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Review of Operations and Services

• OPERATIONS
• Foschini
• Markham
• Exact!
• Sports Division
• Jewellery Division
• @home
• TFG Apparel Supply Company
• Foschini Group Financial Services

• SERVICE DIVISIONS
• Group Finance and Administration
• Group Audit Services
• Foschinidata
• Group Logistics
• Human Resources
• Group Services
• Group Property

Foschini

Positioning

The Foschini division is the primary womenswear fashion division in the group. It comprises the following four chains:

Foschini

The stores in this chain offer contemporary clothing, footwear and cosmetics.

The Foschini brand has undergone a repositioning process over the past year to raise levels of fashionability and quality. This allows the ranges of products offered to be more desirable to the target market and to be consistent with the modern and fashionable image which the Foschini name and reputation are intended to project.

The positioning of the sub-brands Oasis, News, Instinct and WWW, which are house brands applied to ranges of clothing and accessories located within their own areas in the stores, has been clarified and redefined in the division’s overall branding strategy. Product ranges in these brands will be relaunched in the third quarter of the next year.

The target market of the Foschini chain remains 18 to 35 year olds in the LSM 6 – 10 categories. The stores are located in prime shopping centres and CBDs.

Donna-claire

The stores in this chain offer products at a fashionable level for larger-sized women of all ages. The target market is the LSM 6 – 10 categories.

The stores are located in prime shopping centres.

Fashíonexpress

This is a price-centric chain catering for customers in the LSM 5 – 9 categories. Its stores are located in smaller towns and in secondary positions in shopping centres. The stores offer clothing and footwear.

Luella

This is a relatively new chain devoted only to footwear and offering moderately priced products in a modern international store format.

The number of stores in the chain has reached 19, and at this number some consolidation in the roll-out process will take place. Long-term strategy is being reviewed in the light of trading experience since inception of the chain and studies are being undertaken to select the most suitable product mix to meet current and predicted trends in the market.

The stores are located in key shopping centres.

Review of the year

The high level of development of retail space that has been undertaken in recent times in South Africa continued during the past year, and the following new major regional shopping centres in which the division is represented were opened:

Greenstone	East Rand
Loch Logan	Bloemfontein
Maponya Mall	Soweto
Irene Mall	Centurion

In total, 19 new stores were added across the division’s four chains. In addition, nine stores were enlarged or relocated. A total of 11 221 square metres of retail space was added during the year, representing growth of 6,3%.

Trading conditions were reasonable in the first half of the year and weak in the second half. Turnover growth of 9,9% was achieved in the first six months, but October and November, traditionally the division’s key opening summer period, were very soft months, being adversely affected by poor economic conditions, exacerbated in certain instances by a fashion offering which failed to meet expectations. December and January, whilst below budget, showed reasonable growth, with January being buoyed by the year-end sale. February and March saw a decline in sales, and it became clear that consumers were holding back because of the unfavourable economic conditions and the fact that early stock in the Foschini ranges lacked items for the winter.

Cosmetics

The cosmetics business, in contrast, has continued to perform well, growing by 11,7%. Turnover in cosmetics is now close to R500 million annually.

The Foschini cosmetics range brings together a number of major international brands including Clinique, Elizabeth Arden, L’Oreal, Revlon and Yardley. In most of the new-format stores in shopping centres the cosmetics departments have their own entrance, creating a standalone ambience. It has been shown that this layout increases footfall and benefits the other departments within Foschini stores.

An enlarged-format cosmetics range was launched in the Foschini store in Canal Walk, including an in-store MAC department, which is performing well. MAC is the premium make-up range from Estee Lauder, and is used by make-up artists internationally.

Cellular

Mobile handsets were launched in Foschini stores in 2000 and sales have grown to almost R250 million annually. The division’s strategy to date has been to be an exclusive MTN retailer carrying the major product brands. The store base has been limited thus far to the Foschini chain.

Prepaid handsets currently account for 95% of turnover.

In the latter part of the year turnover was negatively affected by stock shortages. A major downturn also occurred in sales of Motorola products, which have lost market share internationally.

Future plans are to roll out cellular products to the Fashíonexpress chain and to stock other brands of handset and complementary products in a drive to increase sales.

Supply chain initiative

The group’s supply chain initiative, described in detail in the report of the Group Logistics division, will reduce lead-times and enable the Foschini division, in common with the other trading divisions, to react faster to trends emerging in the market. This will allow orders to be placed closer to the time when merchandise is required in the stores. The division is positioning itself to take full advantage of this strategic benefit.

Foschini

Total sales in the Foschini chain grew by 3,6%. The first-half growth of 8,5% came off a low base, stock shortages having being experienced in the previous year. The second half suffered from the impact of deteriorating trading conditions stemming from rising interest rates and the implementation of the National Credit Act (NCA). Same store sales for the year showed a small decline of 0,2%.

Six new stores were opened during the year, including one at the V&A Waterfront in Cape Town. A further five stores were upgraded, taking the total number of new-concept stores at the year-end to 107.

The new Waterfront store incorporates a number of innovative design concepts which have been well received and will influence future Foschini store designs. In addition, the Waterfront store prompted the launch of Lipsy, an international fashion brand carried by Topshop of London. Although these products command a premium price there has been a good take-up, and they have been introduced in a number of the division’s other top-selling stores.

The new-concept stores continue to perform at levels well above average for the Foschini chain, both in terms of turnover growth and trading density, and now account for 70% of the chain’s total turnover.

Performance by	New	Old
store concept	concept	format
Number of stores	107	104
Sales growth (%)	5,0	0,2
Sales contribution (%)	70	30
Trading density/m2 (incl. VAT)	R21 600	R16 000
Total number of stores	211

Total rented space grew by 6,2% to 138 553 square metres.

Capital expenditure of almost R40 million was incurred on Foschini store openings, enlargements, relocations and refurbishments. The upgraded stores have shown good growth and they strengthen the Foschini brand.

Fashíonexpress

This value chain, created initially out of ailing Foschini stores, had another good year and has become well established in the marketplace. Built around the concept of “express yourself for less”, this chain offers fashionable garments in a pleasant shopping environment at prices that rival those of traditional cash retailers.

Total sales grew by 14,9% with same store sales up 8,6%.

The new store format has been widely accepted and will continue to be rolled out, including the conversion of the existing older stores. This will allow the Fashíonexpress brand to have a consistent image across all the locations.

During the past year five new stores were opened. A further four are planned for the next year. The division is confident that this chain will continue to increase its profit contribution and that it can easily expand to 150 or even 200 stores.

Donna-claire

The total turnover of this chain grew by 9,1%, assisted by the opening of seven new stores. Same store growth of 3,9% was disappointing but a recent move to place emphasis on products for younger customers is showing signs of success.

With ten new stores already committed for the next year and a similar number envisaged for 2010, this niche chain should have 100 stores within three years.

With their high trading densities and low markdowns, Donna-claire stores are the most profitable stores in the division.

Luella

Now in its third year, the Luella chain has not yet reached its full potential, having at this stage only 19 stores. One additional store was opened in the 2008 year, at the Loch Logan centre in Bloemfontein. All are in key shopping centres.

This standalone footwear concept offers a range of women’s footwear supplemented by handbags and accessories aimed at customers in the middle to upper income groups. The current target market is the fashion-conscious woman with a passion for shoes.

The division is confident that with expected improvements in the fashion ranges the Luella chain will become a positive contributor to profit within three years. It has the potential to be a 50-store chain.

Stock levels and markdowns

Although stock levels at the end of the year were at an acceptable level, being down 11% on the previous year, markdowns for the year were above budget at a disappointing 17,4% of sales. The increase was largely caused by Christmas trading being softer than expected. Current and projected stock levels are considered to be appropriate. The medium-term goal remains to reduce clothing and footwear markdowns to between 10% and 12% of sales, and to increase stock turn.

Strategy and prospects

There is general awareness that the South African consumer is under pressure and that levels of disposable income have declined. Despite this, the Foschini division considers that it is well positioned in terms of the number and quality of existing and planned stores and its flexible buying processes to withstand a trading downturn. Its objective is to emerge strongly, in order to capitalise on the upswing which will follow.

The emerging market continues to grow and to fuel demand, and whilst the introduction of the NCA in June 2007 has softened credit demand in terms of the opening of new accounts, the long-term benefits of this legislation will ensure the sustainability of consumer credit.

The division’s continuing investment in capital expenditure on new stores and the refurbishment of existing stores, even during a period of economic decline, is part of a long-term strategy to capitalise on South Africa’s proven pattern of economic growth, despite periodic downturns in the business cycle.

In the next year, almost 30 new stores will be opened and approximately 15 high-turnover stores will be upgraded. They include some of the division’s premier CBD stores in cities such as Johannesburg and Pretoria. These measures will add substantial turnover and improve the visibility of the division to the consumer. This programme will be followed in the 2010 year by the opening or upgrading of another approximately 20 stores.

In the next year alone more than 15 000 square metres of additional retail space will be added. Among the developments in which the division will have stores are the following regional shopping centres: