Material Issues, risks and opportunities
Aspirational Fashion
2021
Performance against plans
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PLANS FOR 2021 |
PERFORMANCE AGAINST PLANS |
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Ongoing focus on managing the risk of fashion through process improvements, system enhancements and developing new technologies. |
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Launch or relaunch brands including Identity Superstore, Hey Betty, a new specialist brand from Uzzi, the large-format Kids Emporium and e-commerce store. |
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Assist key local and exclusive factories and cut-make-trim (CMT) suppliers by investing in capacity building to increase their merchandise flows and profitability. |
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Manage changing customer demand in a post-COVID-19 environment. |
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Grow e-commerce by improving the customer experience and optimising order fulfilment. |
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Challenges encountered
- COVID-19 lockdowns, weak economic growth, low tourism, prohibition on gatherings or special events and work from home for a large portion of the South African market has led to weaker demand for clothing, specifically in the smart, formal and glamourwear categories.
- Consumers are increasingly value conscious, particularly on casual product in a highly discounted environment which placed pressure on sales growth in Truworths. A continued focus on efficient stock management and quick response has meant that Truworths has been able to achieve normal seasonal clearance.
- Managing the impact of currency volatility and increasing input cost (for example, cotton prices) on product pricing.
- Rolling lockdowns and global instability in supply chains impacted shipping logistics and created significant delays in timelines for delivery of imported goods and raw materials from various countries of origin.
2022
Plans for the year ahead
- Continue to grow and develop new brands launched in 2021 and in the early part of the 2022 financial period.
- Ensure that all products available in Truworths, Identity and Loads of Living stores are available online.
- Improve customer experience in the post-checkout phase of online shopping, with faster delivery times and lower costs.
- Offer customers a true omni-channel shopping experience through the investment in new systems and technology.
Medium-Term
Opportunities
- Grow the value Primark chain to become a meaningful participant in the value fashion segment.
- Continue to introduce new experimental brand concepts and grow them, based on success.
- Introduce new markdown system with improved forecasting and enhanced price elasticity functionality.
- Develop visual merchandising tools to display ranges virtually.
- Capitalise on the functionality of the new e-commerce platform to drive traffic on the site and improve conversion resulting in improved sales.
Key risks and mitigation strategies
Contending with the volatile exchange rate in managing retail selling prices of imported merchandise.
- Forward exchange contracts (FECs) are used to cover merchandise imports to lessen the impact of exchange rate volatility. FECs are reviewed and adjusted during the course of normal business processes.
- Continued to seek opportunities to increase local supply to reduce reliance on imports.
- Acquisition of Barrie Cline Clothing ladies’ design centre enables Truworths to create a vertically integrated design centre for ladies’, men’s and kidswear.
- Improved procurement processes, consolidated fabric sourcing and adjusted product ranges to limit product inflation.
Availability of counterfeit goods devalues the brands and impacts sales negatively.
- Continuous work done with counterfeit experts, training of customs officials and conducting numerous raids on illicit operators.
- Ongoing assessment and bolstering of counterfeit measures.
- Instituting legal action against perpetrators.
Failing to provide quality fashion to customers each season at appropriate margins. This covers buying processes, fashion monitoring, supplier relationships and ensuring Truworths has skilled buying and planning resources.
- Apply proven forecasting, design and assortment planning processes, and key executive interventions throughout the merchandise life cycle aimed at managing and mitigating the risk of fashion.
- Weekly monitoring of merchandise performance by executives and senior management to manage inventory within acceptable levels, thereby limiting markdowns and maintaining the gross margin within the target range.
- Manage suppliers’ contributions of the overall buy to ensure risk is spread across the supply chain.
- Balance local and international supply base to take advantage of both quick response and fast fashion.
- Achieve better prices to offer better value by consolidating fabric sourcing across brands while maintaining product quality and increasing the contribution of planned promotions and excellent value items within the ranges.
Refer to Aspirational Fashion for more detail.
Material Issues, risks and opportunities
Supply Chain
2021
Performance against plans
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PLANS FOR 2021 |
PERFORMANCE AGAINST PLANS |
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Finalise approvals and related services in preparation for the construction of the new distribution centre, subject to board approval. |
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Continue to develop alliances with local design centres and cut-make-trim (CMT) suppliers to ensure the sustainability of key partners to grow local production and manufacturing efficiency. |
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Further enhance e-commerce fulfilment model to shorten lead times and reduce costs. |
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Expand Truworths’ in-house manufacturing capacity and infrastructure, and increase focus on ladieswear. |
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Challenges encountered
- Lower consumer demand locally has negatively impacted CMT suppliers, with some factories being forced to close.
- Ongoing absenteeism and capacity constraints due to COVID-19 have hampered output and efficiencies in local and international factories.
- The global logistics supply chain has been under immense strain, with freight costs at record high levels and reliability of delivery at historically low levels.
- The shortage of containers in the Far East has resulted in delays in goods leaving their port of origin and also delays en route as harbours were under pressure with the docking of vessels. The container shortage has been a major contributor to the dramatic increase in shipping costs.
- Intermittent major congestion at the Cape Town harbour has led to lengthy delays in goods being delivered to the distribution centres. The congestion has forced some vessels to bypass the Cape Town port and only dock on the return journey.
2022
Plans for the year ahead
- Continue to develop the in-house manufacturing capabilities by fully integrating Barrie Cline Clothing with the existing Truworths men’s and kids’ design centre, creating the single-largest supplier to Truworths.
- Enhance systems to support the integrated in-house manufacturing capability.
- Agree the preferred strategy for the development of the new distribution centre and engage professional service providers to enable development to commence in the 2023 financial year, subject to board approval.
- Introduce geographic e-commerce fulfilment model to shorten the customer lead time from order placement to delivery.
Medium-Term
Opportunities
- Further develop the Truworths in-house manufacturing capability by leveraging the Barrie Cline acquisition as well as the CMT supplier network to create a vertically integrated supply chain.
- Develop and commission new distribution centre.
Key risks and mitigation strategies
The sustainability of the local and international supplier base is critical to meet Truworths’ product demand. Several suppliers have been heavily impacted by COVID-19 which could impact on the long-term viability of their businesses.
- Identify key suppliers and provide support where possible to ensure their sustainability.
- Develop closer working relationships with design houses and CMT suppliers.
- Build an integrated supply model by merging the existing Truworths men’s and kids’ design centre with the expanded ladies’ design centre.
- Review international supplier base to ensure the Group has a well-balanced and sustainable range of suppliers across the wide range of product types.
- Identify alternative sources of supply and countries of origin, where necessary, and develop close working relationships through enhanced collaboration and communication.
Suppliers not operating to contracted standards of ethical behaviour could result in reputational damage and interruption of supply.
- Truworths’ code of conduct included in all supplier agreements.
- A breach of the code of conduct amounts to a material breach of terms and conditions.
- Manufacturers are required to comply with ethical standards, labour, health and safety, and environmental legislation.
- Legislative compliance audits are carried out as part of the new supplier take-on process.
- Compliance with Truworths’ code of conduct monitored through internal audit process.
Loss of, or inability to access, distribution facilities
- All distribution centre assets are adequately insured.
- Fire and flood protection installed at all distribution facilities.
- Disaster recovery plans in place to ensure business continuity in the event of a disaster.
Organic and acquisitive growth in the business in medium term placing increased pressure on distribution and warehouse capacity.
- A new distribution centre is in the early stages of planning, although the project has been delayed due to the impact of COVID-19.
- Third-party warehousing facilities used to store imported merchandise during peak periods.
Civil unrest could disrupt the supply chain and the production of merchandise in certain areas.
- Continue assessing supplier planned contributions at a strategic seasonal level and within the monthly review process.
- Review product categories that may present alternate sources of procurement within South Africa and for import.
- Work with a geographically diversified local supply base.
Refer to Supply Chain for more detail.
Material Issues, risks and opportunities
Account Management
2021
Performance against plans
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PLANS FOR 2021 |
PERFORMANCE AGAINST PLANS |
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Respond appropriately to COVID-19 and position the account portfolio for the future. |
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Sustainable new account acquisition. |
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Improve efficiency of new account opening process. |
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Enhance fraud prediction and prevention processes. |
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Upgrade the account management software used to implement all the account scorecards and execute the account management strategies. |
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Invest in omni-channel retail system encompassing stores, e-commerce and customer engagement suite. |
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Implement daily tracking of data, models and strategies to identify new opportunities or areas of concern. |
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Roll out all strategies that will be appropriate in the post-COVID-19 economic environment, including predictive models using the latest data. |
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Challenges encountered
- Increased volatility in key metrics due to new waves of COVID-19 infections which resulted in tighter lockdown restrictions affecting sales and collections as customers stay away from stores.
- Converting risk-approved accounts to opened accounts.
- The performance of certain collection agencies declined, as blended work-from-home/office staffing models were adopted. This was, however, counterbalanced by other collections teams, including the Truworths internal collections department, performing better than in the past. Customer payment behaviour has changed slightly with slower payments at the start of the billing cycle, and then faster payments at the end of the billing cycle versus historical trends.
2022
Plans for the year ahead
- Implement upgraded account management software.
- Implement omni-channel customer engagement solutions.
- Implement a suite of cross-channel customer communication strategies.
- Test new promotions and offers enabled by the new omni-channel solutions.
Medium-Term
Opportunities
- Introduce new credit products/payment alternatives.
- Explore opportunities to establish partnerships with digital platforms including online malls, credit advisory services and payment gateways.
- Introduce new loyalty benefits.
- Leverage customer data in the decision-making process.
- Health of the portfolio and growth in market share of new and active accounts position the Group for account retail sales growth.
Key risks and mitigation strategies
Ineffective management of account risk could result in increased bad debt, lower and slower collections, limited new account growth and a reduction in the number of customers able to buy on account.
- Apply account risk criteria and processes consistently using advanced analytics, scorecards and models.
- Review account management, collections and acquisition strategies regularly and refine to leverage new data and predictive models.
- Implement and maintain best-of-breed account management tools that accurately execute policies, processes and strategies.
Debt relief legislation approved by Parliament will enable the National Credit Regulator (NCR) to extinguish the debts owed to credit providers by low-income consumers with unsecured debt of less than R50 000 who are critically indebted.
- Engaged with the NCR through the National Clothing Retail Federation and other industry bodies to have legislation amended or withdrawn.
- Aligned with other credit providers to propose workable alternatives so that debt review and debt counselling is affordable for low-income consumers.
- Contingency plans developed across the account operations and account risk management areas should the legislation be implemented.
- The allowance for doubtful debts under IFRS 9 includes a provision relating to the potential impact of debt relief legislation.
Refer to Account Management for more detail.
Material Issues, risks and opportunities
Retail Presence
2021
Performance against plans
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PLANS FOR 2021 |
PERFORMANCE AGAINST PLANS |
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Trading space expected to be unchanged with net decrease in number of stores. |
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R272 million committed to store development. |
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Continued consolidation and rationalisation of trading space where trading densities are low, and closure of under-performing stores. |
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Launch project to develop ‘futuristic’ emporium store. |
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Introduction of new menswear brand in free-standing format. |
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Launch enticing new design concepts for existing and new brands, including the Identity Superstore, Loads for Kids Emporium and Hey Betty. |
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Increase the brand awareness in the e-commerce space to off-set lower store sales. |
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Launch e-commerce site for Identity. |
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Challenges encountered
- COVID-19: Trading negatively affected when positive cases detected in stores as well as shorter trading hours in certain stores due to curfew restrictions.
- Ongoing electricity load shedding, with landlords in key centres being slow to install generators.
- Local authorities not paying monies owed to Eskom, which results in electricity being disconnected in certain towns during trading hours, accompanied by deteriorating infrastructure and poor water quality in certain areas.
- Civil unrest and ongoing service delivery protests.
2022
Plans for the year ahead
- Trading space is planned to remain unchanged.
- R240 million committed to store development.
- Continued rationalisation and consolidation of space to improve trading densities, and close under-performing stores.
- Launch Identity Superstore concept.
- Expand store formats.
- Launch Identity website and migrate existing Truworths websites to new cloud-based e-commerce platform.
Medium-Term
Opportunities
- Commence implementation of ‘store of the future’ concept.
- Consolidate trading space further to improve operating efficiency and trading densities by renovating key stores and reprofiling stores by adding new brands.
Key risks and mitigation strategies
High demand for well-located retail premises in established malls, impacting availability of retail space and expansion opportunities.
- New malls present opportunities in prime positions.
- Renovating key stores and optimising existing space to introduce new brands.
- Opening stand-alone stores for key brands to create space in existing high trading density emporium stores.
- Reconfiguring existing space to enable introduction of new brands with changes in fixturing without renovating.
- Securing expansion options in new and renewed leases.
Fixed annual rental escalations, high utility costs and rates increases impacting store profitability.
- Engaging with landlords to secure prime space at competitive rentals and escalation rates.
- Securing rental reversions where possible.
- Securing rental escalations that reflect the constrained economic conditions and over‑supply of retail space in certain areas.
- Consolidating and rationalising trading space where trading densities are low.
- Reducing electricity consumption through smart metering, energy-efficient lighting and enforcing operating discipline.
- Rigorous review of rates increases.
Electricity load shedding in South Africa remains a risk to trading.
- Ongoing engagement with shopping centre owners to connect malls to central generators.
- Evaluating alternative forms of electricity supply.
- Equipping stores without alternative electricity supply to continue trading during load shedding, where possible, without undue risk.
Civil unrest could disrupt trading and result in damage to stores and losses.
- Critically review insurance cover.
- Business continuity plans to ensure contingency measures are implemented where possible in the event of disruptions to the supply chain and store trading.
Refer to Retail Presence for more detail.