. safety audits • Reduction of Safety related incidents in the workplace: our ongoing communication, training and awareness Areas of improvement regarding our Consumer Protection Private Label products tested 1,248 1,132 1,522 1,971 programmes have improved health and safety standards and steered consistency across the Group. This is evidenced programme (most notably on-time delivery and product-price- by the reduction in the number of injuries relating to the manual handling of equipment/products. These initiatives accuracy, especially in relation to growing online sales) have In-store environmental tests 5,700 12,982 16,221 16,508 will continue in 2019; been identified through our customer complaints processes. In (surface swabs, hand swabs, • Ensuring effective safety standards relating to equipment: additional safety standards were implemented to drive response to this, advanced process controls will be implemented product tests, water tests, consistency around operational requirements, machine operations and other safety rules; and drain swabs) in 2019 to balance and improve customer experience both online • Through our ongoing focus on training, communication and awareness, we have noted a decrease in both customer and in-store. Products recalled 24 34 38 55 and staff injuries. We are pleased to report that no fatalities occurred.
84 Corporate accountability Massmart Integrated Annual Report 2018 85 Our approach to corporate governance
Our governance philosophy Massmart’s purpose to be the most trusted wholesale and sub-Committee, the Ethics and Compliance Committee, to retail Group in sub-Saharan Africa continues to guide our oversee that the Group’s ethics and compliance programme efforts and aspiration to deliver exceptional value to our which continues to monitor and measure the Group’s customers in a difficult trading environment. efforts towards attaining effective ethical leadership and We are fully committed to sustainable business practices compliance. This sub-Committee meets six times a year 06 and we continuously monitor and measure our impact to consider legal and regulatory developments and risks on the communities in which we operate, and on the impacting the business; conducts a Group ethics and environment. We believe that the foundation to attaining compliance review; identifies specific focus areas that the highest standards of governance include embracing Massmart’s compliance team manage closely; receives Transparency and robust governance and business practices that are feedback from Massmart Audit Services; and addresses consistent with applicable regulatory frameworks, as well as any ongoing ethics and compliance matters in general. accountability corporate best practice. Additionally, the sub-Committee regularly considers and In the face of recent corporate governance failures in assesses future focus areas holistically to help drive and the South African business landscape, we have continued promote a culture of good ethical conduct and compliance. to strengthen our efforts to ensure that our business Whilst the Massmart Executive Committee and Board sub- practices are guided by and comply with requirements of Committees have delegated oversight in relation to areas applicable regulatory frameworks, including the Companies of governance under their mandate, the Board ultimately Act of 2008, the JSE Listings Requirements and the King endorses and accepts collective responsibility for achieving IV Code on Corporate Governance for South Africa, 2016 the values underpinning good governance advocated (King IV). As such, the effectiveness of our governance, risk by King IV, namely: integrity; competence; fairness; and compliance frameworks, standard operating policies, responsibility; transparency; and accountability. It further procedures and controls are assessed against the ability of embraces the concept of integrated thinking encapsulated our business to fulfil its purpose and commitment while in King IV, which underpins corporate citizenship, stakeholder ensuring that sustainable value is created for stakeholders. inclusivity, sustainable development and integrated We are pleased to report that our Board continues to work reporting. The Board and its Committees regularly review effectively in providing strategic oversight and support to Massmart’s governance structures and processes to ensure our Executive Committee. For the year ended December that the Board exercises effective and ethical leadership, 2018, the Board satisfactorily discharged and fulfilled its conducts its affairs as a responsible corporate citizen and responsibilities in accordance with the Board Charter, King IV makes appropriate decisions to ensure sustainability. and applicable regulatory and legislative requirements. King IV advocates an outcomes-based approach, and defines corporate governance as the exercise of ethical Corporate governance approach and effective leadership towards the achievement of the 87 92 following governance outcomes: Our approach to Board The Massmart corporate governance framework is guided • Ethical culture governance Committee by the principles enshrined in King IV, which has been • Good performance feedback applied by the Board since its implementation effective • Effective control 88 from October 2017 to deliver desired governance outcomes. • Legitimacy Our Board 96 In addition, Massmart continues to embrace and apply the Since its adoption of King IV in 2017, the Group has Remuneration highest ethical standards to its operating environment continued to apply and assess its business practices against report and business practices as reflected in the Group’s Code of the four desired governance outcomes. We are pleased to Ethical Conduct. report that, for the year ended December 2018, the Board The Group is also committed to complying with all is satisfied with management’s efforts to ensure that the legislation, regulations and the highest standards of practices underpinning the principles espoused in King IV corporate governance and best practices relevant to our are entrenched in the Group’s internal controls, policies and business, in every country in which we operate. Massmart’s procedures, governance and compliance frameworks and Executive Committee has established a management supporting structures.
A register documenting the summarised assessment of the King IV principles applicable to Massmart is available online. Visit www.massmart.co.za/iar2018/kingiv
Massmart Integrated Annual Report 2018 87 Our Board
Board composition The role of all Directors is to bring independent judgement and The Board is responsible for directing the Group towards achieving high OUR BOARD AT A GLANCE experience to the Board’s deliberations and decisions. At the time of this report, the Board comprised of two Executive Directors, six standards of corporate governance based on local and international corporate Independent non-Executive Directors and three non-Independent practice and is ultimately accountable for achieving the Group’s strategy, Demographics non-Executive Directors, and as such reflects an appropriate balance with a majority of Independent non-Executive Directors. operating performance and financial results consistent with the Group’s Executives 18% Underpinned by objectivity and impartiality, the Board’s diversity has served as a source of its leadership strength. With combined corporate governance framework. The Board appreciates that strategy, risk, Non-Independent 27% non-Executives experience ranging from global retail and commercial experience performance and sustainability are inseparable elements of value creation. to cultural and gender diversity, business experience and length Independent 55% of service, Massmart’s Board is well positioned to add value to non-Executives the business. We continue to meet our gender equality target of Female 45% appointing 40% of women to Independent non-Executive Director Male 55% positions and every effort will be made to maintain this. The Board has been further strengthened by achieving its race diversity target of ACI 55% appointing 50% African, Coloured and Indian (ACI) candidates to open White 45% Executive and non-Executive Director positions. The Board is satisfied that its composition reflects the appropriate mix of knowledge, skills, Foreign nationals 36% experience, diversity and independence. The gender and race diversity profile of the Board as at the date of Tenure this report is outlined in the infographic to the left. Executive Directors Non-Independent non-Executive Directors On 25 May 2018 we announced Olufunke (Funke) Ighodaro’s Guy Johannes Susan Enrique JP appointment as an Independent non-Executive Director and a Hayward van Lierop Muigai Ostalé Suarez member of the Massmart Audit and Risk Committees. On 23 August 2018 shareholders were informed that Chris Seabrooke had agreed to (53) (52) (49) (58) (55) Average continue to serve on the Board as Lead Independent non-Executive Chief Executive Officer Chief Financial Officer Executive Vice President and CEO of Executive Vice of 8 years Director and Deputy Chairman but would cease to be a member of Employee since 2000 Employee since 2015 President, People and Walmart Latam, UK and President and Chief Appointed Appointed Corporate Affairs at Africa and Chairman of Administrative Officer, Board Committees and step down as Chairman of the Audit, Risk and 15 May 2001 12 March 2015 Walmart Canada the Board of Directors of Walmart International Remuneration Committees. Funke succeeded Chris as the Chairman Appointed Walmart Mexico, Central Appointed of the Audit and Risk Committees, while Phumzile Langeni was E R SE E R America and Chile 26 May 2017 27 February 2019 0-3 years 45% nominated and assumed the role of Chairman of the Remuneration Appointed Committee. SE 24 February 2016 3-5 years 18% 6-9 years 0% On 28 February 2019 we announced the appointment of Lindiwe M N Mthimunye to the Board as an Independent non-Executive Director. >9 years 37% Lindiwe was further nominated to serve on the Audit and Risk Committees. We also announced the appointment of JP Suarez as a Board experience Walmart-appointed non-Executive Director in place of Roger Burnley. On the same day we informed shareholders that Chris Seabrooke’s Leadership retirement will become effective on 23 May 2019, from which date Corporate governance Chris will step down as the Deputy Chairman and Lead Independent non-Executive Director. Compliance Independent non-Executive Directors Johannes van Lierop, Massmart’s Chief Financial Officer, has General business management indicated that for personal reasons he is not available to extend his Kuseni Chris Nolulamo Olufunke Phumzile Lindiwe Economics and public policy tenure in South Africa after the formal conclusion of his South African Dlamini Seabrooke (Lulu) Gwagwa Ighodaro Langeni Mthimunye work visa in February 2020. He has therefore given the Board early (51) (66) (59) (55) (44) (45) Human Resources and legal notice of this development and a formal Executive search process to Chairman of Deputy Chairman Appointed Appointed Appointed Appointed International retail identify and appoint a successor has commenced. This process will the Board of the Board and Lead 1 November 2006 24 May 2018 25 August 2004 27 February 2019 likely take between three to six months. Further announcements will Independent Director Risk management Appointed A R SE A R A M N R A R be made when there are any material developments in this regard.
10 April 2014 Appointed Finance and accounting 1 February 2000 M N For complete and detailed CVs of the Board members please
visit www.massmart.co.za/iar2018/CVs Our Board of Directors as at 4 April 2019
Our Board Committees A Audit E Executive M Remuneration N Nominations R Risk SE Social and Ethics
88 Transparency and accountability Massmart Integrated Annual Report 2018 89 OUR BOARD
Director independence Director appointment and rotation of ACI candidates to the Board. In the event that MASSMART’S the Board does not constitute at least three ACI Massmart has a unitary Board with a majority of non- At least one-third of the non-Executive Directors are Directors at any time, the Board will endeavour to Executive Directors. The majority of the non-Executive required to retire every year and Massmart Executive LEADERSHIP make an appointment of an ACI candidate to its list of Directors are independent. The three Walmart-appointees Directors have elected to also retire on this basis. As a result, Independent non-Executive Directors within a period are not considered independent. Our Lead Independent all Directors retire by rotation at least every three years ROLES of 12 months. Pleasingly the prescribed targets were Director, Chris Seabrooke, chairs the Board meeting when a and, if eligible and available, their names are submitted for met during the reporting period. conflict of interest arises and/or when the Chairman, Kuseni re-election by the shareholders at the ensuing AGM. In MASSMART BOARD OF Dlamini is unable to chair the meeting. addition, shareholders must ratify the initial appointment Leadership roles and functions Annually, the Nominations Committee and the Board of each Director at the first AGM following that Director’s DIRECTORS considers the independence of the Board members appointment. As a result of these requirements, at the 23 The Board is wholly responsible for the formulation, against the criteria set out in King IV and in line with its May 2019 AGM, Olufunke Ighodaro, Lindiwe Mthimunye and development and effective implementation of Group recommendations. In assessing each non-Executive Director’s JP Suarez are nominated for election having been appointed strategy and delegates operational strategy implementation independence, the review considers the following aspects: during the reporting period and Kuseni Dlamini, Enrique and general executive management of the business to its • Whether the Director had been employed in an Ostalé and Susan Muigai retire by rotation. Being eligible, they Executive Directors and Executive Committee. This is achieved Executive capacity in the Group during the preceding all offer themselves for election or re-election, as applicable. A through the direction provided by the application of the three financial years; The Board confirms its support for the election or re-election Board Charter, Memorandum of Incorporation, its respective The Board actively AUDIT • Whether the Director had been the designated external of each Director and records that, save for Lindiwe and JP who COMMITTEE letters’ of appointment and its application of King IV. auditor or a member of the audit team of an external joined the Board on 27 February 2019, the other four Directors delegates its authority The role of the Chairman is distinct and separate from that audit firm responsible for performing the statutory audit were all evaluated as effective in their performance during the to its five sub- of the CEO and the separation of responsibilities is designed Committees and the R for Massmart; reporting period. The evaluation is a formal annual process to ensure that no single person has unfettered decision- Executive Committee. • Whether the Director is a representative of a major conducted by the Group Company Secretary, Joe Ralebepa. RISK making powers and that appropriate balances of power and shareholder; In filling vacant positions, the Board proactively seeks and COMMITTEE authority exist on the Board. • Whether the Director participates in a share incentive appoints qualified previously disadvantaged individuals, In accordance with the Board Charter, and as scheme offered by the Company; in particular, African, Coloured and Indian (ACI) men and N recommended by King IV, the Deputy Chairman of the • Whether the Director is a significant or ongoing women, and men and women with disabilities, who reflect Board, Chris Seabrooke, who is an Independent non- professional advisor to Massmart, other than as a a diverse range of skills and backgrounds that represents the NOMINATIONS Executive Director, serves as the Lead Independent non- member of the Board; South African community to the greatest extent practical, COMMITTEE Executive Director. • Whether the Director is a significant supplier and/or including specifically gender, race and ethnic diversity. The Board actively delegates its authority to the customer to Massmart; When considering vacancies, the Board, by and through SE five sub-Committees and the Executive Committee in • Whether the proportion of that Director’s shareholding its nominating process, shall consider and shall be guided by accordance with the scope and mandate prescribed in Massmart (if any), or Director’s fees, represent a the following: SOCIAL in Committee respective Charters. The Board and sub- material part (10% or more) of their wealth or income; • The target of appointing 40% of women to open AND ETHICS COMMITTEE Committee Charters enable cross membership between • Whether the Director is a significant provider of financial Independent non-Executive Director positions but not the Board and its sub-Committees, which in turn capital, or ongoing funding to the Company; or is an less than two in number; and/or request from its majority requires coordinated timing of meetings; and avoidance officer, employee or representative of such provider of shareholder, Walmart, to consider recommending and M or duplication or fragmented functioning in so far as financial capital or funding; supporting appointments of women to the Board in REMUNERATION possible and consequently, the Board achieves effective • Whether the Director is an executive manager of another accordance with provisions of the gender diversity COMMITTEE collaboration. There is a balanced distribution of power company which is a related party to the Company; or policy. In the event that at any time the Board does not in respect of membership across Committees, so that no • Whether the Director is entitled to remuneration constitute at least two female Directors, then the Board individual has the ability to dominate decision-making, and contingent on the performance of the Company. will endeavour to make an appointment of a woman no undue reliance is placed on any individual. Additionally, CHIEF from its Independent non-Executive Directors within 12 EXECUTIVE the Board and Committee Charters confer at each In addition, the Board rigorously reviews non-Executive months. These targets are driven primarily by the Board’s OFFICER Committee specific matters relevant to that Committee Directors with tenure periods exceeding nine years. In this diversity policies and during the reporting period, the and work is allocated accordingly. The Board delegates its case, the Committee considers whether that Director’s targets prescribed in the policies have been met; and authority to the Massmart Executive Committee through independence, judgement and contribution to the • The target of appointing up to 50% ACI candidates its delegation of authority, which is reviewed annually by Board’s deliberation, when assessed objectively from the to open Executive and Independent non-Executive the Board. perspective of a reasonable and informed third party, could Director positions, provided that the Board shall be unduly influenced or compromised, or may appear to be endeavour to maintain at any time not less than three compromised, by this length. Chris Seabrooke, Lulu Gwagwa in number of ACI Directors on the Board in accordance MASSMART EXECUTIVE and Phumzile Langeni have all served for periods longer than with the provisions of the race diversity policy. For COMMITTEE nine years. Following the rigorous annual review, the Board the avoidance of doubt the above mentioned target has concluded that, in each instance, these Directors continue shall exclude all of Walmart nominee non-Executive to be independent in character, judgement and contribution Directors on the Board, and where necessary the For the complete and detailed CVs of the Executive Committee to the Board’s deliberation, particularly with reference to the Board shall request Walmart to consider supporting please visit www.massmart.co.za/iar2018/CVs aforementioned criteria which emanate from King IV. recommendations for the nomination and appointment
90 Transparency and accountability Massmart Integrated Annual Report 2018 91 BOARD COMMITTEE FEEDBACK BOARD COMMITTEE FEEDBACK
Audit Committee A Risk Committee R
We consider risk management to be a key business discipline The Committee continued to provide oversight and input into the designed to balance risk and reward, and to protect the Group Group’s governance and internal controls to ensure the quality and against risks and uncertainties that could threaten the achievement integrity of its external reporting. The Committee evaluated the of business objectives. The Committee continued to review and O Ighodaro independence and effectiveness of external audit. For this reporting O Ighodaro assesses the dynamic interventions, within the Group’s available CHAIRMAN OF THE period, the Audit Committee is satisfied that it effectively discharged its CHAIRMAN OF THE AUDIT COMMITTEE RISK COMMITTEE resources and skills, required in response to business-specific, statutory duties as well as other duties in accordance with its Charter. industry-wide and general risks and opportunities.
BOARD MEMBERS BOARD STATUS MEMBER SINCE ATTENDANCE COMMITTEE EXPERIENCE BOARD MEMBERS BOARD STATUS MEMBER SINCE ATTENDANCE COMMITTEE EXPERIENCE Corporate governance O Ighodaro (Chairman) Independent non-Executive 25 May 2018 1/2^ O Ighodaro (Chairman) Independent non-Executive 25 May 2018 1/1^ Corporate governance Compliance Compliance K Dlamini Independent non-Executive 22 Aug 2016 0/3^** N Gwagwa Independent non-Executive 20 June 2010 2/2^ General business management General business management N Gwagwa Independent non-Executive 20 June 2011 3/3^ Leadership G Hayward Executive 15 May 2001 2/2^ Leadership P Langeni Independent non-Executive 01 July 2008 3/3^ Accounting and finance Accounting and finance Economics/public policy P Langeni Independent non-Executive 20 June 2011 2/2^ C Seabrooke Lead Independent non-Executive 01 Feb 2000 3/3^* Economics/public policy Risk management C Seabrooke Lead Independent non-Executive 01 Feb 2000 2/2^* International retail ^ Eligibility based on appointment date J van Lierop Executive 12 March 2012 2/2^ Risk management * Chris Seabrooke resigned as Chairman and member of the Audit Committee with effect from 30 September 2018 He acted as Chairman of the November 2018 meeting in Funke’s absence ^ Eligibility based on appointment date ** Kuseni Dlamini resigned as alternate member of the Audit Committee with effect from 25 May 2018 * Chris Seabrooke resigned as Chairman and member of the Risk Committee with effect from 30 September 2018 ** Dhari Moodley and Joe Ralebepa were redesignated as permanent invitees and no longer members with effect from 20 August 2018 thereby ensuring that the Committee comprises of a majority of non-Executive Directors
Key focus areas in 2018 • Reviewed, considered and took appropriate action in Key focus areas in 2018 Committee focus for 2019 and beyond relation to a letter from the JSE on 20 February 2018 in • Considered and recommended the audited consolidated connection with proactive monitoring • Reviewed and monitored the significant risks and • Continue to monitor management’s risk assessments Group Annual Financial Statements, Integrated Annual • Monitored and regularly reviewed the Group financial opportunities facing the organisation taking into and their response to significant risks Report, interim and final financial results, trading updates covenants in relation to its borrowings and debt position consideration the Group’s long-term strategy, its • Ensure that consideration is given to the upside and trading statements to the Board for approval • Assessed the independence and performance of the operating context and environment, the interests of key presented by such risks to ensure that possible • Monitored the effectiveness of the Group and Divisional Company’s auditors and audit partner, Roger Hillen stakeholders, media coverage and/or public concern opportunities are captured internal financial control environment • Monitored the transition of the Group’s FSB License to a • Provided independent and objective oversight of • Conduct a review of global, domestic, industry and the • Monitored the implementation of IFRS 9 ‘Financial new legal entity risk management across the Group and its Divisions competitor risk environment Instruments’ and IFRS 15 ‘Revenue from Contracts • Appointed a new Chief Audit Executive, Phuti Semenya by directing the way risk management should be • Review of the Group’s information and technology with Customers’ to ensure appropriate accounting in August 2018 approached and addressed in the Group governance and controls framework and its judgements and disclosures • Considered the Group’s IT strategy and considered responsiveness to the Group’s IT strategy, including the • Monitored and approved Massmart Mandatory Audit Committee focus for 2019 and beyond the adequacy of the cyber security, information adequacy of cyber security measures Firm Rotation policy and pre-approved the nature and management and data security interventions in place • Review Massmart’s level of risk appetite and tolerance extent of future non-audit services • Continue to monitor and assess the effectiveness of • Considered events and risks that occurred or were and its determination of what constitutes excessive risk • Monitored the implementation and adoption of the Group financial reporting and internal financial controls emerging and were expected to have a direct or indirect • Monitor increasing and evolving regulatory Group’s transparent tax strategy and policy and reviewed • Review and consider management’s plans in respect of impact on the Group’s risk profile developments and their consequential impact on the matters of significance across the Group IFRS 16 ‘Leases’ • Monitored Massmart’s effectiveness in the application of Group’s growth agenda • Reviewed the scope and effectiveness of the external • Monitor the development and adoption of a transparent King IV principles and recommended practices and internal audit functions in terms of their audit tax strategy and policy • Reviewed the appropriateness of the combined quality, expertise and independence, and considered the • Consider the developments arising from the Mandatory assurance model key audit matters reported Audit Firm Rotation relevant regulatory developments • Ensured that the Group maintained an effective and • Reviewed the adequacy and effectiveness of combined within the ambit of the Audit Committee independent ethics and compliance function assurance, compliance and information and technology • Continue to monitor the effectiveness of information governance and technology governance and its ability to support • Considered and recommended the appointment of the the Group in achieving its strategic objectives new sponsor and corporate broker to the Board • Monitor the effectiveness of cyber security risk • Considered the treatment and implications of management accounting standards on the Group’s voluntary buying • Assess and apply findings arising from the JSE Proactive association Monitoring Progress report
92 Transparency and accountability Massmart Integrated Annual Report 2018 93 BOARD COMMITTEE FEEDBACK BOARD COMMITTEE FEEDBACK
Nominations Committee N Social and Ethics Committee SE
The Nominations Committee assisted the Board in identifying and The Social and Ethics Committee is responsible for overseeing and nominating candidates, making recommendations on its composition monitoring, on an ongoing basis, how the consequences of Massmart’s with respect to race, gender and the balance between Executive, activities affect its status as a responsible corporate citizen. It has oversight Kuseni Dlamini non-Executive and Independent non-Executive members appointed of Massmart’s efforts towards supporting small local manufacturers; CHAIRMAN OF THE to the Board. It assisted the Board in formulating succession plans for Phumzile Langeni socio-economic development; responsible sourcing; efforts to minimise NOMINATIONS COMMITTEE CHAIRMAN OF THE SOCIAL AND both Executive and non-Executive Directors and assessing the ETHICS COMMITTEE its environmental footprint; and its contribution to society through effectiveness of the Board and its sub-Committees. employment, skills development and a responsible tax policy.
BOARD MEMBERS BOARD STATUS MEMBER SINCE ATTENDANCE COMMITTEE EXPERIENCE BOARD MEMBERS BOARD STATUS MEMBER SINCE ATTENDANCE COMMITTEE EXPERIENCE K Dlamini Independent non-Executive 10 Apr 2014 4/4^ Corporate governance P Langeni (Chairman) Independent non-Executive 20 Nov 2011 2/2^ Corporate governance Compliance Compliance P Langeni Independent non-Executive 22 Nov 2017 4/4^ Prof De Jongh Independent permanent invitee 20 Nov 2011 2/2^ General business management General business management E Ostalé Independent non-Executive 24 Feb 2016 4/4^ Leadership G Hayward Chief Executive Officer 1 Jun 2014 2/2^ Leadership C Seabrooke Lead Independent non-Executive 01 Mar 2003 4/4^* Accounting and finance S Muigai Non-Executive Director 26 May 2017 2/2^ Accounting and finance Economics/public policy Economics/public policy ^ Eligibility based on appointment date International retail ^ Eligibility based on appointment date International retail * Chris Seabrooke resigned from the Nominations Committee on 25 May 2018 Risk management Risk management Human resources Human resources
Key focus areas in 2018 Committee focus for 2019 and beyond Key focus areas in 2018 Committee focus for 2019 and beyond • Reviewed the composition of Board Committees • Continue to review Board and sub-Committee • Considered, analysed, reviewed and deliberated • Consider South Africa’s regulatory, political, and, where required, recommended to the Board the composition in line with Board race and gender management reports on ethics, health and public safety, environmental and social landscape and its implications reconstitution of Board Committees to ensure that the diversity policies food and other products safety, supporting small local for Massmart and the retail sector Committees comprised members with the relevant • Ensure that policies and procedures are in place to manufacturers and socio-economic development • Monitor and track the Group’s employment equity plans knowledge and skills ensure the Board leads ethically and effectively • Reviewed and assessed Massmart’s response to and related progress • Assessed and made recommendations on the • Assess and enhance the effectiveness of succession the listeriosis outbreak in South Africa, ensuring the • Monitor the Group’s pay parity response strategies and appointment of non-Executive Directors to the Board planning for senior Executives, the CEO, the CFO and effectiveness of Massmart’s testing protocols compliance • Reviewed the composition of the Board and found no non-Executive Board Directors • Oversight of Massmart’s talent strategy • Ensure that systems, procedures and policies are in place relationships or circumstances likely to affect, or which • Seek independent advice and external assurance in • Reviewed and assessed the effectiveness of the Group’s to enable Massmart to maintain its responsible corporate appear to affect, the judgement of Chris Seabrooke, Lulu respect of the Board’s self-assessment transformation initiatives including, monitoring the Group’s citizenship status Gwagwa and Phumzile Langeni as Independent non- • Monitor of conflicts of interest, Directors dealing in progress against BBBEE and employment equity targets • Massmart’s continued participation in various Executive Directors. These Directors have served on the company securities, declarations of interest and regularly • Considered Massmart’s interaction with key stakeholders internationally accredited governance, social and Board in excess of nine years review and assess independence of Independent non- and industry bodies to understand the perspectives of environmental indices • Reviewed the appropriateness of the Board’s race Executive Directors those impacted by Massmart and who in turn have an • Monitor Group structures, particularly in relation to and gender diversity policies and ensured that Board impact on Massmart responsible Private Label sourcing appointments were made with due consideration • Assessed compliance with all statutory duties assigned • Monitor Group compliance with minimum wage thereof, pleasingly targets set in both the race and to it in terms of section 72(4) and Regulation 43 of the legislation and applicable wage sectoral determinations gender policies were met Companies Act of 2008 and King IV and monitored • Monitor the Group’s progress against its transformation • Ensured that the induction and ongoing training and relevant regulatory developments agenda development of Directors took place • Reviewed and considered the Group human capital and • Continued to search for suitably qualified non-Executive related talent management and retention strategies Directors to broaden the Board’s pool of Independent • Considered the Group’s response strategies to address non-Executive Directors and strengthened succession equal pay for work issues and government policy on planning. Four female Independent non-Executive minimum wage Directors were appointed as at the date of this report
94 Transparency and accountability Massmart Integrated Annual Report 2018 95 SECTION 01 // REMUNERATION REPORT Letter from the Chairman of the Remuneration Committee to shareholders
The Remuneration Committee oversees a formal and transparent performance and improved returns on invested capital. We Key remuneration issues deliberated procedure for developing and implementing a fair and responsible do not disclose these forecast figures within this report, as in 2018 remuneration policy that enables the Group to recruit, retain and this would reveal confidential and commercially sensitive motivate high calibre employees. In this way, the Committee assists information. In accordance with our drive for continued alignment of our Phumzile Langeni Remuneration Report to the requirements of King IV, in 2018 the Board to promote the achievement of strategic objectives and CHAIRMAN OF THE Director changes we proposed various amendments all of which were tabled REMUNERATION COMMITTEE positive outcomes by the organisation. and approved at Massmart’s AGM held in May 2018. Progress In 2018 a number of non-Executive Director changes took made in 2018: place. On 25 May 2018, we announced the appointment • The revised Massmart Group remuneration policy was of Olufunke (Funke) Ighodaro as an Independent non- approved in May 2018. Executive Director and a member of the Massmart Risk and • A non-financial metric constituting 20% of the total Audit Committees. Annual Incentive Plan (AIP) metric was approved and I am pleased to present the Massmart Remuneration Report for the year On 23 August 2018, shareholders were informed that Chris implemented as proposed. In principle, it was agreed THE REPORT IS ended December 2018. In this report you will find information applicable Seabrooke had agreed to continue as Lead Independent that there would be a maximum of four metrics; the PRESENTED IN THE to Massmart’s remuneration philosophy and the policy for Executive and non-Executive Director and Deputy Chairman but would highest of which would support the business objective FOLLOWING THREE non-Executive Directors’ remuneration. The report provides a description cease to be a member of the Board Committees and step of improvement against the BBBEE score. Other metrics of how the policy has been implemented and discloses payments made down as Chairman of the Remuneration, Audit and Risk SECTIONS: in this category include; improved customer satisfaction, to Executive Directors, non-Executive Directors and Executive Committee Committees. Funke succeeded Chris as the Chairman of addressing team or business unit management members during the year. the Audit and Risk Committees and I assumed the role of succession, food safety, completing specific significant A background With a rise in the VAT rate, higher fuel prices and low economic growth, Chairman of the Remuneration Committee. projects or interventions, new product category or statement with the year under review was challenging for the consumer. This resulted in On 28 February 2019 we announced the appointment of 01 geographic market developments, etc. For the 2018 softer than expected sales, particularly over the crucial November and Lindiwe Mthimunye to the Board as an Independent non- the Remuneration reporting period, a decision was taken by the Board to December 2018 period, and slightly lower gross margins which adversely Executive Director. Lindiwe was further nominated to serve Committee apply the BBBEE metric as the single objective. Chairman’s letter to impacted profitability. Massmart’s total sales for the year ended December on the Audit and Risk Committees. We also announced the shareholders 2018 were R90.9 billion, a like-on-like increase of 2.9% over the prior the appointment of JP Suarez as a Walmart-appointed Massmart’s guaranteed remuneration was benchmarked year (2017: R88.4 billion, 2016: R87.6 billion and 2015: R81.3 billion). The non-Executive Director, in place of Roger Burnley. On the using data from the PwC Remchannel, Mercer and the difficult consumer environment demanded an intense focus on expense same day we informed shareholders that Chris Seabrooke’s Korn Ferry Hay Group salary surveys, as well as specific An overview management and our efforts resulted in total expense increases being retirement will become effective on 23 May 2019, from benchmarking to other similar sized JSE-listed companies. 02 of Massmart’s limited to 5.0%. Group profit before tax (PBT) declined by 33.9% to R1.3 billion which date Chris will step down as the Deputy Chairman We are satisfied that the surveys used are independent and remuneration (2017: R1.9 billion, 2016: R1.9 billion and 2015: R1.7 billion). and Lead Independent non-Executive Director of the objective. Board. I stepped down as member and Chairman of the philosophy and Per our remuneration policy, the Group’s Executives, including the Executive Directors, are incentivised based on the achievement of each Social and Ethics Committee with effect from 28 February policy year’s actual financial performance compared to the annual business plan for 2019 and Lulu Gwagwa was appointed to serve as member that year, approved by the Board in the previous year as well as non-financial and Chairman of the same Committee. metrics for the 2018 financial year. As we detail within the remuneration policy, performance is measured against four dimensions namely: PBT; non- Reports on financial metrics; total sales; and return on investment (ROI). Massmart’s COMMITTEE EXPERIENCE 03 When we finalise the annual business plan for the following financial BOARD MEMBERS BOARD STATUS MEMBER SINCE ATTENDANCE implementation of Corporate governance year, the Board takes into consideration multiple factors including the P Langeni (Chairman) Independent non-Executive 22 Nov 2017 4/4^ the remuneration Compliance prevailing and forecast economic conditions in all countries in which we K Dlamini Chairman 10 Apr 2014 4/4^ General business management policy during 2018 operate, key business objectives, the pursuit of growth, capital investment E Ostalé Non-Executive 24 Feb 2016 4/4^ Leadership programmes, the relative business maturity and the appropriate degree of Accounting and finance C Seabrooke Lead Independent non-Executive 01 Mar 2003 4/4^* improvement in business performance. As can be seen from the historical Economics/public policy International retail targets noted in the implementation report, our previous annual business * Chris Seabrooke resigned from the Remuneration Committee on 25 May 2018 Risk management plans have incorporated real growth in total sales, improved operating ^ Eligibility based on appointment date Human resources
96 Transparency and accountability Massmart Integrated Annual Report 2018 97 REMUNERATION REPORT // LETTER FROM THE CHAIRMAN OF THE REMUNERATION COMMITTEE TO SHAREHOLDERS
Remuneration in 2019 R’000 GUY HAYWARD JOHANNES VAN LIEROP Looking forward, the Remuneration Committee’s main focus We proactively engaged with our key shareholders on Guaranteed Package 7,011 5,566 areas and priorities include: this policy in 2018, and the request for more in-depth Other Benefits 560 2,603 • Ensure the continued relevance of the remuneration communication around fair and responsible pay and the Short-term incentive: Actual paid (20.0% of target achieved) 1,306 1,055 policy; disclosure of specific non-financial metrics have been Long-term incentive: Value of Performance Shares vested March 2018, based • Ensure that remuneration is implemented in accordance addressed in the 2018 Remuneration Report. Additional on the performance of years 2015, 2016 and 2017 2,431 3,108 with the remuneration policy; information on the non-financial metrics is noted on Value of Restricted Shares granted September 2018 5,057 3,523 • Ensure that employees are remunerated fairly, page 109, while commentary around the management of Total 2018 16,365 15,855 responsibly and transparently; and fair and responsible pay has been included on page 104. Total 2017 16,750 24,588 • Continued entrenchment of our commitment In line with the principles set out in King IV, Massmart will % increase (excluding long-term incentive vestings) (12.8%) (21.0%) to remunerate employees fairly, responsibly and table its remuneration policy and implementation report % increase (including long-term incentive vestings) (2.3%) (35.5%*) transparently. In order to achieve this the Remuneration for two separate non-binding advisory votes at its 2019 % of earnings performance based: short term 8.0% 6.7% Committee is committed to the ongoing review of AGM. Should 25% or more of the shareholders vote against % of earnings performance based: long term 45.8% 41.8% remuneration as explained on page 107. Furthermore, either resolution at the AGM, the Board will invite dissenting * Johannes van Lierop had no shares vesting prior to 2018 as he only joined Massmart in 2015. the Remuneration Committee undertakes to support the shareholders to engage with the Remuneration Committee Group in enhancing its Employee Value Proposition to on their concerns. The information provided in this report has been approved by the Board on the recommendation of the retain key talent as well as to attract critical skills as may The Remuneration Committee is confident that the Remuneration Committee. be required to meet strategic objectives. remuneration policy promotes the achievement of strategic I would like to thank Chris Seabrooke for his immense contribution and dedication as the Committee Chairman objectives and that the levels of remuneration are fair and over the past five years. Under his leadership Massmart’s remuneration policy was improved and balanced against equitable to support the attraction, motivation, reward Stakeholder engagement shareholder’s interests. and retention of human capital. We confirm that both the At the AGM held on 25 May 2018, in accordance with King IV, I would also like to take this opportunity to express my appreciation to the members of the Committee for their remuneration policy and implementation thereof will be the Group remuneration policy and implementation report support and efforts during the past year. were put to a separate non-binding advisory vote, allowing subject to ongoing review. shareholders to express their views on the policy adopted. We received a 92.4% (2017: 95.8%) vote in favour of the policy Executive Directors’ single total figure and 92.8% supported the implementation report. remuneration We value the opinion of our stakeholders and believe King IV prescribes that companies must provide a single that strong stakeholder engagement strengthens the total figure of remuneration, received and receivable, Phumzile Langeni relationship between our stakeholders and our Board, for the reporting period and all the remuneration Chairman of the Remuneration Committee helping to ensure the effectiveness of our Board and its elements that it comprises, each disclosed at fair value. 4 April 2019 alignment to all stakeholder interests. Prior to voting at The following table provides an overview of the Executive the AGM, Massmart Executives engage with shareholders Directors’ remuneration for 2018, explained in detail in and institutional investors regarding components of the Section 03 of this report ( pages 108-117). remuneration policy. • The ‘guaranteed package’ and ‘other benefits’ reflect actual payments made in the reporting period; • In order to match incentive awards with the performance to which they relate, the ‘short-term incentives’ and the ‘long-term incentive performance shares vested’ reflect the amounts accrued in respect of the year and not amounts paid in that year; and • As per guidance received in terms of the single total figure remuneration definition, the ‘long-term incentive restricted shares’ number represents restricted shares granted in the financial year, valued at the closing share price for the financial year.
98 Transparency and accountability Massmart Integrated Annual Report 2018 99 SECTION 02 // REMUNERATION REPORT Remuneration policy
Remuneration philosophy The purpose of Massmart’s remuneration philosophy MASSMART’S is to establish sustainable, fair and equitable reward levels that will attract, motivate and retain high calibre TOTAL REWARD employees. This is in line with the Group’s culture and REMUNERATION ADDITIONAL NON-FINANCIAL values, whilst aligning remuneration with stakeholder OFFERING interests and best practice in the retail environment. We strive to ensure that our remuneration policy supports the development and retention of top talent and critical skills. Its purpose is to ensure a workforce that is motivated to successfully develop, implement and support the Group’s business strategy. The focus is on ensuring the long-term growth and success of the Group and the enhancement of stakeholder value. TGP AIP SIP TOTAL GUARANTEED SHORT-TERM LONG-TERM TERMINATION/ ROLE SPECIFIC LEAVE The desired outcome of our PACKAGE INCENTIVES INCENTIVES SEVERANCE PAYMENTS COMMISSIONS AND remuneration programmes are to: CAREER What is TGP? What is AIP? What is SIP? Summary ALLOWANCES DEVELOPMENT • Basic salary • One year Annual Incentive • A share incentive plan • Paid to employees who Summary • Provide competitive, equitable and responsible TRAINING, remuneration based on an employee’s skills, • Car/travel benefits Plan which awards Performance leave employment due • May be paid to • Retirement and insurance • Bonus is expressed as shares and grants to business restructure LEARNING AND performance and contributions to the Group, individuals in certain benefits a multiple of monthly Restricted shares requirements specific non-Executive DEVELOPMENT among other factors; • Medical aid benefits pensionable salary • Award/grant is expressed Alignment to strategy roles • Attract and retain the talent necessary to achieve OTHER EMPLOYEE • Other expatriate benefits Alignment to strategy as a percentage of TGP • The payments the Group’s business objectives; Alignment to strategy Alignment to strategy • To recognise individual Alignment to strategy to employees at BENEFITS • Develop a sense of Group ownership and align • Achievement of Group • To achieve the Group and Company • The performance share termination of strategic objectives the interests of employees with those of its strategic priorities it achievement of financial plan is aligned to the employment for no-fault Read more about stakeholders; is important that our and non-financial achievement of the reasons follow legislated Empowering our people • Recognise Massmart Division-specific goals employees are fairly objectives aligned to financial objectives, directly requirements and may p80-83 and reward employees appropriately for their rewarded for their Group strategy linking this remuneration include additional ex- contribution towards achieving those goals; and contribution to achieving • Financial objective: profit component to Company gratia payments which • Provide opportunities for the potential of greater operational and strategic before tax financial performance and would not exceed 12 objectives • Non-financial objectives: the sustained creation of months guaranteed financial rewards to those who perform well • Retirement benefits aligned to Group strategy shareholder value remuneration within their job responsibilities. provide our employees • The restricted share plan with an opportunity to is specifically utilised for save for retirement and the retention of talent by RETENTION promote responsible linking performance to Due to the highly competitive nature of the retail Annual Bonus corporate citizenship long-term value creation industry the following payments may be considered: Summary aligning to the Group’s • Employees who are not • Pre-vesting forfeiture • May be paid to value of creating eligible to participate in provisions are covered individuals in certain opportunities for everyone the short-term incentive by the SIP plan which is identified key roles to prosper plan may receive an available on request RESTRAINTS OF TRADE Alignment to strategy • The Group has the annual bonus depending • There are no provisions for responsibility of ensuring post-vesting forfeitures Summary • The business may on Group and individual award retention bonus that appropriate medical performance • Financial objective: Group • May be paid to individuals in certain identified key roles plans offered are Nominal Sales and Group payments to the Alignment to strategy Alignment to strategy identified individuals to sustainable and affordable ROI, weighted equally • The business has included a restraint clause that may be • This drives an individual’s retain key skills required for all levels of employees enforced at the sole discretion of Massmart, whereby performance to support to achieve strategic Massmart will compensate certain identified key individuals objectives business strategy Massmart’s full remuneration policy is for up to 12 months, at the time of the enforcement of the • All retention payments restraint available online. www.massmart. are subject to clawbacks co.za/iar2018/remcom
100 Transparency and accountability Massmart Integrated Annual Report 2018 101 REMUNERATION REPORT // REMUNERATION POLICY
MASSMART’S TOTAL REWARD OFFERING Incentives Massmart believes in rewarding employees for performance that is aligned to shareholders’ interests, in particular the Guaranteed remuneration sustained creation of shareholder value. In prior years, various share schemes were established to recognise and reward different levels of employees. In May 2013, the Massmart Share Incentive Plan, which is more closely aligned to the Walmart Massmart remains committed to ensuring competitive remuneration packages whilst managing costs. The guaranteed approach, was approved and replaced all other previous share schemes. No further share options are issued from either the remuneration of Executive Directors is set according to annual benchmarking using data from the PwC Remchannel, Mercer Massmart Holdings Limited Employee Share Trust or the Massmart Black Scarce Skills Trust. Those options which have not and the Korn Ferry Hay Group salary surveys, as well as specific benchmarking to other similar sized JSE- listed companies. The yet vested through the above-mentioned Trusts will still vest according to the relevant rules and plans. Massmart offers both TGP is benchmarked to the third quartile. Annual TGP increases for Executive Directors are determined by the Remuneration short- and long-term incentives as detailed below. The performance measures are set and approved by the Remuneration Committee and are aligned to individual performance and the annual salary increase percentage range as set for the Group. Committee on an annual basis.
Short-term incentive:
Basic salary 10.5% of pensionable salary to Eligibility At the lower levels of the AIP an individual TOTAL The basic salary is calculated from the retirement fund and related ANNUAL Executives and employees of a certain metric, based on employee performance, the TGP and is used as a basis for the insurances. Employees contribute at staff level are eligible to participate in the is included. GUARANTEED pensionable salary and AIP. Expatriate least 7%. Expatriate employees are paid INCENTIVE AIP, subject to Remuneration Committee employees working for Massmart in a cash allowance in lieu of retirement approval. Bonus pay-outs PACKAGE South Africa receive a basic salary benefits. PLAN The bonus pay-out is determined denominated in US Dollars or Euros, as Formula separately for financial and non-financial TGP Medical aid benefits AIP well as additional non-cash benefits e.g. Participating employees can earn an performance to target. The two incentive It is compulsory for all new permanent increasing multiple of their monthly basic portions earned together equal the total The TGP provides a fixed housing, schooling and home leave. The AIP aims to Massmart Group employees to join salary dependent upon achievement bonus payable. remuneration package, as incentivise and reward Retirement benefits a Company-approved medical plan. against the agreed targets. determined to be appropriate and the achievement of the All permanent employees are The Group has the responsibility Financial performance: market-aligned, for each particular approved financial required to belong to a Group- of ensuring that appropriate plans Performance For business performance below 90% of level and/or role. TGPs are and non-financial goals approved retirement fund. The are offered by the Massmart Health Financial performance: planned PBT, no incentives are earned. reviewed annually against market and targets. current Group-approved funds are all Plan and that contribution levels are From 2018, the financial performance Incentives are capped at performance data and increases are awarded on defined contribution schemes. The sustainable and affordable for all levels metric was reduced from 100% of the total levels of 107% of planned PBT, unless the TGP in July each year. The actual funds provide the employee with an of employees. Expatriate employees metric to 80% to cater for the introduction Remuneration Committee has approved a percentage increases awarded are opportunity to save for retirement. are covered by a separate international of a non-financial metric. The financial super-maximum target for a specific year. determined by taking CPI, Life, disability and funeral cover medical insurance. The Company metric continues to measure PBT and is business performance, market Non-financial performance: are also provided to all permanent contributes a portion of the medical calculated as follows: trends and individual merit into For performance below target, no employees. Alexander Forbes aid fund contribution; the difference is Group Executives are 100% incentivised on account, whilst also considering incentives are earned. There is no additional administered the Massmart funds for a contributed by the employee. Group performance, Divisional CEOs are salary positioning against the payment for performance above target. number of years and was replaced by incentivised on 50% of Group performance Massmart salary structure and Car/travel benefits Sanlam as administrators in October and 50% on Divisional performance, while Discretion of the Remuneration market data. Travel allowances, or Company cars, 2018 as we believed that Sanlam could Divisional Executives are incentivised on Committee are provided to nominated employees offer technology, efficiencies and an 25% of Group performance and 75% of Outside of the AIP, the Remuneration to enable them to perform their overall employer/member experience Divisional performance. Committee also has the option to provide duties, as required. The quantum more aligned to our requirements. discretionary awards to reward individual of the allowance or Company car Non-financial performance: A formal service level agreement is in performance. The discretionary awards are value is determined based on the From 2018, 20% of the Executive AIP was place that regulates this relationship. capped at not more than 25% of target requirements of each specific level based on non-financial metrics, which The trustees of the funds monitor AIP. If awarded, these incentives are paid and/or role. are set annually and aligned to business fund performance on a quarterly strategic initiatives at the time. annually. basis. The Company contributes
At Executive Director level the bonus pay-outs per achievement level are: PROFIT BEFORE TAX NON-FINANCIAL (80% WEIGHTING) (20% WEIGHTING) Threshold payout Target payout Above target payout Target Payout = 4.8 months = 9.6 months = 14.4 months = 2.4 months No payout basic salary basic salary basic salary basic salary
(based on 100% achievement (based on 90% (based on 100% (based on 107% of target – no payment where achievement of target) achievement of target) achievement of target) target not achieved)
A super-maximum level may be agreed and approved by the Remuneration Committee.
102 Transparency and accountability Massmart Integrated Annual Report 2018 103 REMUNERATION REPORT // REMUNERATION POLICY
Long-term incentive:
Eligibility Mix of awards In line with the principles of our approach to the management of fair and responsible pay and within the context of the SHARE Full-value share rights are awarded The plan provides for a mix of Performance achievement of business strategic objectives, Massmart has developed remuneration governance frameworks and bi-annually to qualifying permanent shares which are awarded annually in April, remuneration guidelines to ensure the consistent application of standard remuneration principles that promote pay parity INCENTIVE employees taking into account SARB and Restricted shares which are granted at all levels. The management of fair and responsible pay is guided by the application of a standard grading structure and exchange control regulations. annually in September, based on the level of market-referenced pay scales across all Divisions. PLAN Initial qualification is based on the employee. At Executive levels, the mix These frameworks and guidelines form the foundation for all pay decisions and have been established to support and SIP motivation by the Executive Committees is 75% Performance shares/25% Restricted promote the management of pay and benefit elements that are consistent, fair, follow recognised global methodologies and of each of the Divisions. Final approval shares and at other levels, 50%/50%. reference both external and internal pay data. They have been implemented throughout the Group and will be consistently The SIP is a long-term for participation is provided by the reviewed and improved over time to ensure continued good governance, alignment with the principles of Massmart’s equity-based incentive Remuneration Committee. Value of awards remuneration policy and best practice guidelines. plan. A combination of Currently, at Executive Director level, the Performance shares and Operation and instruments value of the award is 100% of guaranteed Remuneration governance frameworks ensure: Restricted shares are Performance shares: The performance package. • Remuneration Committee review and approval of changes to all Executive remuneration and benefits; awarded and granted to share plan has specific performance • Remuneration Committee approval and Board oversight of any exceptions; qualifying employees. metrics that have been designed to align Limits • An annual review of remuneration structures and incentive plans; with Walmart’s metrics and are measured Individually, one participant may not exceed • Correlation of incentive structures to business objectives, value creation and sustainability; and individually against approved Group-level four million shares. • Legislative compliance. annual nominal sales and ROI targets, over three separate years, with an equal Settlement Remuneration guidelines ensure: weighting (50% nominal sales and 50% ROI). The settlement of grants and awards are • A consistent approach to the management of pay with specific regard to pay placement, pay movement, peer review Each target has a range and the final awards done primarily through on-market share and market relatedness; are calculated based on a sliding scale in the purchases. • Fairness in pay levels of employees performing the same or similar work with differentiation that can be attributed to, for range of 50% to a maximum of 150%. example, tenure, qualifications, high performance, experience and scarce skills; and If achieved, the awards are equity- Discretion of the Remuneration • Flexibility and adaptability to business and market requirements within prescribed parameters. settled at the end of the third year. If Committee performance against either of the targets The Remuneration Committee may approve falls below the minimum of the range, no special restricted share grants to employees Executive pay mix performance share awards will be earned whom the Company wishes to recognise for Anticipated contribution to total annual packages against that target. extraordinary achievements. The Committee believes that over an extended period and subject to business performance, Executives’ total annual remuneration should comprise approximately equal amounts from TGP, AIP and SIP. The amounts received annually under Restricted shares: Restricted share AIP will vary depending on the achievement of the set targets, and those received under the SIP will also vary depending on grants are specifically utilised for retention the business achievement targets and the growth of the Massmart share price. purposes and vest on a time basis, being It is anticipated that about two thirds of Executives’ remuneration should be variable and conditional upon sustainably one third each at the end of years three, improving business performance. four and five. There are no performance conditions applicable to the restricted shares. Restricted shares are aimed at the retention of employees with the long-term Potential award mix: reward linked to share price growth. The following chart shows the potential mix of total annual remuneration for Executive Directors:
Group CEO and CFO Massmart’s approach to fair and responsible pay Below threshold Massmart remains cognisant of the high levels of disparity in South African remuneration and as such endeavours to 49% 20% 31% 90% remunerate employees fairly, responsibly and transparently. Similarly, attraction and retention of key talent and scarce skills Threshold remains challenging in a difficult economic environment. In this context, ensuring internal equity and market competitiveness across all levels remains a key focus area. The Remuneration Committee is committed to the ongoing review of remuneration 36% 29% 35% 100% at all levels, as well as comparing remuneration between levels, to ensure that progress is made in addressing any inequality Target performance identified in the Group, whilst at the same time ensuring that key employees and Executives are remunerated competitively. 28% 34% 38% 107% Maximum performance
TGP AIP SIP
104 Transparency and accountability Massmart Integrated Annual Report 2018 105 REMUNERATION REPORT // REMUNERATION POLICY
Non-Executive Director fees The Remuneration Committee and its role These fees remunerate the non-Executive Directors for their The remuneration of Independent non-Executive Directors Composition • Reviewing and guiding the drafting and approval of the time, responsibilities and commitment to Massmart. is reviewed annually by the Remuneration Committee and The Remuneration Committee consists of three non- form for submission to the Board of the Remuneration All Committee members complete detailed self- the Board after a benchmarking exercise against market. Executive Directors, of whom the majority are independent. Report to be included in the Integrated Annual Report; assessments covering the composition, duties, responsibilities, Fees are required to be competitive but not necessarily in the Meetings are held four times per year and more often if • Ensuring that the implementation and execution of process and effectiveness of the relevant Committees. The top quartile of the market. Recommendations for increases deemed necessary. The CEO is a permanent invitee to all the Group’s remuneration policy achieves the policy’s results of these assessments are collated by the Company are made to shareholders at the AGM for consideration and Committee meetings. Other nominated Executives attend objectives; Secretary and sent in summarised form to the Chairman for approval. meetings by invitation. Neither the CEO nor nominated • The review of all the benefits, remuneration, incentive a formal written response. The summarised results, together The Walmart-appointed non-Executive Directors do not invitees are present when matters relating to their own and share scheme policies for all employees and non- with the Chairman’s written response, are included in the receive fees from Massmart. remuneration are discussed. The Group General Counsel Executive Directors in the Group; Board papers at the November Board meeting. Non-Executive Directors do not qualify for participation in acts as a secretary for the Committee. • Annual evaluation of senior Executives’ salary packages Based on their Board membership and membership of the any share plan or incentive scheme. against remuneration paid to Executives of other Board sub-Committees, each Independent non-Executive Responsibilities companies of a similar size, both in South Africa and Director receives a fixed fee for their services. Proposed fees 2019 With a view of making remuneration recommendations for internationally (where relevant), utilising published The Board has elected to pay a fixed fee only, without the Despite a recent benchmarking exercise of the upper- approval by the Board, the Committee shall assist the Board surveys or independent consultants performing the payment of additional attendance fees. This decision was quartile of the South African market, the Board has proposed with the following: specific analysis; and the extent to which Executives have taken on the basis that many Directors provide expertise that that fees for non-Executive Directors and the various • The development and maintenance of a remuneration met their performance targets, goals and objectives; extends beyond the boardroom. Committee roles remain unchanged for 2019. Confirmation policy which, inter alia, sets out: • Recommendation for approval by the Board of of the fees are recorded in the table below: • Arrangements for ensuring that the remuneration performance incentives that are consistent with the of Executive Management is fair and responsible in Group’s overall objectives and compensation policy and the context of overall employee remuneration in reflective of market trends; the Group; • The review of the Group’s retirement plans and medical • The use of performance measures that support schemes; positive outcomes across the economic, social • Recommendation of non-Executive Directors’ and Board Proposed fees: and environmental context in which the Group Committee members’ fees; 2018 FEE 2019 FEE % Role (R’000) (R’000) CHANGE operates; • Determination of the Company’s policies regarding the various components and mix of compensation, Chairman of the Board 1,575.0 1,575.0 0% • The voting by shareholders on the remuneration policy and implementation report, and the incentivisation and wealth creation; and Deputy Chairman of the Board 840.0 840.0 0% implementation of related measures to address • Determination of the cost of Executive compensation to Independent non-Executive Directors 420.0 420.0 0% various outcomes of such votes, which policy shall be the Company relative to short-, medium- and long-term Audit Committee Chairman 368.0 368.0 0% put to the shareholders at the AGM for endorsement performance. Risk Committee Chairman 289.0 289.0 0% by way of a non-binding advisory vote; Remuneration Committee Chairman 289.0 289.0 0% A full account of the role and responsibilities of Nominations and Social and Ethics Committee Chairmen 289.0 289.0 0% the Remuneration Committee is described in the Audit Committee members 184.0 184.0 0% Remuneration Committee Charter and is available online. Other Board Committee members 147.0 147.0 0% www.massmart.co.za/governance/board-charters/
106 Transparency and accountability Massmart Integrated Annual Report 2018 107 SECTION 03 // REMUNERATION REPORT Implementation of the remuneration policy during the year ended December 2018
Fair and responsible remuneration Employee benefit improvements As disclosed on page 103, the AIP for TOTAL Massmart is committed to the execution Massmart has embarked on a strategic drive ANNUAL 2018 is linked to approved annual and management of fair and responsible to offer an appropriate retirement, medical PBT and non-financial targets for GUARANTEED Executive remuneration in the context and risk basket of benefits across Africa. INCENTIVE both the Massmart Group and its of overall employee remuneration and During 2018, benefit structures in territories Divisions. The following illustration PACKAGE continues to view the wage gap disparity with more than one trading format were PLAN shows the achievement to plan and TGP as an ongoing priority. In 2018 increases aligned and implemented, with only two AIP actual pay-outs received by the awarded to Massmart’s Executive Directors, outstanding matters being medical benefits Executive Directors. The Committee remains alert the Executive Committee and Divisional in Lesotho and the implementation of to the concentrated and management teams averaged 5.81%, in line aligned retirement benefit structures in 2018 financial performance measures: highly competitive nature of with the average percentage of increases to Zambia. In Ghana and Kenya, new health As noted, from 2018 onwards, 80% of the total performance metric of the AIP is comprised of PBT. the South African retail salaries across the Group. benefit schemes were introduced, which The Board supports the transparent reporting of Executive remuneration but believes that disclosing the prospective PBT market, as well as a shortage Following the formal 2014 external have been well received by employees. target, which forms the basis for the AIP achievement and pay-out calculation, is commercially sensitive and this has therefore of retail-specific skills and sets review of remuneration within and In January 2016, Massmart introduced not been disclosed. remuneration levels across the Group, the management of truCARE, an Occupational Health and Safety accordingly. remuneration remains an ongoing priority offering for employees earning salaries with specific focus on ensuring that pay below a specific monthly cap and provides Performance measure = achievement of approved Group PBT target progression is applied consistently and fairly cost free access to private primary health 2018 approved Group PBT target = R2.5 billion and aligns with the principles as noted in care for employees. There are currently our remuneration policy. Remuneration 13,937 employees registered on the PROFIT BEFORE TAX (80% WEIGHTING) Threshold payout Target payout Above target payout management and pay progression is truCARE offering. Below 6 months 12 months 18 months consistently monitored to ensure that no AIP intentional discrimination occurs and any threshold basic salary basic salary basic salary PAYOUT (‘000) disparity should be justified by qualification, Target R2.5 billion years of experience, performance and tenure differences. The process of Guy Hayward R1.5 billion achieved (58.9% of target) No payout = R0 managing outliers remains a priority and is Johannes van Lierop R1.5 billion achieved (58.9% of target) No payout = R0* tracked on a regular basis. Formal bi-annual tracking mechanisms will be implemented in 2019. 2018 non-financial performance measures: As noted, 20% of the total performance metric of the AIP has been assigned to the delivery of specific non-financial performance measures. For the 2018 financial year, the decision was taken to utilise the full 20% to drive the achievement of an improved BBBEE score to Level 4.
NON-FINANCIAL (20% WEIGHTING) Target payout Below 2.4 months AIP threshold basic salary PAYOUT (‘000) Target Level 4 BBBEE rating
Guy Hayward Level 4 BBBEE rating (100% of target) Payout 2.4 months basic salary = R1,306
Johannes van Lierop Level 4 BBBEE rating (100% of target) Payout 2.4 months basic salary = R1,055*
* US-dollar denominated salary so Rand amounts are based on an exchange rate at a point in time
108 Transparency and accountability Massmart Integrated Annual Report 2018 109 REMUNERATION REPORT // IMPLEMENTATION OF THE REMUNERATION POLICY
The SIP was established The illustration below shows previous performance against in September 2013 and approved annual nominal sales and ROI targets. The next vesting SHARE VALUE OF NO. OF is linked to approved of performance share awards will take place in March 2019 (for 2017 share vestings: VESTED SHARES SHARES 2015 2016 2017 INCENTIVE ROI and sales targets performance in years 2016/7/8). 2014 Performance shares awarded assuming 100% target achieved 32,786 10,927 10,927 10,932 PLAN (refer to Section 02 for This vesting of awards issued in 2016, will be as a result of the % of target achieved: 104.2% of original award 108.2% 100.1% 104.4% more information). The following performance achievements to target in the subsequent Fully vested March 2017: actual shares vested 34,179 11,827 10,937 11,415 first vesting of this new three years: 104.4% for 2016, 72.3% for 2017 and 39.4% for 2018. SIP Value at vesting R5,109,422 plan took place in The next vesting of restricted share grants will take place in 2013 Restricted shares granted 6,950 September 2016. September 2019. Second tranche vested September 2017: actual shares vested 2,316 Value at vesting R274,793 Performance measure = achievement of approved Group ROI and sales targets 2014 Restricted shares granted 11,506 Approved Group sales targets* = 2016: R92.2 billion, 2017: R100.7 billion First tranche vested September 2017: actual shares vested 3,834 Approved Group ROI targets* = 2016: 17.3%, 2017: 18.2% Value at vesting R460,195 * The Board believe that the sales and ROI targets, which form the basis for the SIP achievement and pay-out Total value of award and grants at vesting date R5,844,410 SIP VESTED calculation, are commercially sensitive information and therefore not all targets have been disclosed. VALUE
Guy Hayward Johannes van Lierop 2018 Performance share vesting: 2018 performance share vesting:
Sales (50% weighting) ROI (50% weighting) Total achieved (92.3%) Sales (50% weighting) ROI (50% weighting) Total achieved (92.3%)
2015 R84.7 billion achieved 17.1% ROI achieved 100.1% 9,194 shares vested 2015 R84.7 billion achieved 17.1% ROI achieved 100.1% 23,851 shares vested
R92.2 billion target 17.3% ROI target R92.2 billion target 17.3% ROI target 2016 9,591 shares vested 2016 24,882 shares vested R84.7 billion achieved 17.7% ROI achieved 104.4% R84.7 billion achieved 17.7% ROI achieved 104.4%
R100.7 billion target 18.2% ROI target R100.7 billion target 18.2% ROI target 2017 6,645 shares vested 2017 72.3% 17,236 shares vested R94.5 billion achieved 17.8% ROI achieved 72.3% R94.5 billion achieved 17.8% ROI achieved
VALUE OF NO. OF VALUE OF NO. OF 2017 share vestings: VESTED SHARES SHARES 2015 2016 2017 2017 share vestings: VESTED SHARES SHARES 2015 2016 2017 2015 Performance shares awarded assuming 100% target achieved 27,559 9,185 9,185 9,189 2015 Performance shares awarded assuming 100% target achieved 71,495 23,829 23,829 23,837 % of target achieved: 92.3% of original award 100.1% 104.4% 72.3% % of target achieved: 92.3% of original award 100.1% 104.4% 72.3% Fully vested March 2018: actual shares vested 25,430 9,194 9,591 6,645 Fully vested March 2018: actual shares vested 65,969 23,851 24,882 17,236 Value at vesting R4,329,712 Value at vesting R11,231,882
2013 Restricted shares granted 6,950 2015 Restricted shares granted (March) 23,832 Final tranche vested September 2018: actual shares vested 2,318 First tranche vested March 2018: actual shares vested 7,943 Value at vesting R243,483 Value at vesting R1,352,375
2014 Restricted shares granted 11,506 2015 Restricted shares granted (September) 12,351 Second tranche vested September 2018: actual shares vested 3,834 First tranche vested September 2018: actual shares vested 4,116 Value at vesting R402,723 Value at vesting R432,345
Total value of awards and grants at vesting date R13,016,602 SIP VESTED 2015 Restricted shares granted 14,198 VALUE First tranche vested September 2018: actual shares vested 4,732 Value at vesting R497,049 2017 share vestings: Total value of awards and grants at vesting date R5,472,967 SIP VESTED Johannes van Lierop had no shares vesting in 2017 as he only joined Massmart in early 2015. VALUE
Definition of SIP performance measures: Nominal sales: total sales of the Massmart Group for a financial year. Return on investment (%): adjusted operating profit/average invested capital. Adjusted operating profit includes finance income and adds back depreciation, amortisation and rentals. Average invested capital is average total assets of continuing operations plus average accumulated depreciation and amortisation less average accounts payable less average accrued liabilities plus occupancy costs x8.
110 Transparency and accountability Massmart Integrated Annual Report 2018 111 REMUNERATION REPORT // IMPLEMENTATION OF THE REMUNERATION POLICY
Directors’ contracts and earnings The comments below provide further background and context to the figures disclosed in the tables which follow and the composition of remuneration outcomes in 2018 for the CEO and CFO are represented graphically below.
SUBSCRIPTION NUMBER OF SHARES/ GAIN ON SALE GUY HAYWARD Employee Share Incentive Plan GRANT DATES PRICE (R) SHARE OPTIONS EXERCISE (R 000’S) EXPIRY DATE Guy was awarded a 6.0% annual guaranteed package increase in July 2018. In terms of Massmart’s AIP, Guy received an Balance at December 2017 159,859 incentive payment of R1.3 million (equivalent to 2.4 months of salary) based on the Group’s actual operating income Performance shares vested 16 Mar 15 – (27,974) – 16 Mar 18 performance against the 2018 plan and achievement against non-financial metrics. Through the Employee Share Trust, Restricted shares vested 16 Sep 13 – (2,318) – 16 Sep 18 Guy holds 375,977 Massmart shares and options. Restricted shares vested 15 Sep 14 – (3,834) – 15 Sep 18 The average length of time that he has held these is 7.7 years and the average strike price is R134.74 per share. Guy Restricted shares vested 15 Sep 15 – (4,732) – 15 Sep 18 also owns 102,735 Massmart shares directly. Performance share award forfeitures* 18 Mar 16 – (3,481) – 18 Mar 19 Through the SIP, Guy was awarded 36,150 Performance share awards on 13 April 2018 and 19,427 Restricted share Performance share award forfeitures* 18 Apr 17 – (3,639) – 18 Apr 20 grants on 14 September 2018. Whilst Guy does not have a fixed-term contract, he is contractually bound by a notice period of twelve months. Performance share awards 13 Apr 18 – 36,150 – 13 Apr 21 Restricted share grants 14 Sep 18 – 6,475 – 14 Sep 21 Restricted share grants 14 Sep 18 – 6,475 – 14 Sep 22 Restricted share grants 14 Sep 18 – 6,477 – 14 Sep 23 Composition of remuneration (R’000) 2017 6,884 3,149 5,844 Balance at December 2018 169,458 2018 7,239 1,306 5,473 Comprising: Restricted share grants 15 Sep 14 – 3,838 – 15 Sep 19 TGP AIP SIP Restricted share grants 15 Sep 15 – 4,732 – 15 Sep 19 Restricted share grants 15 Sep 15 – 4,734 – 15 Sep 20 Performance share award 18 Mar 16 – 34,794 – 18 Mar 19 Details of shares and share options: Restricted share grants 16 Sep 16 – 4,650 – 16 Sep 19 SUBSCRIPTION NUMBER OF SHARES/ GAIN ON SALE Restricted share grants 16 Sep 16 – 4,650 – 16 Sep 20 Employee Share Option Scheme GRANT DATES PRICE (R) SHARE OPTIONS EXERCISE (R 000’S) EXPIRY DATE Restricted share grants 16 Sep 16 – 4,653 – 16 Sep 21 Balance at December 2017 436,994 Performance share award 18 Apr 17 – 35,792 – 18 Apr 20 Options exercised/shares sold 72.86 (36,573) 842.1 Restricted share grants 15 Sep 17 – 5,345 – 15 Sep 20 Options exercised/shares sold 94.25 (24,444) 245.1 Restricted share grants 15 Sep 17 – 5,345 – 15 Sep 21 Balance at December 2018 375,977 Restricted share grants 15 Sep 17 – 5,348 – 15 Sep 22 Comprising: Shares 27 May 09 77.56 105,448 – – Performance share award 13 Apr 18 – 36,150 – 13 Apr 21 Options 1 Sep 11 153.84 120,987 – 1 Sep 21 Restricted share grants 14 Sep 18 – 6,475 – 14 Sep 21 Options 16 May 12 159.62 149,542 – 16 May 22 Restricted share grants 14 Sep 18 – 6,475 – 14 Sep 22 Restricted share grants 14 Sep 18 – 6,477 – 14 Sep 23
Options exercised/shares sold at market price of R105.51 * Due to unmet performance conditions
112 Transparency and accountability Massmart Integrated Annual Report 2018 113 REMUNERATION REPORT // IMPLEMENTATION OF THE REMUNERATION POLICY
JOHANNES (HANS) VAN LIEROP 2018 BBBEE discretionary bonus Hans was awarded a 2.0% annual salary increase on his US-dollar denominated basic salary in July 2018. In terms To align with King IV, 20% of the annual incentive was linked to the achievement of non-financial metrics. In 2018, this was of Massmart’s AIP, Hans received an incentive payment of R1.1 million (equivalent to 2.4 months of salary) based specified as improving the Group’s externally-verified BBBEE score (the verification of which is lagged a year i.e. the bonus solely on the Group’s actual operating income performance against the 2018 plan and achievement against non- relates to the prior year’s BBBEE score). financial metrics. During the year to December 2018 Hans did not sell any Massmart shares. Non-Executive Directors’ remuneration summary Through the SIP, Hans was awarded 24,922 Performance share awards on 13 April 2018 and 15,761 Restricted share grants on 14 September 2018. As approved by the shareholders at Massmart’s May 2018 AGM, the following fees were paid Whilst Hans does not have a fixed-term contract, he is contractually bound by a notice period of twelve months. to non-Executive Directors in the financial year ending December 2018:
Composition of remuneration (R’000) 2018 FEE 2017 11,723* 2,384 Role (R’000) Chairman of the Board 1,575.0 2018 8,169 1,055 13,017 Deputy Chairman of the Board 840.0 * TGP includes expatriate benefits Independent non-Executive Directors 420.0 TGP AIP SIP Audit Committee Chairman 368.0 Risk Committee Chairman 289.0 Remuneration Committee Chairman 289.0 The Directors’ interests in the Details of shares: Nominations and Social and Ethics Committee Chairmen 289.0 Company’s shares and options held NUMBER OF GAIN ON SALE at reporting date can be found in the SUBSCRIPTION SHARES/ EXERCISE Audit Committee members 184.0 Employee Share Incentive Plan GRANT DATES PRICE (R) SHARE OPTIONS (R 000’S) EXPIRY DATE Directors’ Report p54-56 Other Board Committee members 147.0 Balance at December 2017 200,924 Performance shares vested 16 Mar 15 – (72,570) – 16 Mar 18 Walmart-appointed Directors are not remunerated for their services by Massmart Restricted shares vested 18 Mar 15 – (7,943) – 16 Mar 18 Restricted shares vested 15 Sep 15 – (4,116) – 15 Sep 18 Performance share award forfeitures* 18 Mar 16 – (3,433) – 18 Mar 19 Executive Committee members Performance share award forfeitures* 18 Apr 17 – (2,839) – 18 Apr 20 for the year ended 30 December 2018 Performance share awards 13 Apr 18 – 24,922 – 13 Apr 21 Restricted share grants 14 Sep 18 – 5,253 – 14 Sep 21 R’000 DEC 18 DEC 17 Restricted share grants 14 Sep 18 – 5,253 – 14 Sep 22 Executive manager A 11,025 12,775 Restricted share grants 14 Sep 18 – 5,255 – 14 Sep 23 Executive manager B 5,604 5,161 Balance at December 2018 150,706 Executive manager C 4,432 2,904 Comprising: Executive manager D 8,740 12,267 Restricted share grants 16 Mar 15 – 7,943 – 16 Mar 19 Executive manager E 14,868 6,384 Restricted share grants 16 Mar 15 – 7,946 – 16 Mar 20 Executive manager F 4,802 4,593 Restricted share grants 15 Sep 15 – 4,116 – 15 Sep 19 Executive manager G 5,445 5,339 Restricted share grants 15 Sep 15 – 4,119 – 15 Sep 20 Executive manager H 12,532 13,151 Performance share awards 18 Mar 16 – 34,314 – 18 Mar 19 Executive manager I 5,412 5,812 Restricted share grants 16 Sep 16 – 3,858 – 16 Sep 19 Executive manager J 10,129 11,554 Restricted share grants 16 Sep 16 – 3,858 – 16 Sep 20 Executive manager K1 - 10,670 Restricted share grants 16 Sep 16 – 3,862 – 16 Sep 21 Executive manager L2 - 7,328 Performance share awards 18 Apr 17 – 27,921 – 18 Apr 20 Executive manager M 7,579 10,974 Restricted share grants 15 Sep 17 – 4,028 – 15 Sep 20 Total 90,568 108,912 Restricted share grants 15 Sep 17 – 4,028 – 15 Sep 21 Restricted share grants 15 Sep 17 – 4,030 – 15 Sep 22 1 Resigned with effect from September 2017 Performance share awards 13 Apr 18 – 24,922 – 13 Apr 21 2 Retired with effect from April 2017 Restricted share grants 14 Sep 18 – 5,253 – 14 Sep 21 Restricted share grants 14 Sep 18 – 5,253 – 14 Sep 22 Restricted share grants 14 Sep 18 – 5,255 – 14 Sep 23
* Due to unmet performance conditions
114 Transparency and accountability Massmart Integrated Annual Report 2018 115 REMUNERATION REPORT // IMPLEMENTATION OF THE REMUNERATION POLICY
Directors’ emoluments for the year ended 30 December 2018
December 2018 December 2017 GAINS ON GAINS ON FRINGE EXERCISE FRINGE EXERCISE BENEFIT OF OF SHARE BENEFIT OF OF SHARE SERVICES AS INTEREST- OPTIONS AND SERVICES AS INTEREST- OPTIONS DIRECTORS OF BONUSES AND FREE LOANS ON SHARES DIRECTORS OF BONUSES AND FREE LOANS AND ON MASSMART PERFORMANCE RETIREMENT USED TO PURCHASED MASSMART PERFORMANCE RETIREMENT USED TO SHARES HOLDINGS SALARY AND RELATED OTHER AND RELATED FINANCE BY HOLDINGS SALARY AND RELATED OTHER AND RELATED FINANCE PURCHASED R’000 LIMITED ALLOWANCES PAYMENTS1 BENEFITS BENEFITS SUBTOTAL SHARES2 DIRECTORS TOTAL R’000 LIMITED ALLOWANCES PAYMENTS1 BENEFITS BENEFITS SUBTOTAL SHARES2 BY DIRECTORS TOTAL
Executive Directors Executive Directors GRC Hayward - 6,345 1,306 228 666 8,545 332 3,921 12,798 GRC Hayward - 5,909 3,149 163 620 9,841 341 4,333 14,515 JJM van Lierop - 5,566 1,055 2,603 - 9,224 - 13,017 22,241 JJM van Lierop - 5,250 2,384 3,749 - 11,383 - - 11,383 - 11,911 2,361 2,831 666 17,769 332 16,938 35,039 - 11,159 5,533 3,912 620 21,224 341 4,333 25,898
Non-Executive Directors Non-Executive Directors KD Dlamini 2,262 - - - - 2,262 - - 2,262 KD Dlamini 1,961 - - - - 1,961 - - 1,961 CS Seabrooke 1,965 - - - - 1,965 - - 1,965 CS Seabrooke 1,419 - - - - 1,419 - - 1,419 R Burnley ------R Burnley ------NN Gwagwa 845 - - - - 845 - - 845 A Clarke4 ------O Ighodaro3 533 - - - - 533 - - 533 NN Gwagwa 738 - - - - 738 - - 738 P Langeni 1,541 - - - - 1,541 - - 1,541 RM Kgosana5 768 - - - - 768 - - 768 S Muigai - - - - - – - - - P Langeni 1,106 - - - - 1,106 - - 1,106 E Ostalé ------S Muigai ------7,146 - - - - 7,146 - - 7,146 E Ostalé ------JP Suarez6 ------Total 7,146 11,911 2,361 2,831 666 24,915 332 16,938 42,185 5,992 - - - - 5,992 - - 5,992
1 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 Total 5,992 11,159 5,533 3,912 620 27,216 341 4,333 31,890 not amounts paid in that year 2 Held in terms of the rules of the Company’s share scheme 3 Appointed with effect from May 2018 4 Resigned with effect from February 2017 5 Resigned with effect from September 2017 6 Resigned with effect from May 2017
116 Transparency and accountability Massmart Integrated Annual Report 2018 117 Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting (AGM) of holders of all classes of shares of the Company will be held on Thursday, 23 May 2019 at 09h00 at Massmart House, 16 Peltier Drive, Sunninghill Ext 6, Sandton, for purposes of: 1. Transacting the following business: i. presenting the audited consolidated Group Annual Financial Statements of the 07 Company and its subsidiaries (Group) for the year ended December 2018, and the associated Directors’ report and Independent Auditor’s report, the Audit Committee report and the Social and Ethics Committee report; ii. electing Directors in the place of those resigning and/or retiring in accordance Shareholder with the Company’s Memorandum of Incorporation; iii. the election and appointment of Ernst & Young Inc. (with Roger Hillen) as the Company’s external auditors for the ensuing financial year; and The summary Consolidated information iv. such other business as may be transacted at an Annual General Meeting. Group Financial Statements 2. Considering and, if deemed fit, passing, with or without modification, the below for the year ended December mentioned ordinary and special resolutions. 2018 are set out in the The Board of Directors of the Company has determined, in accordance with section 59 Performance section on of the Companies Act 71 of 2008, as amended (Act), that the respective record dates for p57-64 shareholders to be recorded as shareholders in the securities register of the Company in order to: (i) be entitled to receive this notice of AGM is Friday, 5 April 2019; and (ii) be entitled to attend, participate and vote at the AGM is Friday, 17 May 2019. The last date to trade to be entitled to attend, participate and vote at the AGM is Tuesday, 14 May 2019. The audited consolidated Ordinary business Group Annual Financial Statements for the year ended The summary consolidated Group Financial Statements of the Company and the Group December 2018 can be found (as approved by the Directors of the Company), including the Directors’ report and on the Company website at: Independent Auditor’s report, the Audit Committee report and the Social and Ethics www.massmart.co.za/ Committee report for the year ended December 2018, circulated together with this iar2018/groupafs notice of AGM, are presented to the shareholders for their consideration. Ordinary resolutions Ordinary resolution number 1 119 126 “Resolved that Olufunke Ighodaro, who was appointed during the reporting period and Notice of Notes to the has offered herself for election, be and is hereby elected to the Board of Directors of the Annual General form of proxy Company.” Meeting In terms of the Act, more than 50% of the voting rights exercised on this resolution 127 must be cast in favour of ordinary resolution number 1 for it to be adopted. 125 Definitions Form of proxy and formulas Ordinary resolution number 2 “Resolved that Lindiwe Mthimunye, who was appointed during the reporting period and has offered herself for election, be and is hereby elected to the Board of Directors of the Company.” In terms of the Act, more than 50% of the voting rights exercised on this resolution must be cast in favour of ordinary resolution number 2 for it to be adopted.
Massmart Integrated Annual Report 2018 119 NOTICE OF ANNUAL GENERAL MEETING
Ordinary resolution number 3 “Resolved that JP Suarez, who was appointed during the In terms of the Act, more than 50% of the voting rights Pursuant to the JSE Listings Requirements, the Company will such price, in such manner and subject to such terms and reporting period and has offered himself for election, be and exercised on each of these resolutions must be cast in favour only be entitled to implement this general authority to allot conditions as the Directors may deem fit, but subject to the is hereby elected to the Board of Directors of the Company.” of each of ordinary resolution numbers 8.1, 8.2, 8.3 and 8.4 for and issue ordinary shares for cash if this ordinary resolution Memorandum of Incorporation of the Company, the Act and In terms of the Act, more than 50% of the voting rights such resolutions to be adopted. number 9 is passed by a majority of 75% or more of the the JSE Listings Requirements, and provided that: exercised on this resolution must be cast in favour of votes cast by all shareholders present or represented by 1.1. the authority hereby granted will be valid until the ordinary resolution number 3 for it to be adopted. Ordinary resolution number 9 proxy at the AGM, excluding any votes cast by the Massmart Company’s next AGM or for 15 months from the date “Resolved that, subject to the JSE Limited (JSE) Listings Holdings Limited Employee Share Trust. of this special resolution, whichever period is shorter; Ordinary resolution number 4 Requirements (JSE Listings Requirements), the Directors be 1.2. repurchases may not be made at a price greater than “Resolved that Enrique Ostalé, who retires by rotation has and are hereby authorised to issue ordinary shares in the Ordinary resolution number 10 10% above the weighted average of the market value offered himself for re-election, be and is hereby re-elected authorised but unissued shares of the Company (or to issue “Resolved that, by way of a non-binding advisory vote, for the shares determined over the five business days to the Board of Directors of the Company.” options or convertible securities convertible into ordinary the remuneration policy of the Company, as outlined on immediately preceding the date that the repurchase In terms of the Act, more than 50% of the voting rights shares) for cash to such person or persons on such terms and the Remuneration Report on pages 102 to 107, is endorsed.” is effected (or, if no shares of the Company have been exercised on this resolution must be cast in favour of conditions as they may deem fit, subject to the following: As this is a non-binding advisory vote, no minimum voting traded in that period, subject to a ruling by the JSE); ordinary resolution number 4 for it to be adopted. 9.1. the securities shall be of a class already in issue, or threshold is required. Nevertheless, for record purposes, in 1.3. repurchases in the aggregate in any one financial year convertible into a class already in issue; terms of the King IV Report on Governance for South Africa, shall not exceed 15% of that class of the Company’s Ordinary resolution number 5 9.2. the securities shall be issued to public shareholders 2016 more than 75% of the voting rights exercised on this issued shares; “Resolved that Susan Muigai, who retires by rotation and has (as defined in the JSE Listings Requirements) and resolution must be cast in favour of ordinary resolution 1.4. the repurchase of shares will be effected through offered herself for re-election, is hereby re-elected to the not to related parties (as defined in the JSE Listings number 10 for it to be adopted. This non-binding advisory the order book operated by the JSE trading system Board of Directors of the Company.” Requirements); vote allows shareholders to express their views on the and will be done without any prior understanding In terms of the Act, more than 50% of the voting rights 9.3. the issues of securities in the aggregate under the remuneration policies adopted by the Company. In the or arrangement between the Company and the exercised on this resolution must be cast in favour of authority of this resolution during the period in 9.5 event that 25% or more of the voting rights exercised are counterparty (reported trades are prohibited); ordinary resolution number 5 for it to be adopted. below shall not exceed 5% of the number of securities cast against this resolution, the Board of Directors will invite 1.5. the Company may appoint only one agent, at any point of that class already in issue as at the date of this notice dissenting shareholders to engage with the Remuneration in time, to effect the repurchases on the Company’s Ordinary resolution number 6 of AGM, excluding treasury shares, being 217,179,142 Committee on their concerns in line with the provisions of behalf; “Resolved that Kuseni Dlamini, who retires by rotation and ordinary shares, determined in accordance with the the JSE Listings Requirements. 1.6. neither the Company nor its subsidiaries may repurchase has offered himself for re-election, be and is hereby re- relevant provisions of the JSE Listings Requirements, shares during a prohibited period (as defined in the JSE elected to the Board of Directors of the Company.” provided that: Ordinary resolution number 11 Listings Requirements) unless a repurchase programme In terms of the Act, more than 50% of the voting rights 9.3.1 any equity securities issued under the authority “Resolved that, by way of a non-binding advisory vote, the is in place where the dates and quantities of shares to be exercised on this resolution must be cast in favour of during the period contemplated in 9.5 below remuneration implementation report of the Company, traded during the relevant period are fixed (not subject ordinary resolution number 6 for it to be adopted. must be deducted from such number in 9.3 as outlined on pages 108-117 of the Integrated Annual to any variation) and has been submitted to the JSE in above; and Report, is endorsed.” writing prior to the commencement of the prohibited Ordinary resolution number 7 9.3.2 in the event of a sub-division or consolidation As this is a non-binding advisory vote, no minimum period. The Company will instruct an independent “Resolved that Ernst & Young Inc. (with Roger Hillen as the of the issued equity securities during the period voting threshold is required. Nevertheless, for record third party, which makes its investment decisions in Audit Partner) be and are hereby elected as the Company’s contemplated in 9.5 below, the existing authority purposes, in terms of the King Report on Governance for relation to the Company’s securities independently external auditors for the ensuing financial year to hold must be adjusted accordingly to represent the South Africa more than 75% of the voting rights exercised of, and uninfluenced by, the Company, prior to the office until the Company’s next AGM, as approved by the same allocation ratio; on this resolution must be cast in favour of ordinary commencement of the prohibited period to execute Audit Committee and recommended to shareholders.” It is 9.4. the maximum discount at which the shares may be resolution number 11 for it to be adopted. This non-binding the repurchase programme submitted to the JSE; recorded that Roger Hillen has served as Audit Partner since issued shall be 10% of the weighted average traded advisory vote allows shareholders to express their views on 1.7. an announcement complying with paragraph 11.27 of 26 May 2017 and this will be his second reporting period. price of the shares of the Company measured over the the remuneration implementation report adopted by the the JSE Listings Requirements will be published by the The Company’s external auditors, Ernst & Young Inc. were 30 business days prior to the date that the price of Company. As set out in the JSE Listings Requirements, if Company when the Company and/or its subsidiaries appointed on 7 November 2012 and have served tenure of the issue is agreed between the Company and the 25% or more of the voting rights exercised are cast against have cumulatively repurchased 3% of the Company’s six reporting periods. party subscribing for the shares (or, if no shares of the this resolution, the Board of Directors will invite dissenting initial number of issued ordinary and/or preference In terms of the Act, more than 50% of the voting rights Company have been traded in that period, subject to a shareholders to engage with the Remuneration Committee shares at the time that the general authority from exercised on this resolution must be cast in favour of ruling by the JSE); on their concerns. shareholders is granted and for each 3% in aggregate of ordinary resolution number 7 for it to be adopted. 9.5. the authority hereby granted will be valid until the the initial number of that class acquired thereafter; and Company’s next AGM, provided that it will not extend Special resolutions 1.8. a resolution by the Board of Directors that it authorises Ordinary resolution number 8 beyond 15 months from the date on which this such repurchase, that the Company and its subsidiaries “Resolved that the following persons be and are hereby resolution is passed; and Special resolution number 1 have passed the solvency and liquidity test as set out appointed, each by way of a separate vote, as members of 9.6. once shares representing, on a cumulative basis within “Resolved, as a special resolution, that the Company and/ in section 4 of the Act and that since the application by the Audit Committee: the period contemplated in 9.5 above, 5% or more of or its subsidiaries be and are hereby authorised to generally the Board of Directors of the solvency and liquidity test, 8.1. Olufunke Ighodaro (Chairman) the Company’s issued ordinary and/or preference shares repurchase the ordinary and/or preference shares in the there have been no material changes to the financial 8.2. Lindiwe Mthimunye prior to that issue, have been issued, the Company shall issued shares of the Company from such shareholder/s, at position of the Group, has been passed.” 8.3. Lulu Gwagwa publish an announcement in accordance with the JSE 8.4. Phumzile Langeni” Listings Requirements.”
120 Shareholder information Massmart Integrated Annual Report 2018 121 NOTICE OF ANNUAL GENERAL MEETING
Statement by the Board of Directors In accordance with the JSE Listings Requirements, the Other than the facts and developments reported in the to any one or more related or interrelated companies or The section 45 Board Resolution will be effective only if and Directors state that: Integrated Annual Report, to which this notice of AGM is corporations (as defined in the Act) of the Company that to the extent that special resolution number 3 is adopted a. the intention of the Directors is to utilise the authority attached, there have been no material changes in the financial are currently or in the future have become subsidiaries by the shareholders, and the provision of any such direct given under special resolution number 1 at a future date, or trading position of the Company and its subsidiaries since (whether local or foreign) of the Company on such terms or indirect financial assistance by the Company, pursuant provided that the cash resources of the Company are in the publication of the audited consolidated Group Annual and conditions as the Board of Directors of the Company, to such resolution, will always be subject to the Board of excess of its requirements. In this regard, the Directors will Financial Statements for the year ended December 2018. or by any one or more persons or Committees authorised Directors being satisfied that (i) immediately after providing take into account, inter alia, an appropriate capitalisation In terms of the Act, at least 75% of the voting rights by the Board of Directors of the Company from time to time such financial assistance, the Company will satisfy the structure for the Company and the long-term cash needs exercised on this resolution must be cast in favour of special for such purpose, deems fit, provided that any such financial solvency and liquidity test as referred to in section 45(3) of the Company, and will ensure that any such utilisation resolution number 1 for it to be adopted. assistance shall not in the aggregate exceed an amount of (b)(i) of the Act, and that (ii) the terms under which such is in the interests of the shareholders; and R15 billion in any financial year.” financial assistance is to be given are fair and reasonable to b. having considered the effect of the maximum number Special resolution number 2 In terms of the Act, at least 75% of the voting rights the Company as referred to in section 45(3)(b)(ii) of the Act. of ordinary and preference shares that may be acquired “Resolved, as a special resolution, that the following exercised on this resolution must be cast in favour of special In as much as the section 45 Board Resolution contemplates pursuant to the authority given under special resolution Directors’ remuneration (payable to the applicable non- resolution number 3 for it to be adopted. that such financial assistance will in the aggregate exceed number 1: Executive Directors for services to be rendered by them in The following direct and/or indirect financial assistance one tenth of one percent of the Company’s net worth • the Company and the Group will in the ordinary their capacities as such), be and is hereby approved, each was provided by the Company to related and/or interrelated at the date of adoption of such resolution, the Company course of business be able to pay its debts for a period by way of a separate vote, for the period commencing on 23 companies and/or corporations of the Company as at the hereby provides notice of the section 45 Board Resolution of 12 months after the date of this notice of AGM; May 2019 to the date of the Company’s next AGM. financial year ended December 2018: to shareholders. Such notice will also be provided to any • the assets of the Company and the Group will be in trade union representing any employees of the Company. 2019 FEE 2018 FEE R’bn excess of the liabilities of the Company and the Group Role (R’000) (R’000) Cross suretyships in respect of banking for a period of 12 months after the date of this notice 2.1 Chairman of the Board 1,575.0 1,575.0 facilities 7.9 General of AGM, such assets and liabilities being recognised 2.2 Deputy Chairman of the and measured in accordance with the accounting Loans to subsidiary companies 5.5 Identification, voting and proxies Board 840.0 840.0 policies used in the audited consolidated Group Total 13.4 Shareholders are entitled to attend, speak and vote at the Annual Financial Statements of the Company and the 2.3 Independent non-Executive AGM. Group for the year ended December 2018; Directors 420.0 420.0 It is anticipated that such financial assistance will increase In terms of section 63(1) of the Act, any person attending • the issued share capital and reserves of the Company 2.4 Audit Committee Chairman 368.0 368.0 during the period of two years commencing on the date of or participating in the AGM must present reasonably and the Group will be adequate for ordinary business satisfactory identification and the person presiding at the 2.5 Risk Committee Chairman 289.0 289.0 special resolution number 3, mainly as a result of the Groups purposes for a period of 12 months after the date of expansion plans but that the total financial assistance after AGM must be reasonably satisfied that the right of any this notice of AGM; and 2.6 Remuneration Committee such anticipated increase will not exceed R15 billion in any person to participate in and vote (whether as shareholder • the working capital available to the Company and Chairman 289.0 289.0 financial year. Before this limit may be exceeded shareholder or a proxy for a shareholder) has been reasonably verified. the Group will be adequate for ordinary business 2.7 Nominations and Social and approval under section 45 of the Act would again have to Forms of identification include valid identity documents, purposes for a period of 12 months after the date of Ethics Committee Chairmen 289.0 289.0 be sought. driver’s licences or passports. Shareholders holding dematerialised shares, but not this notice of AGM. 2.8 Audit Committee members 184.0 184.0 In the event that the Company provides financial The general authority to repurchase the ordinary and/or assistance to its subsidiary companies in the form of loans, in their own name, must furnish their Central Securities preference shares in the issued shares of the Company is 2.9 Other Board Committee the Company’s solvency and liquidity will not be impaired Depository Participant (CSDP) or broker with their limited to the authority granted 1.1 to 1.8 above. members 147.0 147.0 ” as the Company will raise an asset in its books for the instructions for voting at the AGM. The following additional information, which appears equivalent amount then due by that subsidiary. If your CSDP or broker, as the case may be, does not obtain In terms of the Act, at least 75% of the voting rights exercised in the Integrated Annual Report of which this notice of Notice to shareholders of the Company in terms of instructions from you, it will be obliged to act in accordance on each of these resolutions must be cast in favour of special AGM forms part, is provided in terms of the JSE Listings section 45(5) of the Act of a resolution adopted by the with your mandate furnished to it, or if the mandate is silent resolution numbers 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8 and 2.9 Requirements for purposes of special resolution number 1: Board authorising the Company to provide direct or indirect in this regard, complete the form of proxy attached. for such resolutions to be adopted. The Remuneration • Major shareholders on page 18; financial assistance. Unless you advise your CSDP or broker, in terms of the Report for the year ended December 2018 can be found on • Material changes on page 122; By the time this notice of AGM is delivered to shareholders, agreement between you and your CSDP or broker by the pages 96-117 of the Integrated Annual Report. • Share capital of the Company on page 55; and the Board of Directors will have adopted a resolution cut-off time stipulated therein, that you wish to attend the • Responsibility statement on page 122. (section 45 Board Resolution) authorising the Company to AGM or send a proxy to represent you at the AGM, your The Directors, whose names are set out on page 88 of Special resolution number 3 provide, at any time and from time to time during the period CSDP or broker will assume that you do not wish to attend the Integrated Annual Report, collectively and individually, “Resolved, as a special resolution, to the extent required of two years commencing on the date on which special the AGM or send a proxy. accept responsibility for the accuracy of information in terms of, and subject to the provisions of, section 45 resolution number 3 is adopted, any direct or indirect If you wish to attend the AGM or send a proxy, you must contained in this statement and certify that, to the best of the Act, that the shareholders hereby approve of the financial assistance as contemplated in section 45 of the request your CSDP or broker to issue the necessary letter of their knowledge and belief, there are no other facts Company providing, at any time and from time to time Act to any one or more related or inter-related companies of authority to you. Shareholders holding dematerialised the omission of which would make any statement false or during the period of two years commencing on the date or corporations of the Company and/or to any one or more shares, and who are unable to attend the AGM and wish misleading and that they have made all reasonable enquiries of this special resolution, any direct or indirect financial members of any such related or inter-related company or to be represented thereat, must complete the form of in this regard. assistance as contemplated in such section of the Act corporation and/or to any one or more persons related to proxy attached in accordance with the instructions therein any such company or corporation, provided that any such and lodge it with or mail it to the transfer secretaries, financial assistance shall not in the aggregate exceed an Computershare Investor Services Proprietary Limited amount of R15 billion in any financial year. (Computershare).
122 Shareholder information Massmart Integrated Annual Report 2018 123 NOTICE OF ANNUAL GENERAL MEETING Form of proxy Massmart Holdings Limited Incorporated in the Republic of South Africa Registration number 1940/014066/06 JSE share code MSM ISIN ZAE000152617 (‘Massmart’ or ‘the Company’)
A form of proxy (which is attached) must be dated and the revocation instrument is delivered to Computershare For use by certificated and dematerialised shareholders who have ‘own name’ registration of shares on Friday, 17 May 2019 at the AGM to be signed by the shareholder appointing a proxy and should as required in the first sentence of this paragraph. held on Thursday, 23 May 2019 at 09h00 at Massmart House, 16 Peltier Drive, Sunninghill Ext 6, Sandton. be forwarded to reach Computershare by no later than • If the instrument appointing the proxy or proxies has been I/We (Please PRINT full names) 09h00 on Tuesday, 21 May 2019 for administrative purposes, delivered to Computershare, as long as that appointment of (address) being the or thereafter to the Company by hand no later than 08h00 remains in effect, any notice that is required by the Act holders of ordinary shares/‘B’ preference shares, hereby appoint (see note 3), on Thursday, 23 May 2019. Before a proxy exercises any rights or the Company’s Memorandum of Incorporation to be 1. or failing him/her, of a shareholder at the AGM, such form of proxy must be so delivered by the Company to the shareholder, must be 2. or failing him/her, delivered. delivered by the Company to: (i) the shareholder or (ii) the In compliance with the provisions of section 58(8) (b) (i) proxy or proxies, if the shareholder has: (a) directed the the Chairman of the AGM as my/our proxy to participate in, speak and vote for me/us on my/our behalf at the AGM which will be held for the of the Act, a summary of the rights of a shareholder to be Company to do so in writing and (b) paid any reasonable purpose of considering and, if deemed fit, passing the ordinary and special resolutions to be proposed and at each adjournment of the AGM and to vote for or against the ordinary and special resolutions or to abstain from voting in respect of the shares in the issued capital of the represented by proxy, as set out in section 58 of the Act, is fee charged by the Company for doing so. Company registered in my/our name/s, in accordance with the instructions as set out in note 4. set out immediately hereunder: • Attention is also drawn to the Notes to the form of proxy. For Against Abstain • A shareholder entitled to attend and vote at the AGM may • The completion of a form of proxy does not preclude any OS PS OS PS OS PS appoint any individual (or two or more individuals) as a shareholder from attending the AGM. Ordinary resolutions proxy or as proxies to attend, participate in and vote at Shareholders may participate (but not vote) electronically 1. Election of Olufunke Ighodaro to the Board of Directors the AGM in the place of the shareholder. A proxy need not in the AGM. Shareholders wishing to participate in the AGM 2. Election of Lindiwe Mthimunye to the Board of Directors be a shareholder of the Company. electronically should contact the office of the Company 3. Election of JP Suarez to the Board of Directors • A proxy appointment must be in writing, dated and Secretary on [email protected] or +27 11 517 6020 4. Re-election of Enrique Ostalé to the Board of Directors signed by the shareholder appointing a proxy and, not less than five business days prior to the AGM and are subject to the rights of a shareholder to revoke such required to provide identification reasonably satisfactory to 5. Re-election of Susan Muigai to the Board of Directors appointment (as set out below), remains valid only until the office of the Company Secretary for purposes of verifying 6. Re-election of Kuseni Dlamini to the Board of Directors the end of the AGM. that shareholders right to participate. Access to the AGM by 7. Election of Ernst & Young Inc. as the Company’s auditors (with Roger Hillen as audit partner) • A proxy may delegate the proxy’s authority to act on way of electronic participation will be at the shareholders 8. Appointment of the Audit Committee members: behalf of a shareholder to another person, subject to expense. Only persons physically present at the AGM or 8.1 Olufunke Ighodaro (Chairman) any restrictions set out in the instrument appointing the represented by a valid proxy shall be entitled to cast a vote 8.2 Lindiwe Mthimunye proxy. on any matter put to a vote of shareholders. 8.3 Lulu Gwagwa • The appointment of a proxy is suspended at any time and 8.4 Phumzile Langeni to the extent that the shareholder who appointed such By order of the Board 9. Authorisation for the Directors to issue ordinary shares for cash, not exceeding 5% of the shares in issue proxy chooses to act directly and in person in the exercise Non-binding Advisory resolutions of any rights as a shareholder. 10. Resolution 10 – approval of the remuneration policy • The appointment of a proxy is revocable by the 11. Resolution 11 – approval of the remuneration implementation report shareholder in question cancelling it in writing, or Special resolutions making a later inconsistent appointment of a proxy, 1. Authorisation for the Company and/or its subsidiaries to repurchase its own shares and delivering a copy of the revocation instrument to 2. Approval of non-Executive Directors’ remuneration the proxy and to Computershare. The revocation of a Joe Ralebepa 2.1 Chairman of the Board proxy appointment constitutes a complete and final Company Secretary 2.2 Deputy Chairman of the Board cancellation of the proxy’s authority to act on behalf of 4 April 2019 2.3 Independent non-Executive Directors the shareholder as of the later of: (i) the date stated in the 2.4 Audit Committee Chairman revocation instrument, if any and (ii) the date on which 2.5 Risk Committee Chairman 2.6 Remuneration Committee Chairman 2.7 Nominations and Social and Ethics Committee Chairmen 2.8 Audit Committee members 2.9 Other Board Committee members 3. Authorisation to provide financial assistance pursuant to section 45 of the Act Indicate with an ‘X’ or the relevant number of ordinary or ‘B’ preference shares, in the applicable OS – Ordinary shares space, how you wish your votes to be cast (see note 4). If you return this form duly signed, without PS – ‘B’ Preference shares any specific directions, the proxy will vote as he/she thinks fit.
Signed at on 2019 Signature Assisted by me (where applicable) Tel Cell Email
Completed forms of proxy must be lodged with Computershare Investor Services Proprietary Limited, not less than 48 (forty-eight) hours before the time for holding the AGM, i.e. by no later than 09h00 on Tuesday, 21 May 2019, for administrative purposes, or thereafter to the Company by hand no later than 08h00 on Thursday 23 May 2019. 124 Shareholder information Please read the notes on the reverse side of this form of proxy. Notes to the form of proxy DEFINITIONS
Employment costs Includes the IFRS 2 share-based payment expense Net finance costs Interest received less interest paid 1. A form of proxy is only to be completed by those 6. Forms of proxy must be received by the transfer EBITDA Earnings before interest, taxation, depreciation, amortisation and asset impairments shareholders who are: secretaries, Computershare Investor Services EBITDAR Earnings before interest, taxation, depreciation, amortisation, asset impairments and occupancy costs 1.1. holding shares in certificated form; or Proprietary Limited (Computershare), Rosebank Towers, 15 Biermann Avenue, Rosebank, 2196, South Africa (PO Trading profit before interest Earnings before interest, taxation, asset impairments, the BBBEE IFRS 2 charge, foreign exchange movements, loss on 1.2. recorded on the sub-register of the Company in and taxation disposal of business and assets classified as held for sale and Walmart-related costs dematerialised electronic form in ‘own name’ on the Box 61051, Marshalltown 2107) by no later than 09h00 Comparable sales Sales figures quoted for stores that have traded, and will trade, for all 12 months of the current and prior year record date for attending, participating and voting on Tuesday, 21 May 2019 for administrative purposes, or FTEs (full-time equivalents) Includes all permanent employees and the permanent equivalent of temporary employees and contracted workers at the AGM. thereafter to the Company by hand no later than 08h00 Trading space (m2) Trading space excludes parking, yard, warehouse space, office space and receiving areas 2. If you have already dematerialised your shares through on Thursday 23 May 2019. a Central Securities Depository Participant (CSDP) or 7. The completion and lodging of this form of proxy will Regional distribution centre Distribution centre space excludes parking and yard space space (m2) broker and wish to attend the AGM, you must request not preclude the relevant shareholder from attending your CSDP or broker to provide you with a letter of the AGM and speaking and voting in person at such representation or you must instruct your CSDP or meeting to the exclusion of any proxy appointed in broker to vote by proxy on your behalf in terms of the terms of this form of proxy. agreement between yourself and your CSDP or broker. 8. Documentary evidence establishing the authority of a 3. A shareholder may insert the name of a proxy or the person signing this form of proxy in a representative FORMULAS names of alternative proxies of the shareholder’s choice capacity or other legal capacity must be attached to this form of proxy unless previously recorded by Sales per store Return on average Includes the IFRS 2 share-based payment expense in the space/s provided, with or without deleting ‘the Sales Chairman of the AGM’ but any such deletion must be Computershare or waived by the Chairman of the AGM. (R000) shareholders’ equity Number of stores initialed by the shareholder. The person whose name 9. Any alterations or corrections made to this form of (%) proxy must be initialed by the signatory/ies. Return on capital stands first on this form of proxy and who is present at Sales per FTE (R000) Operating profit before asset Sales the AGM will be entitled to act as proxy to the exclusion 10. A minor must be assisted by his/her parent or guardian employed (%) impairments unless the relevant documents establishing his/her FTEs of those whose names follow. Average of opening and closing 4. Please insert an ‘X’ in the relevant space according to legal capacity are produced or have been registered by capital employed balances Sales per trading m2 how you wish your votes to be cast. However, if you Computershare. Sales 11. The Chairman of the AGM may accept any form of proxy (R000) The Group defines capital employed as the average wish to cast your votes in respect of a lesser number Trading m2 of opening and closing equity of shares than you own in the Company, insert the which is completed other than in accordance with Return on invested number of shares held in respect of which you wish to these notes if the Chairman is satisfied as to the manner Net asset turn The Group defines net assets as total equity and Adjusted operating profit in which the shareholder wishes to vote. interest-bearing LT liabilities capital (%) vote. Failure to comply with the above will be deemed Average invested capital to authorise the proxy to vote or to abstain from voting 12. If any shares are jointly held, the first name appearing in Sales the register shall, in the event of a dispute, be taken as Adjusted operating profit includes finance income at the AGM as he/she deems fit in respect of all the Net assets a shareholder. and adds back depreciation, amortisation and shareholders’ votes exercisable at the AGM. occupancy costs. 5. A shareholder or his/her proxy is not obliged to use all Gross margin (%) Gross profit Average invested capital is average total assets of the votes exercisable by the shareholder or by his/her Sales continuing operations plus average accumulated proxy, but the total of the votes cast and in respect of depreciation and amortisation less average accounts which an abstention is recorded may not exceed the Operating margin (%) payable less average accrued liabilities plus Operating profit total of the votes exercisable by the shareholder or by occupancy costs x8 his/her proxy. Sales Debt : Equity (%) Average debt Trading profit before Trading profit before Average of opening and closing equity interest and taxation interest and taxation attributable to equity holders of the parent margin (%) Sales Debt comprises non-current interest-bearing liabilities EBITDA margin (%) EBITDA Cash earnings cover Sales Operating cash flow per share Headline earnings per share Transfer secretaries Effective tax rate (%) Headline earnings Computershare Investor Services Proprietary Limited Net cash to total Average of opening and closing equity Cash and cash equivalents, Rosebank Towers, 15 Biermann Avenue, Rosebank 2196 equity (%) net of borrowings PO Box 61051, Marshalltown 2107 attributable to equity holders of the parent Total equity at the end of Telephone: 011 370 5000 The tax rate reconciliation can be found on p50 the financial year Call Centre: 086 110 09818
126 Shareholder information Massmart Integrated Annual Report 2018 127 Registered Name FORMULAS Massmart Holdings Limited Company Secretary Current ratio Diluted headline Current assets Headline earnings NJ Ralebepa earnings per share Current liabilities Diluted weighted average Contact details number of shares in issue Registered office Quick ratio Current assets excluding Attributable We strive to provide useful and frequent disclosure to Massmart House inventory Earnings attributable to the 16 Peltier Drive earnings per share equity holders of the parent our shareholders. Current liabilities Sunninghill Ext 6, Sandton Weighted average number of Inventory days 2157, South Africa Inventory number of days shares in issue Massmart reports formally to shareholders twice a year (in February x traded in the and August) when its full-year and half-year results, together Postal address Total cost of sales Dividends/ financial year Distribution to shareholders with a thorough Executive overview, are announced and issued Private Bag X4, Sunninghill distribution per share Total number of shares to shareholders and the media. On both occasions the CEO, CFO 2157, South Africa Inventory turn Total cost of sales in issue and certain Group Executives give presentations to institutional Telephone number Inventory Cash generated from investors, analysts and the media. + 27 11 517 0000 Cash generated from Debtor days operations before Early in January and July, shortly after the conclusion of the Trade debtors number of days operations before working Facsimile number working capital excluding VAT traded in the capital movements full-year and half-year trading periods, on release of the Integrated + 27 11 517 0020 x movements per share financial year Annual Report and at the Group’s AGM in May, Massmart releases Total sales Weighted average number Website of shares in issue sales updates reporting on the Group’s year-to-date sales Payable days www.massmart.co.za Trade payables number of days Operating cash flow performance. In addition, annually in May, the CEO and CFO host excluding VAT traded in the Net cash flow from Company x per share a day-long visit by institutional analysts and investors to Massmart financial year operating activities registration number Total cost of sales stores. A sales update is released along with this visit. 1940/014066/06 (incorporated Current liabilities During the year, apart from closed periods, the CEO and CFO Asset turn in South Africa) Sales Net asset value Closing equity attributable to together meet regularly with institutional shareholders and, Total assets per share equity holders of the parent in addition, are available for meetings or conference calls with JSE share code MSM Total liabilities to total analysts and any existing or prospective Massmart shareholder. ISIN ZAE000152617 Current and non-current Weighted average number of equity liabilities shares in issue Total equity Net cash flow from operating activities, excludes dividends paid. Share data: Design partner Headline earnings per Dividend cover Headline earnings Headline earnings and publisher share per share 31 December 2017 – 30 December 2018 Weighted average number Ninepoint of shares in issue Interim and final dividend per share Closing price, 28 December 2018 R103.00 Editor Share price (52 weeks high) R178.48 Iris Consulting Share price (52 weeks low) R86.35 Printer Market cap (billions) R22.28 Law Print Shares in issue (millions) 217.2 Photography SHAREHOLDERS’ CALENDAR Shares traded (millions) 156.7 Objektiv, Gareth Gilmour, Roger Jardine Percentage of shares traded 72.2% Transfer secretaries Reuters MSMJ.J Computershare Investor Services
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Bloomberg MSM SJ Proprietary Limited Analyst presentation and preliminary announcement • 15 Biermann Avenue, Rosebank, 2196 Final dividend declared • Principal bankers Cape Town institutional investor road show • Additional information ABSA Bank Limited First National Bank Johannesburg institutional investor road show • DECEMBER 2018 DECEMBER 2017 (A division of FirstRand Final dividend paid • (AUDITED) (AUDITED) Bank Limited) Publication of Integrated Annual Report • Net asset value per share (cents) 2,999.4 2,900.6 Investec Bank Limited Annual General Meeting • Ordinary shares (000’s): Nedbank Group Limited Analyst presentation and preliminary announcement • - In issue 217,179.1 217,145.5 The Standard Bank of South Africa Interim dividend (if declared) • - Weighted average (net of treasury shares) 216,390.6 215,276.1 Limited Cape Town institutional investor road show • - Diluted weighted average 221,078.7 219,352.1 Auditors Johannesburg institutional investor road show • Preference shares (000’s): Ernst & Young Inc. Interim dividend paid • - Black Scarce Skills Trust 'B’ shares in issue 2,797.7 2,831.3 Corporate law advisors Capital expenditure (Rm): United States institutional investor road show • Cliffe Dekker Hofmeyr - Authorised and committed 958.8 797.6 ENS Africa United Kingdom institutional investor road show • - Authorised not committed 1,413.9 1,378.3 Lead sponsor Financial year-end • US dollar exchange rates: - year end (R/$) 14.47 12.44 JP Morgan Equities South Africa - average (R/$) 13.18 13.37 Proprietary Limited
128 Shareholder information www.massmart.co.za/iar2018 Massmart values your feedback. Do you have any questions or suggestions regarding Massmart’s 2018 Integrated Annual Report? Email [email protected]