Integrated Annual Report 2014

The style. The passion

Material issues


Enterprise and economic

Stakeholders: shareholders, franchisees, employees, customers, suppliers and business partners 

Strategic focus     2014     2015 focus and targets  
Enterprise Risk Management     The Group's Enterprise Risk Management (ERM) programme serves to:
  • specify the sources of assurance over the Group's risks;
  • link risk management and assurance activities, which facilitate review of risk management effectiveness; and
  • provide a basis for identifying assurance gaps.
These activities are designed to ensure that the Group's risks are adequately addressed.
The ERM structure is based on a combined assurance model comprising three elements:
  • management (isional and executive directors);
  • external auditors (EY); and
  • Support Centre oversight (including the internal audit function).
  • The Group's flat reporting structures continued to facilitate transparent communication and oversight in the business.
  • Throughout the year, management conducted regular regional and isional meetings. The executive directors paid frequent visits to stores and supply chain partners; embraced regular communication with and motivation of staff; and continued to foster a culture of partnership and empowerment.
  • The external audit function focused on addressing perceived audit risk related to presented financial information and internal controls.
  • The Group's accounting, operational and HR functions are largely centralised at the Support Centre, which facilitates effective oversight of in-store operations and results. The internal audit function continued to focus primarily on the assessed risks of inventory and cash management and identifying possible obstacles to achieving key targets.
  • The Group's ‘Be Heard' hotline introduced in the prior year is a useful mechanism to enable staff to report perceived fraud or any other improper workplace practices.  
  • The Group has a consistent track record of unmodified audit reports and by enforcing a robust control environment will maintain that status.
  • Management's focus on best practice benchmarks and hands-on approach will continue to ensure attention is centred on safeguarding assets and compliance with relevant policies.
  • Support Centre oversight will continue to be enhanced through improvements which ensure consistent business practices in-store. The internal audit function will continue to grow with the business and will play an increasingly important role.  
Market risk and financial viability    
  • The Group grew system-wide turnover by 17% and trading profit by 23% from continuing operations despite the testing economic environment.
  • Market share was retained across the brand offering and merchandise categories. The strength of the Group's well-established business model, underpinned by its integrated supply chain and cash reserves were critical to its continued growth in the challenging trading conditions. In addition, the strategy of ensuring the right stock at the right time, place and price, together with an uncompromising focus on quality, afforded a key competitive advantage in a volatile marketplace.  
  • Implementation of further improvements across the business and supply chain and capitalising on opportunities in the industry should enable continued growth and market share gain.  
Reliance on key suppliers    
  • The Group's requirements were consistently met by its supply chain throughout the year.
  • The Group holds strategic stakes in both of its major local suppliers, namely 20% in Ceramic Industries and an effective 46% in Ezeetile. These suppliers are key to the Group attaining its growth targets and the strategic investment strengthens its relationships with these businesses.  
  • The Group will continue to pro-actively manage its supplier relationships to ensure supply requirements are consistently executed throughout the year. Core activities will include projection planning, monitoring, and ensuring suppliers' capacity to increase production if required.
  • In the unlikely event of insufficient supply from Ceramic and Ezeetile, the Group could source alternative supply from other local suppliers (adhesive and grout) or importers (tiles and sanitaryware).  
Supply chain management    
  • In the context of currency and market volatility, the supply chain provided invaluable support to the retail operations through competitive pricing and consistent availability of fashionable merchandise.
  • Despite increased inventory levels, stock turn continued to improve, and further enhancements were made in automated ordering processes and model stock matrixes across the Group.
  • During the period, the Group's new Distribution Centre which opened in Cape Town made progress in achieving its strategic objectives to streamline distribution and logistics of imported product and improve performance in the region.  
  • Well-established, cooperative relationships with local and international suppliers will remain crucial to ensuring uninterrupted product supply and mitigating the impact of currency volatility.
  • Improved supply chain functionality, focused on procurement and stock management, will be a core focus area in the forthcoming year.  
Supply chain disruption (Distribution Centres)   
  • The Group's disaster management plan is structured to withstand interruption of operations due to supplier, shipping or warehouse storage difficulties.  
  • The Group will continue to ensure optimal inventory levels thereby negating any short-term disruption to supply.  
Remaining fashionable    
  • The Group enjoys a strong reputation for its high quality, fashionable offering in a marketplace which is largely informed by international vogue, and is continuously evolving as new styles and fashions emerge. Management is constantly mindful that the Group's industry leadership position is upheld by remaining on-trend.
  • In order to prioritise fashion and flair in the product range across merchandise categories, intense research is conducted on an ongoing basis into new products and markets. Consumption related trading information is continuously analysed to ensure the Group's offering aligns with customer expectations and desires.  
  • The Group will continue to invest in research-driven innovation in order to entrench its position as a style icon.
  • This will be accomplished through attending trade shows and accessing industry thought-leadership resources to gain insight into global trends and product offerings, and by capitalising on procurement opportunities in international markets.
  • Internally, experienced brand managers and continuous communication within the Group at regional and national level will ensure improved understanding of local fashion desires.
  • Optimal range/pricing structures will also remain a priority.  
International competitiveness    
  • Consumers in the local market continued to aspire to international fashion trends and increasingly demanded innovation in products and technology. Mindful of this, and the opportunity it provides to gain competitive advantage, the Group remained focused on delivering a contemporary and aspirational offering through significant enhancements in its range, its use of technology, access to new channels (e-commerce and social media) and in cost/pricing.  
  • The Group's stated goal is to be a world-class, low-cost retailer through alignment of customer satisfaction and profitability. Consistent focus on providing an unrivalled shopping experience and implementation of best practice business principles, will promote achievement of this objective.  
Foreign currency    
  • The Group imports a range of products and was therefore subject to fluctuations in the local currency and volatility of international markets. Management of foreign currency exposure remained a key priority and wherever possible risk was mitigated.  
  • Company policy dictates that foreign currency fluctuations will continue to be closely managed and all foreign liabilities will be matched with forward exchange contracts on confirmation of order.  
Computer-based business processes    
  • Management is cognisant that the IT environment affords significant opportunities for the Group to accomplish its growth objectives and improve customer satisfaction. In pursuit of these goals, a range of projects was completed, within budget and on schedule, including improvements in functionality of the Group's online and in-store technology, and enhancement of SAP systems in the retail operations and supply chain.
  • The Group's comprehensive disaster recovery plan was further enhanced and the business maintained its minimal downtime track record.  
  • Seamless operation of the Group's IT infrastructure is vital to the business; accordingly management of potential downtime and system failure risk will remain a key priority.
  • SAP functionality will continue to be enhanced to unlock efficiencies, thereby promoting growth.
  • Roll out of technology, including improved web-shopping capability for both CTM and Italtile Retail, will remain a focus area.  
Liquidity, cash reserves and treasury risk    
  • Capital management and cost containment were core focus areas during the period. This, together with the Group's strong cash generating ability ensured that cash reserves continued to exceed operational requirements.
  • The Group's treasury policy is structured to anticipate and mitigate the major treasury risks which exist, namely:
    • sub-standard investment returns;
    • inadequate liquidity of investments to meet commitments; and
    • institutional/commercial risk relating to funds into which investments are made.  
  • Cost containment and rigorous management of cash flow and overheads will remain key priorities in the year ahead.
  • The Group's treasury policy has proved well-constituted and effective, and will continue to attenuate risks linked to investments.  
Credit risk    
  • The Group's consumer credit offering is outsourced through RCS, an independent financial services business specialising in credit products. Italtile and CTM also offer a trade credit facility which is managed and insured by an outsourced specialist debtors' solutions company, Cladding Finance. During the reporting period, credit applications and credit management continued to be intensively monitored and well administered.  
  • The Group's business model is centred on cash transactions in the retail operations thereby limiting exposure to consumer credit risk.
  • In the current economic climate, credit applications and management thereof will remain a priority focus area.  
Brand reputation    
  • The Group's Italtile Retail and CTM brands are respectively 45 and 31 years old, and are pivotal to the business model and the Company's profitability. Accordingly, reputation management of these and all other Group brands is a core priority, conducted through continuous review and brand-enhancing activities.
  • Potential areas of reputational risk include: poor customer service; poor product quality and unrealistic pricing; poor staff management; negative environmental impact and non-compliance with legislation and standards. Each of these risk areas was monitored closely and mitigated through the following mechanisms:
    • brand managers who attend regular regional meetings to gain insight into markets and product offering;
    • ongoing training for staff on service and products; and
    • implementation of an employment equity policy, environmental sustainability programme, whistle-blowing facility, and involvement of the services of a Health and Safety expert.  
  • Customised strategies have been developed specifically for each of the three inidual retail brands. These strategies will focus on growth opportunities for the respective brands and maintaining the good reputation they enjoy in the market.  
Property investment portfolio    
  • Significant strategic advantage is afforded to the retail operations by this portfolio, which is centred on providing an optimal shopping experience for customers, achieved through branded stores that are situated on highly visible, accessible sites offering an aesthetically pleasing, well maintained shopping environment. It has an estimated market value of R1,9 billion and strong cash reserves; returns are in line with the retail operations. During the reporting period R96 million was added to the value of this investment portfolio net of property sales and refurbishment capital expenditure.  
  • Continuous review of the portfolio and marketplace ensures that risk is minimised and potential investment opportunities capitalised on. This ision's main objective is to constantly improve the value and quality of its investment properties to support the retail operations in delivering the required rate of return.  
Preservation of the organisational philosophy and structure    
  • Empowerment, partnership, entrepreneurship and autonomy are central pillars of the Group's business model and philosophy. Inidual business units continued to be managed and operated independently within the broader Group structure, facilitating development of management experience and expertise across the organisation.  
  • The Group's organisational structure and culture will be maintained through mentorship, empowerment, encouraging transparent communication facilitated by flat reporting lines and ensuring best practice leadership development.  
Succession planning    
  • During the period the Group appointed a new CEO and COO, thereby enhancing the Board's endeavours to comply with relevant King legislation. These key appointments will have a significant impact on increasing the depth of management in the Group.  
  • Elsewhere in the business, the goal is to build succession cover for each major management position to ensure that there are successors for each key inidual, both in the short- and long-term.
  • Attracting, developing and retaining human capital will remain a key focus, with mentorship and leadership programmes prioritised.  
Chairman's mentorship programme    
  • A management mentorship programme is conducted under the auspices of the Chairman, through which the values and ethics of the business are instilled across the organisation.
  • Leadership development is also facilitated through CTM's in-house Operator Training Programme, in conjunction with Stellenbosch University, which aims to produce graduates with the necessary skills and qualifications to manage Group stores.  
  • The Group will continue to commit significant resources to initiatives centred on developing a pool of leaders with extensive experience and expertise to facilitate achievement of the Group's growth targets.