MASSMART

Massmart began the financial year owned by a spread of Institutional Investors, and ended the year as a Walmart subsidiary. This brings a great deal of change from all dimensions but also brings opportunity to the Group in the years ahead. Walmart's entry into Africa signals the increasing confi dence that the global market has in Africa, South Africa, South African retailers and most significantly, Massmart. Whilst the demands of completing the transaction were significant, the Group managed to operate in a disciplined manner and continued to implement its ambitious growth strategy. Operating disciplines were tightly managed and any mistakes made were identified and responded to with a sense of urgency. Our main trading brands of Game, Makro, Builders Warehouse, Cambridge Foods and Saverite are in good health. Their business models, social relevance and competitive advantage remain strong and all have signifi cant growth plans in place. The environment within which we operate remains challenging and complex, but managing that complexity is both stimulating and rewarding.

Financial performance
Pre-transaction cost operating profits increased by 10.3%, just below the increase in sales of 11.6%, which was a reasonable performance given the economic environment that prevailed during the 2011 financial year. At a Divisional level, Massdiscounters and Massbuild had strong performances each growing profi ts above 20%; Makro a more tempered 9.3% profit growth; and Masscash a disappointing 20.1% profi t decline. This trading pattern and profi t performance was typical of the low infl ation, low interest rate environment in South Africa. For the 52 weeks to 26 June 2011, sales increased by 11.6% (comparable sales by 5.2%), Trading Profi t increased by 6.4%, Operating Profi t before
Transaction costs increased by 10.3% and Headline Earnings before Transaction costs increased by 10.0%. The Walmart transaction costs signifi cantly affected Earnings, with Earnings and Earnings per Share down 22.5% and 23.6% respectively. Stock is up by 10.7% compared to the sales increase of 11.6%, showing an improvement in stock effi ciencies.

Walmart transaction
We were delighted with the 31 May 2011 Tribunal approval of the acquisition of Massmart by Walmart. Included with the approval were four conditions, three of which Massmart had volunteered. The conditions we offered the Tribunal were, in a sense, intuitive as they represented our natural intentions to contribute positively to the environment within which we operate, and our desire to fi nd solutions with parties with whom we disagree. During the course of a “social dialogue”, these conditions had been offered to the Opposing Parties
involved in the merger approval process, but had been rejected. Subsequently, SACCAWU, Massmart’s major representative union, lodged an appeal against the Competition Tribunal ruling and three Departments of Government lodged a review of the Tribunal process. The hearing for both has been set down on 20 and 21 October 2011. We have begun to manage the implementation of the Tribunal’s conditions, the two most visible being the offer of re-employment of the 503 retrenched Massdiscounters’ colleagues and the R100 million Supplier Development Fund. Work has begun on both. We have appointed an executive to manage the Supplier Development Fund, Mncane Mthunzi, who joined us on 1 September 2011. Legally, implementation of the transaction is not delayed by any appeal or review, and so Integration workstreams commenced in July 2011. The 12-person Integration expatriate team is in place, and the Integration process has got off to a successful start. Integration is a disciplined process where 155 different potential projects (toolkits) are being evaluated, approved, implemented, measured and monitored by combined teams from both Massmart and Walmart. It is expected that the Integration process will last between 18 months and three years. It is worth noting that within the controversy generated by aspects of the
transaction, we rarely disagreed with the objectives of some of the opposition, but did at times disagree on how to achieve those objectives. We remain open to partnering with anyone in the best interests of customers in the markets in which we trade, on an equal and mutually respectful basis. Perhaps the most under-reported aspect of the Walmart transaction, is that members of Massmart’s Thuthukani Empowerment Trust for employees, 86% of whom are black and 41% of whom are women, had their shareholdings in Massmart valued at R840 million, 51% of which was realised in cash and the balance freed up to be realised at the 9,000 individual employees' discretion. Although this share scheme was criticised in some quarters at its inception in October 2006, this is perhaps one of the best examples of BBBEE in action, and one of which Massmart shareholders can be very proud.


Environment
The Group performance suggests that the South African consumer is in reasonable shape, in an environment which is enabling them to invest their savings from low non-durable goods infl ation into durable goods spending. In addition, the negative infl ation in durable goods has encouraged consumers to either buy more durable goods, or to upgrade to higher quality durable goods. Market data suggests that Builders Warehouse and Massdiscounters materially increased their market shares. This however, suggests that our sales growth rates are not refl ective of higher consumer spending levels and that the health
and confi dence of the South African consumer may be weaker than it appears. The semi-durable goods sector, which we barely participate in, has performed well, although market shares may have moved between players. Meaningful interpretation of the current state of the South African retail market will have to wait until the national data for July and August 2011 is released, which will give us an accurate reading for the fi rst time in several months,
during which time the prior year base was affected by the timing of Easter moving and the signifi cance of the 2010 Soccer World Cup. The African markets outside of South Africa have begun to recover from the global fi nancial crisis, and despite high infl ation, consumers appear to be increasing spending on durable goods.

Divisional operating review
Massdiscounters. Sales increased by 9.6% (and by 3.7% on a comparable basis). Sales deflation was -7.3%. Given the low comparable sales growth, this Division’s profit performance was remarkable and was achieved through effective gross margin and expense management. Even more impressive is that the African business struggled due to Rand currency strength and weak local economies, and therefore Game SA performed even better than the overall Division. Although still small, DionWired had another spectacular performance, and is changing the market within which it operates as it expands. During the year, some historic milestones were reached. The 70,000m2 Johannesburg Regional Distribution Centre (RDC) was opened and, despite some commissioning challenges, ended the year operating smoothly. Four Game Foodco stores were opened successfully, a concept fi rst contemplated in January 2010. The R500 million overstock position evident after the 2010 festive period was also dealt with well and we commenced the 2012 fi nancial year in a satisfactory inventory position. This year the Division’s focus will be on building and executing the Foodco rollout strategy, building the fi nal KwaZulu-Natal RDC, and Integration.
Masswarehouse: Sales increased by 10.6% (and by 6.9% on a comparable basis). Sales defl ation was -0.4%. General Merchandise was the best performing category increasing sales by 14.2% with Food and Liquor sales recovering in the second half to reach growth of 8.9%. Margins and overheads were well controlled. Given that a new Makro store was
opened during this fi nancial year, with the associated higher than average costs and pre-opening costs of R14.0 million, the Division did well to grow profits to the extent it did.
The two stores comprising Makro Zimbabwe were sold. As a consequence, we reported transaction-related losses, partly resulting from the procedural delays, and the total amount of R38.6 million was excluded from headline earnings. The Division’s focus is on new stores, building the Fresh and retail offering, and Integration. The new supply chain executive role is developing a Supply Chain and Africa Strategy, both of which are progressing well.
Massbuild: Sales increased by 14.2% (and by 7.2% on a comparable basis). Sales inflation was 0.8%. Very pleasingly, trading profi ts increased by 21.0% (off a prior year profi t increase of 27.0%). By the end of the third quarter, we were on track for an even better performance but were hampered by the sales weakness of the last quarter of the 2011 financial year. The good start to sales growth in the 2012 financial year indicates that perhaps the World Cup effect was larger in Massbuild than anticipated – but we have no compelling explanation for this. Builders Warehouse continues to perform the best. Builders Express did well in its comparable stores but saw weaker sales in the acquired stores – this
was primarily due to poor stock and system conversion problems. Builders Trade Depot sales remained weak, but stable. We are implementing a Project Complete strategy in Builders Trade Depot, which is working, and will be well positioned when growth returns to the building contractor market. At a Divisional level, the integration is complete and all three formats are running off a single Divisional Head Offi ce. Analysis is underway to consider
having a single IT system across the Division. The Division’s focus is to complete Builders Trade Depot's repositioning, build a pipeline of new stores able to serve smaller markets, expand into Southern Africa and Integration.
Masscash: Sales increased by 12.7% (and by 4.1% on a comparable basis). Sales infl ation was 2.1%. Trading profi t decreased by 20.1%. The year was difficult because of first deflation and then low food inflation, compounded by a competitive market. Not assisting this were several own goals, some of which were probably avoidable. From a trading perspective, sales were reasonable given the low inflation, but margins were tight as competitors traded hard and targeted our store locations. In context though, we confronted and implemented some difficult decisions. These include converting the Gauteng and Free State retail stores to Cambridge Foods branding; completing the roll-out of the new wholesale IT systems; selling the loss-making Saverite corporate stores and installing a Gauteng DC for the Retail business. While each decision was correct, they increased expenses and hurt profits. The Division’s focus will be on growth in both our Saverite franchises and Cambridge Foods stores, and enhancing our supply chain capacity as we expand.

Corporate accountability review
In the 2011 Corporate Accountability Report I expressed concern that our accountability agenda had become cluttered and this could impact negatively on implementation quality. I also indicated that we needed to improve our understanding of how retailers can optimise their practical corporate accountability impact. As a result, we made three improvements:
1. We expanded the corporate accountability team by appointing two group corporate sustainability project managers (including an ecologist) and a researcher. They are tasked with identifying, sharing and tracking implementation of accountability best practice across our group.
2. We initiated a study to gain insight into stakeholder views about how we could improve our impact. The study revealed fi rm stakeholder opinions that we should:
Establish clearer relevance of sustainability projects within the retail industry, social discourse and public policy contexts;
Improve communicability of our sustainability commitment by focusing on three accountability themes;
Avoid a ‘one size fits all’ approach by differentiating each division’s focus based on retail format, merchandise proposition and commercial model. It became clear that the pivotal role retailers occupy in the supply chain creates high stakeholder expectations that we use our supplier convening power and unparalleled consumer access to improve accountability in the supply chain. The result is a reframing of our accountability focus around
three themes:
Enabling sustainable supply and consumerism;
Minimising our group environmental footprint; and
Championing social equality initiatives.
3. Finally, we utilised our access to Walmart by identifying opportunities to leverage their sustainability expertise. These opportunities are numerous and include areas such as sustainable agriculture, packaging rationalisation, eco-label advocacy, consumer empowerment and energy efficiency. Through this process we did not lose sight of the need to ensure continuity of our established sustainability commitments. We were delighted to achieve a Level 3 BBBEE contributor status and be ranked the most empowered retailer
in the 2011 Top Empowerment Companies Survey. This included being rated 7th of all JSE-listed companies for Employment Equity representation. (Having said this, it’s likely that our 2011/12 BBBEE score will be lower, reflecting a dilution in the Thuthukani staff shareholding and the implementation of revised Enterprise Development best practice guidelines.) We have also been focused on developing format-specific energy intensity benchmarks that are sensitive to opportunities to improve energy efficiency in our old and new stores. One energy efficiency highlight for us was the launch of Makro Vaal, which is 25% more energy effi cient than similar sized older stores and which serves as a model for future Makro stores. I was pleased to see that the Massmart human resource community’s efforts to improve enrolment of HIV-positive staff on our Impilo treatment programme have begun to bear fruit. A total of 87% of HIV-positive staff are now enrolled, and although this is still 13% below our 100% enrolment target, it’s significantly better than two years ago. A new objective will be to concentrate on improving our testing penetration rate to at least 70% of staff. We’re confident that we now have a better-resourced and more structured corporate accountability approach. When combined with input from Walmart, we anticipate that our efforts will be more impactful than in the past. This is not to say that there won’t be diffi culties and disappointments. There will be, but we believe that we are even better equipped to deal with these as they arise.

Vision for growth 2014
Due to the distraction of the Walmart transaction, we followed an abbreviated strategy process this year and focussed on preparations for Integration. I believe the fundamental strategy remains sound and valid. The Strategic Action Plan remains focussed as:
Leadership and Transformation development
Grow core business (comparable stores)
Customer-focussed Trading
Supply Chain Development
Private Label Development
Financial Services
Retail Food (Cambridge Foods, Saverite, Foodco, Makro Food Retail)
New Categories
Organic growth in SA and Africa
Sustainability (Governance, Climate Change, BBBEE, CSI)
Integration
The final point of Integration is obviously new, otherwise the Strategic agenda remains unchanged, but will be enhanced by Walmart's ownership.

Prospects
Massmart’s total sales increased by 14.7% for the fi rst 14 weeks to 2 October 2011, with product infl ation averaging 0.7%. Comparable sales increased by 8.0% for the same period.
With the fi rst quarter's sales indicating a return to stability with growth in all categories and Divisions, the fi nancial year ahead looks to be solid. Management will have to balance operating discipline with the investment in growth and the speed of Integration. We will also have to balance the sometimes divergent interests of different stakeholders.

Appreciation
In addition to the usual thanks to all Massmart colleagues, we would also like to thank Massmart Board members, old and new, our advisors, our Walmart colleagues, our suppliers, and our shareholders, old and new, for their advice and support over a very signifi cant period in Massmart’s life. Over the past year, we have engaged more than usual with Regulators, Government, Union leadership, Industry and NGOs. We have appreciated the
constructive engagement and were also appreciative of the general support we enjoyed. At times we have disagreed, but in those disagreements we always learnt and, where necessary, changed our views. We thank you for your input. To our customers, the most sincere thanks. You can rely on the fact that the entire Massmart supply chain will be focusing our attention on helping you save money, so that you can live better.

Most of the events that led to this transition have been widely publicized, with your company attracting more headlines over the past year than over the previous twenty. Sadly, little of this was related to our primary objective of good shop keeping, and the commentary surrounding the change of Massmart’s ownership contained varying degrees of accuracy and emotion, reflective more of narrow self-interests than those of broader society. The catalyst was an initial non-binding offer by Walmart to acquire the entire issued share capital of Massmart for R148 per share. At an historic price earnings ratio of 26, this placed a value of R31 billion on your company and represented a 19.2% premium to the then share price, thought by some to be inflated by speculation. In due course Walmart made a binding offer to purchase 51% of the company at the same price per share.

THE END OF AN ERA

Consistent with their fi duciary record and stakeholder orientation, the members of the previous Board deliberated at length on the strategic, commercial and societal merits of the transaction and concluded that control by Walmart would enhance the growth and prospects of Massmart with substantial benefi ts for all stakeholders.

Shareholders would receive a fair price for 51% of their shareholdings and also benefit in their remaining shareholdings from future participation in the Walmart-enhanced performance of the Company. Management would deepen their expertise in the art and science of retailing. Staff would be presented with new career prospects arising from faster growth and Walmart’s support of the Broad Based Black Economic Empowerment initiatives that resulted in Massmart being a Level 3 contributor with the highest Employment Equity
score of all listed retailers. Suppliers would benefi t from participation in leading edge distribution practices and the potential to access Walmart’s international supply chain. And South African consumers would benefi t from lower prices, on more products, in more locations. In short the transaction would enhance the sustainability of the Company.

Following a unanimous recommendation by the Board, ninety seven per cent of shareholders voted in favour of the transaction. The regulatory approval process, delayed to ensure full participation by all dissenting parties, ended on 31 May 2011, when the Competition Tribunal approved the transaction after an exhaustive and thorough evaluation process. This concluded the largest investment in South Africa by an American company, the 10th largest corporate transaction in South Africa over the past decade, and the fi fth largest acquisition by Walmart.

The investment in Massmart by the largest retailer in the world is indicative of the growing significance of Africa for global companies, and an extraordinary vote of confidence in the government, private sector and consumers of South Africa.

It is also a vindication of over two decades of strategic positioning and operational implementation by almost 30,000 Massmart people, led in recent times by a cohesive management team who Walmart insisted must remain, under the direction of a Board who with an average tenure of over ten years, delivered an enviable record of service to all stakeholders.

GRATITUDE

It is common cause, and my experience, that competent individuals do not necessarily make an effective board. The Massmart Board members that brought the Company to this juncture were individually competent and collectively excellent, and it is fi tting that I pay tribute to those whose departure was volunteered in its reconstitution.
- R Michael Rubin joined Makro in 1989 as Development Director, served as an executive director on the Massmart Board from its inception and became a non-executive director in 1997. I relied heavily on his advice in the repositioning of Makro and the early acquisitions, and store location and design decisions that resulted in the creation of Massmart and its growth thereafter. Michael is a contrarian with an impeccable ethic, who always forced us to think more deeply about retail, fi nancial and social issues.
- Nigel Matthews joined the Board in 2001 and served with extraordinary diligence as Chairman of the Audit and Risk Committees. His savvy corporate wisdom could always be relied on, and the cordial relationship he developed with the fi nance community, internal auditors and external auditors belied a steely commitment to the establishment and maintenance of a robust control environment and impeccable governance.
- Dawn Mokhobo joined the Board in 2002 and served on the Remuneration and Nominations Committee, and the Sustainability and Transformation Committee, where her experience and humanity found full expression mainly in support of the Group’s internal constituencies.
- R Peter Maw joined the Board in 2003, bringing his formidable financial and corporate fi nance expertise to bear through astute questions and his membership of the Audit, Risk, Strategy and Investment Committees.
- R Dods Brand joined the Board in 2003, enriching the Board’s deliberations with principled insight and a perspective borne from his experience as Chief Executive of a JSE-listed retail group.
- Jim Hodkinson joined the Board in 2004. The quietest member of the Board but a consummate shopkeeper whose experience and reputation as Chief Executive and Chairman of B&Q plc added inestimable value in the stores, and in developing access to international retailers and trends.
- Kuseni Dlamini joined the Board in 2006, bringing a keen independent mind to bear on all debate, particularly though his Chairmanship of the Remuneration and Nominations Committee, where the tensions around executive remuneration were always confronted thoughtfully.

On behalf of all associated with Massmart, I thank them for over 70 years of collective service and for their part in making your company Walmart’s preferred target. We wish them every good fortune in the years ahead.

2011 performance

The strategic, operational, fi nancial and societal performance of Massmart in the year to June 2011 is described in detail throughout this report.

From the Board’s view point the following matters warrant emphasis.

Performance
Sales grew 11.6% to R53,0 billion and pre-tax profi ts before transaction costs grew 10.3% to R2,1 billion. Headline earnings per share fell 23.6% to 433.3 cents per share, depressed by R408.8 million of costs directly associated with the Walmart transaction. Headline earnings per share adjusted for these costs increased by 10.0%. Notwithstanding a R1,2 billion capital investment programme, your company continues to render high returns on sales, equity and capital employed of 3.8%, 33.7% and 47.2% respectively. These high Level metrics were the result of continued investment in strategic initiatives and sound operational management in a recovering low interest rate, low infl ation consumer economy.

A demanding strategic agenda
Massmart has always been driven by a rolling three year strategic agenda, which aims to enhance the competitive advantage and positioning of the Group and its parts. The breadth and complexity of the initiatives arising from this thinking has increased each year, concomitant with the increase in Massmart’s resources and capabilities.

In a year when organic growth and everyday trading was challenging, and the Walmart transaction exciting but potentially diversionary, the progress with a multitude of strategic initiatives was impressive. Acquisitions and a necessary disposal; the thrust into retail food in three Divisions; the development of new stores, formats, categories and private labels; the rebranding of stores; and the enhancement of the regional distribution capability; were underpinned by a continued investment in the development of people and the pillars
of sustainability.

As a result, by year end, your company comprised: 313 stores; trading under ten brands; totalling 1,280,936 square metres; selling almost 501,000 SKUs in General Merchandise. Home Improvement, Food and Liquor; supported by regional distribution centres of 89,711 square metres; employing over 30,495 people (over 26,500 employed in the prior year), in 13 sub-Saharan countries.

Managing the change of ownership
A change of ownership is typically disruptive to a business. This has not been our experience. While management of the transaction and the regulatory developments required Grant Pattison (Chief Executive Offi cer) and Guy Hayward (Chief Financial Offi cer) to totally redirect their efforts, the vast majority of the organisation remained focussed on managing the implementation of the strategic agenda, delivering value to customers and producing the results contained in this report.

This was a reflection both of the depth and calibre of divisional and functional leadership, and of the excitement and confi dence with which all Massmart people view the new ownership. The relationship with Walmart and the Sam M. Walton College of Business has been cultivated over 20 years and many of our executives and senior managers have experienced the humble warmth and hospitality personified by Walmart associates. With few exceptions there is an alignment of philosophies, values and culture, and contrary to the trepidation normally prevalent in the acquired organisation, the dominant sentiment in Massmart today, is an urgency to extract value from Walmart’s expertise and resources.

Leaders invariably determine the success of organisational change and Grant, ably assisted by Guy, must take credit not only for concluding the transaction but also for inspiring the enthusiasm with which the Company is embracing a demanding integration agenda. He did this while handling a wide range of new and unpredictable developments with sound judgement and a cool demeanour that belied the gravity and complexity of the issues we were facing.

In consequence, your company is stretched but not stressed.

Reconstitution of the Board
The Board was reconstituted on 20 June 2011, when Walmart’s control, direction and oversight were given effect through:
- the resignation of the seven directors acknowledged above
- Chief Executive Officer Grant Pattison and Chief Financial Officer Guy Hayward retaining their positions as executive directors
- Christopher Seabrooke retaining his position as Deputy Chairman and lead
independent non-executive director
- Dr. Lulu Gwagwa and Ms. Phumzile Langeni retaining their positions as
independent non-executive directors
- the appointment of: Doug McMillon, President and Chief Executive Officer of Walmart International; JP Suarez, Walmart International Senior Vice President of International Business Development; and Jeffrey Davis, Walmart International’s Senior Vice-President Finance & Treasury.

It was a singular honour to be asked by Walmart Chief Executive Michael Duke to remain on as the independent non-executive Chairperson of Massmart. I accepted the appointment mindful that it may one day entail the leadership of a board divided on what is in the best interests of the Company, the controlling shareholder and the minority shareholders. If and when this occurs, I am confident that the Board will ensure that the best interests of the company prevail.

Moving forward
Since its inception Massmart has experienced numerous forms of ownership. While past shareholders have always acted in the best interests of the Company, none have possessed the expertise or capabilities to enhance Massmart’s strategic or competitive stance in the distribution of consumer goods to the mass market. This is no longer the case. Walmart’s ownership is the catalyst for new avenues of efficiency, productivity and growth in pursuit of lower prices to more customers in more places. Notwithstanding the current global economic challenges, Massmart powered by Walmart’s scale, capabilities and experience, is poised to accelerate its high return expansion on the sub-continent.

We look forward to a year of stimulating learning for all involved.