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OPERATIONS
RETAIL BRANDS
LEWIS GROUP HAS A NETWORK OF 548 STORES ACROSS ITS THREE RETAIL CHAINS:
- Lewis is South Africa’s largest furniture brand and contributes 84% of the group’s merchandise sales.
- Best Home and Electric accounts for 12% of group sales and has experienced rapid store expansion in recent years.
- Lifestyle Living is a niche retailer of contemporary furniture.
These retail brands are supported by Monarch Insurance, the group’s short-term insurer.
LEWIS
| REVENUE | MERCHANDISE SALES |
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Lewis sells a range of household furniture, electrical appliances and home electronics to customers in the LSM 4 to 7 categories. Each store carries a basic range of merchandise and stores then select a further optional range to cater for specific markets and regional differences. Lewis outlets are generally situated in main streets and town centres, with some presence in shopping centres. Lewis has 436 stores, including 47 stores in the neighbouring countries of Botswana, Lesotho, Namibia and Swaziland.
The smaller format store introduced in the previous financial year has enabled the chain to gain access to high traffic areas at more affordable rentals. This store format offers customers key merchandise lines, with the full range available on electronic catalogue and display screens in-store. These small stores average 250 m² compared to the average 400 m² of the conventional Lewis store. Lewis now has nine small format stores.
| Performance | |||
| 2010 | 2009 | ||
| Revenue | Rm | 3 470.3 | 3 204.5 |
| Revenue growth | % | 8.3 | 5.7 |
| Merchandise sales | Rm | 1 689.5 | 1 568.5 |
| Merchandise sales growth | % | 7.7 | 1.7 |
| Comparable store merchandise sales growth | % | 5.4 | (0.4) |
| Operating profit | Rm | 808.7 | 737.0 |
| Operating profit margin | % | 23.3 | 23.0 |
| New stores opened during year | 10 | 10 | |
| Number of stores | 436 | 427 | |
| Total trading space | m2 | 203 598 | 201 458 |
| Annual revenue per m2 | R’000 | 17.0 | 15.9 |
| Credit sales | % | 71.2 | 67.9 |
BEST HOME AND ELECTRIC
| REVENUE | MERCHANDISE SALES |
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Best Home and Electric is a retailer of electrical appliances, sound and vision equipment and selected furniture, targeting customers in the rapidly growing LSM 4 to 7 groups. The chain offers exclusive branded merchandise which is differentiated from Lewis to create a distinctive electrical goods brand. Furniture lines are sold mostly through the electronic catalogue and now accounts for 28% of sales in the chain. Stores are smaller than Lewis stores (150 m2 in size) and are generally situated in high traffic areas with high trading densities.
| Performance | |||
| 2010 | 2009 | ||
| Revenue | Rm | 503.4 | 454.3 |
| Revenue growth | % | 10.8 | 9.1 |
| Merchandise sales | Rm | 243.7 | 226.0 |
| Merchandise sales growth | % | 7.8 | 3.6 |
| Comparable store merchandise sales growth | % | 4.3 | 1.7 |
| Operating profit | Rm | 96.2 | 91.2 |
| Operating profit margin | % | 19.1 | 20.1 |
| New stores opened during year | 6 | 3 | |
| Number of stores | 92 | 88 | |
| Total trading space | m2 | 13 458 | 12 829 |
| Annual revenue per m2 | R’000 | 37.4 | 35.4 |
| Credit sales | % | 67.6 | 60.3 |
LIFESTYLE LIVING
| REVENUE | MERCHANDISE SALES |
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Lifestyle Living is a niche retailer aimed at consumers in the LSM 8 to 10 market. Following continued underperformance Lifestyle Living will cease trading during the second half of the new financial year.
| Performance | |||
| 2010 | 2009 | ||
| Revenue | Rm | 136.9 | 148.3 |
| Revenue growth | % | (9.2) | (0.5) |
| Merchandise sales | Rm | 112.3 | 125.4 |
| Merchandise sales growth | % | (10.4) | (2.8) |
| Comparable store merchandise sales growth | % | (8.3) | (6.5) |
| Operating profit | Rm | 2.3 | 4.1 |
| Operating profit margin | % | 1.7 | 2.8 |
| Number of stores | 20 | 20 | |
| Total trading space | m2 | 8 835 | 8 815 |
| Annual revenue per m2 | R’000 | 15.5 | 16.8 |
| Credit sales | % | 31.4 | 27.4 |
MY HOME
A new trading brand, My Home, has been launched to target aspirational customers in the LSM 7 – 8 categories. This new chain is aimed at attracting customers requiring more upmarket furniture who have a need for in-store credit facilities. My Home will adopt the successful Lewis business model and use the group’s well-established credit infrastructure. The focus will be on differentiating the merchandise offering through exclusive and innovative ranging of more aspirational yet still traditional furniture.
MONARCH INSURANCE COMPANY LIMITED
Monarch offers a range of short-term insurance products to the group’s customers purchasing merchandise on credit.
Insurance cover is provided for the settlement of customers’ outstanding debt in the event of death or permanent disability. Other insurance products cover the replacement of goods as a result of any form of accidental loss, such as fire, theft or natural disaster. A retrenchment cover benefit is also available.
Customers purchasing insurance products through Monarch qualify for free membership of the Lewis Club.
Monarch is registered with the Financial Services Board and operates under a restricted short-term insurance licence. The Short-term Insurance Act requires the company to hold assets to meet future financial obligations and total insurance assets were R894 million at year-end.
The investment of the insurance portfolio is outsourced to Sanlam Investment Management (SIM), with the investment and asset allocation strategies being determined in consultation with the boards of Lewis and Monarch. Funds may only be invested in conservative asset classes and within prescribed regulatory limits. At year-end the portfolio consisted of 35% equities and 65% cash and bonds.
MERCHANDISING
| MERCHANDISE SALES (R millions) | |
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Innovative product sourcing both locally and internationally enables the group to offer customers exclusive and distinctive furniture ranges at affordable prices.
The merchandising strategy has focused on increasing sales of the higher margin furniture product category. In the past year furniture sales grew by 9.1% and the contribution from furniture increased to 55% of total sales (2009: 53%). Appliance sales (27% of merchandise) increased by 7.3% while electronic sales (18% of sales), which is a discretionary purchase spend in tough economic conditions, were flat. Product price inflation averaged 3% for the year.
Gross profit margin improved from 31.3% to 34.9% fully recovering currency losses reported at the half-year. After adjusting for currency losses, which are shown separately, the net position improved from 31.9% to 33.4%.
An electronic merchandise catalogue is displayed in all stores. As the complete merchandise range cannot be stocked in stores, customers are able to navigate their way through the full range on a large touch screen, as well as view all colour and fabric options.
The import programme enables the group to offer distinctive and exclusive merchandise ranges which have the latest designs, manufacturing techniques and fashion trends. Direct imports accounted for 24% of total purchases in the period under review.
International factories are able to accommodate a broader range of developmental designs and have access to a wider variety and diversity of raw materials, which allows for product differentiation.
Imports offer price and design advantages and mitigate the risk of disruption in local supply. As part of the group’s commitment to quality, all products are supported by local and overseas after-sales service.
The supply chain model is based on merchandise being delivered directly by suppliers to stores. Stores are responsible for deliveries to customers, with an average of 90% of deliveries completed within 24 hours of the sale.
Efficient stock management and successful product ranging during the year resulted in the inventory turn improving from 5.8 to 6.0 times.
MARKETING
The group’s marketing strategy has proved effective in achieving high levels of customer loyalty, strong repeat sales and consistently high consumer awareness through the creative use of mainstream media advertising and non-traditional marketing strategies.
Targeted marketing campaigns are tailored for the Lewis target market. These are aimed at communicating the group’s customer promise of value for money, quality, merchandise exclusivity and personalised service to current, settled and potential customers.
Targeted brochure distribution is undertaken in core trading areas each month. Brochures feature the depth of the merchandise range while leaflets featuring promotional lines are distributed in high traffic commuter areas.
In-store promotions are effective in retaining and regaining customers. Selected customers are invited by the store management to special in-store events and exposed to the Lewis product offering.
Customer loyalty is entrenched through the Lewis Club. Through this customer loyalty programme, over 600 000 Lewis customers receive the Club magazine bimonthly which includes competitions, coupons and merchandise give-aways for readers. Membership of the Lewis Club is free to customers taking out insurance when purchasing merchandise.
The high level of repeat sales made to current and settled customers reflect the level of customer loyalty to the group’s brands. A re-serve programme identifies current customers for further credit extension based on payment history and current level of debt to the group. Marketing campaigns are targeted at these customers.
The creative and media functions within the Lewis marketing division have been outsourced to specialist agencies. This is aimed at enhancing the quality of the creative product, ensuring effective media strategy, planning and buying across all media and improving cost efficiencies.