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Massmart’s earnings reveal why Dion Wired is closing down

| Economic factors

Massmart on Thursday (27 February) reported total sales of R93.7 billion for the 52-week period ending 29 December, representing total sales growth of 3.0%.

Sales from its South African stores increased by 2.7%, with comparable store sales increasing by 1.3%, it said.

However, Massmart reported a loss of R1.3 billion for the year, down nearly 245% from a prior profit of R888 million.

The group reported a diluted headline loss per share of 522 cents – down 228%.

Massmart Group opted not to declare a dividend.

During the period, seven net new stores were opened, including the Makro store in Cornubia, north of Durban.

“Consequently, and further impacted by increased municipal tariffs, electricity costs and the cost associated with power generation as a result of load-shedding in February and again in December, occupancy costs increased by 8.4%,” it said.

Contributing to the 17.3% increase in depreciation and amortisation during the period was the impact of new stores and increased cost associated with the new SAP Hybris web and fulfilment platform in Makro, Massmart said.

Other operating expenses increased by 14.2%.

“This was impacted by costs associated with the current economic climate: 5.8% increase in credit card costs as we see bigger credit sales participation; 9.6% increase in security costs driven by the need to increase our security efforts; and a 66.1% increase in bad debts. In addition, pre-opening costs associated with opening new stores, increased by 21.2%,” the group said.

The combination of the factors explained above culminated in trading profit decreasing by 79.3%, Massmart said.

Headline losses amounted to R747.3 million, down from headline earnings of R901.2 million in 2018.

Massdiscounters, which comprises the 150 Game stores, trading General Merchandise and Food in South Africa and 11 other African countries; and the 23 DionWired stores, trading Hi-tech in South Africa recorded a trading loss of R674.6 million, down 2,169.3%.

Masswarehouse, which comprises the 22 Makro stores, Warehouse club trading General Merchandise, Food and Liquor in South Africa; and Massfresh, housing the Group’s fresh produce, fresh meat and bakery operations, including the Fruitspot, saw trading profit decline 15.1% to R934.9 million.

Dion Wired

At the start of January, Massmart said that it was in talks with unions about store closures and jobs cuts at Dion Wired.

This includes a plan is to shutter the 23-store Dion-Wired chain and 11 Masscash wholesale outlets – impacting around 1,440 employees.

While the group described these as ‘potential’ closures, it has said that the intention is to close the brand in the country. The closures are dependent on the outcome of the retrenchment process and consultations with unions, it said.

Game Stores

Also in January, Massmart announced a complete overhaul of its operations in South Africa, including big changed for its popular Game stores.

In a shareholder presentation at the end of January, the company said that Game’s customer value proposition is currently unclear, with a lack of resonance in key growth segments.

It added that there is a lack of coherence in its offering, an over-reliance on promotions, and certain segments – like fresh and frozen foods – which are just not working.

Speaking to BusinessTech, Massmart corporate reputation manager Michelle Kemp said that Game will be focusing on its product assortment, specifically by focusing on the ranges that it is renowned for and introducing new lines, such as clothing.

“We will be phasing out categories that have not been successful such as fresh and frozen food, and music and movies,” she said.

“We are also focusing on improving our customer service levels, merchandise availability and general store standards. Our intention is to get the retail basics right so that customers have a much more pleasant shopping experience.”

In the immediate term, Kemp said that Game is focused on strengthening categories that customers really enjoy – citing babies, multimedia and groceries.

“In addition, we are bringing in clothing essentials. We have already started with a big focus on improving customer service, which is based on the Walmart happy-to-Help programme,” she said.

Kemp said that Game would also focus on improving in-store execution and basic on-shelf standards.

“Customers will see better, easier to shop price ticketing, on-shelf merchandising standards and much-improved availability of the products that they are looking for,” she said.

On 30 January Massmart announced six turnaround interventions:

  1. Unlocking benefits of Group scale by implementing a Retail and Wholesale focused operating model, supported by centres of excellence;
  2. Establishing a R50 billion consolidated, low-cost Wholesale route to market with high relevance to customers and suppliers;
  3. Positioning the Group supply chain to improve stock availability, increase supplier income, and reduce operating costs and working capital;
  4. Relentlessly pursuing a R1.5 billion cost reset opportunity covering expense lines including; rental, utilities, technology infrastructure and applications software;
  5. Driving significantly better basic operational execution at Game to restore sales growth, recover margins and operate as a low cost discounter; and
  6. Closure (subject to a Section 189 consultation process) of 34 persistently unprofitable DionWired and Masscash stores.

Mitch Slape, who was appointed CEO of Massmart in September 2019, said: “Our Road to Recovery acknowledges that the core underlying business is strong and comprised of entrenched brands with high customer appeal. However, the landscape has changed, and we have been slow to respond. We are now acting with urgency to reset and unlock the real potential of our business.

Looking ahead, Massmart said that total sales for the seven weeks to 16 February 2020 amounted to R11.4 billion and represents an increase of 2.2% over the prior year.

Comparable store sales increased by 1.0% and product inflation is estimated at 2.3%. “The subdued economic environment experienced in the latter part of 2019 continues and we expect margin pressure to persist in 2020,” it said.

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