VALUE-CREATING BUSINESS MODEL
THE CAPITALS OF VALUE CREATION
Inputs into the Group’s business activities constitute the financial, manufactured, intellectual and human capitals available to and utilised by the Group as well as the social and relationship capital evident in the important relationships and partnerships with stakeholders. Through its supply chain, which outsources the manufacturing and transportation processes to suppliers, the Group indirectly utilises natural capital in the form of raw materials such as cotton, wool and leather, as well as water and carbon-depleting energy sources. The Group’s operations, to a lesser extent, utilise water and carbon-depleting energy sources in its head offices, distribution centres and stores, and the business travelling undertaken by its employees. Inputs provided below are measured at the end of the 2022 reporting period.FINANCIAL
CAPITAL
INPUTS 
INPUTS
Financial capital relates to the funding received from the providers of capital and the financial resources available to the Group.
- Equity of R6.1 billion (2021: R6.2 billion)
- Net debt of R564 million (2021 net cash: R577 million)
CONSTRAINTS
CONSTRAINTS
The Group does not face any financial capital constraints. Should it become necessary, the Group could raise additional financial capital through an issue of shares or by utilising its robust balance sheet to raise additional loan funding.
MANUFACTURED
CAPITAL
INPUTS
Manufactured capital is the physical infrastructure used in the distribution and selling of merchandise, including the distribution centres, leased retail stores and the information technology systems (including websites) throughout the business.
- 877 (2021: 891) stores
- Three (2021: four) main distribution centres
- Seven (2021: six) e-commerce sites
CONSTRAINTS
Distribution centre capacity during peak periods, local manufacturing capacity and financial viability in the local supply base, container shortages impacting the importation of merchandise and additional retail space in key locations where the Group’s existing stores are overtraded.
INTELLECTUAL
CAPITAL
INPUTS
Intellectual capital focuses on knowledge in the organisation, systems, processes, trademarks, intellectual property and brands.
- More than 40 own-brands across Truworths and Office
- Sophisticated merchandise, distribution and account management systems and processes
- Policies, procedures and manuals
CONSTRAINTS
Ageing merchandise and warehouse management systems in Office are preventing further efficiencies from being unlocked.
HUMAN
CAPITAL
INPUTS
Human capital relates mainly to employees’ skills, capabilities, development and experience.
- 11 355 (2021: 11 562) employees
- Values-driven corporate culture
- Market-leading merchant trainee programme
- Extensive skills training and management development
CONSTRAINTS
Scarcity of specialist skills and portability of skills which are in demand in other countries, with higher levels of emigration currently. Experienced some constraints in Office in relation to suitable candidates for available positions not being employed quickly enough.
SOCIAL AND
RELATIONSHIP CAPITAL
INPUTS
Social and relationship capital deals broadly with stakeholder relationships and engagement, corporate reputation and values.
- 2.6 million (2021: 2.6 million) active account customers
- 16.4 million (2021: 13.9 million) loyalty programme customers
- More than 500 merchandise suppliers across the Group
- Corporate social investment (CSI) programme funded by three trusts
CONSTRAINTS
South African consumers under pressure with reduced disposable income as a result of adverse macroeconomic conditions, negatively affecting payments and credit scores. This affects both account acquisition growth and account purchase behaviour.
NATURAL
CAPITAL
INPUTS
Natural capital relates to environmental resources which impact on the Group’s prosperity.
- Natural materials depleted in the manufacturing of merchandise and packaging materials
- Consumption of fossil fuels in the supply chain
- Electricity and water consumed in operations
CONSTRAINTS
Load shedding in South Africa results in constraints in electricity supply, which has an adverse effect on local manufacturing and trading.
AS A FASHION RETAILER, THE GROUP’S BUSINESS MODEL IS TO PROCURE MERCHANDISE THROUGH AN EFFICIENT LOCAL AND INTERNATIONAL SUPPLY CHAIN AND TO SELL IT TO CONSUMERS FOR CASH OR ON ACCOUNT THROUGH ITS NETWORK OF RETAIL STORES AND E-COMMERCE PLATFORMS. THE GROUP’S PURPOSE IS TO PROVIDE EXCLUSIVE AND ASPIRATIONAL APPAREL TO YOUTHFUL FASHIONABLE CONSUMERS USING PREDOMINANTLY COMPANY-OWNED BRANDS IN TRUWORTHS AND THIRD-PARTY BRANDS IN OFFICE.
The successful execution of this business model will create value for the Group’s primary stakeholders, notably shareholders, customers and employees, and other stakeholders including suppliers, financiers, landlords and the regulators in the countries in which the business operates. The business model, underpinned by the business philosophies which encompass its operating segments, distinguishes the Group from its industry peers, with its unique DNA thereby providing a sustainable, competitive advantage.
ASPIRATIONAL FASHION
Business activity
- Predict and interpret latest trends in fashion apparel, footwear and homeware
- Design, develop and source own-branded exclusive fashion merchandise from both local and international suppliers
- Collaborate with third-party brands on trends and most wanted exclusive styles (Office)
- Consistently update established brands and create new and enticing brands and range extensions
ACCOUNT MANAGEMENT
(including lay-bys and loyalty) (Truworths)
Business activity
- Offer accounts and lay-bys in South Africa and selected other African countries to enable retail sales
- Continuously refine existing and develop new credit products and strategies
- Account granting and approval functions centralised at Truworths head office
- Collections and customer engagement through stores and call centres
- Increase basket size and frequency of purchases through loyalty programmes for account customers and loyalty members
SUPPLY CHAIN
Business activity
- Operate a centralised distribution model (Truworths in Cape Town, South Africa and Office in Kilmarnock, Scotland)
- Receive imported and locally manufactured merchandise from suppliers at distribution centres for onward distribution to stores and e-commerce customers
- Distribute merchandise via third-party transport and distribution networks
- Fulfil e-commerce orders from stores and distribution centres, leveraging existing transport networks
- Dynamic interaction with local and imported product from suppliers aligned with business requirements and profile
- Persistent focus on dynamic planning systems and process
RETAIL PRESENCE
Business activity
- Offer a portfolio of exclusive and aspirational ladies', men's and kidswear fashion apparel and footwear including third-party exclusive styles, and homeware
- Stock, display and sell merchandise in stores (operating from leased premises) and online, as well as to wholesale partners and from concession outlets (Office)
- Emporium store concept showcases multiple brands in one store (Truworths)
- Optimise trading space to gain market share and promote sales
- Complement store sales with e-commerce merchandise offering, service online customers and provide convenient delivery and collection options
- Leverage customer loyalty through targeted marketing
ASPIRATIONAL FASHION
Business activity
- Predict and interpret latest trends in fashion apparel, footwear and homeware
- Design, develop and source own-branded exclusive fashion merchandise from both local and international suppliers
- Collaborate with third-party brands on trends and most wanted exclusive styles (Office)
- Consistently update established brands and create new and enticing brands and range extensions Refer to Aspirational fashion on pages 68
- (Truworths) and 81 (Office) for more detail
ACCOUNT MANAGEMENT
(including lay-bys and loyalty) (Truworths)
Business activity
- Offer accounts and lay-bys in South Africa and selected other African countries to enable retail sales
- Continuously refine existing and develop new credit products and strategies
- Account granting and approval functions centralised at Truworths head office
- Collections and customer engagement through stores and call centres
- Increase basket size and frequency of purchases through loyalty programmes for account customers and loyalty members
SUPPLY CHAIN
Business activity
- Operate a centralised distribution model (Truworths in Cape Town, South Africa and Office in Kilmarnock, Scotland)
- Receive imported and locally manufactured merchandise from suppliers at distribution centres for onward distribution to stores and e-commerce customers
- Distribute merchandise via third-party transport and distribution networks
- Fulfil e-commerce orders from stores and distribution centres, leveraging existing transport networks
- Dynamic interaction with local and imported product from suppliers aligned with business requirements and profile
- Persistent focus on dynamic planning systems and process
RETAIL PRESENCE
Business activity
- Offer a portfolio of exclusive and aspirational ladies', men's and kidswear fashion apparel and footwear including third-party exclusive styles, and homeware
- Stock, display and sell merchandise in stores (operating from leased premises) and online, as well as to wholesale partners and from concession outlets (Office)
- Emporium store concept showcases multiple brands in one store (Truworths)
- Optimise trading space to gain market share and promote sales
- Complement store sales with e-commerce merchandise offering, service online customers and provide convenient delivery and collection options
- Leverage customer loyalty through targeted marketing
OUR PRODUCTS, BY-PRODUCTS AND WASTE
The Group’s value-creating business model is focused on producing fashion clothing, footwear, homeware and related merchandise of international styling and quality to cater to every lifestyle need of our customers. An inevitable consequence of the creation of our products is the creation of waste in the supply chain during the course of production, packaging and transportation processes, mostly undertaken and managed by our suppliers and service providers.
Retail sales of
R18.5 billion
(2021: R17.0 billion)
Cost of sales of
R8.3 billion
(2021: R8.0 billion)
Total emissions in SA
81 029 tCO2e
(2021 revised: 81 596 tCO2e)
OUTPUTS
ASPIRATIONAL FASHION
OUTPUTS
Business activity outputs and outcomes
- Unique and aspirational own-brands that provide differentiation
- Adventurous blends of colour, fabric and fashion styling create enticement
- Broad curated ranges of latest 'in-demand' fashion footwear with exclusive third-party product lines combined with own-brand styles (Office)
SUPPLY CHAIN
OUTPUTS
Business activity outputs and outcomes
- Optimal inventory levels to satisfy customer demand
- Efficient supply chain which meets targeted inventory turn levels
RETAIL PRESENCE
INPUTS
Business activity outputs and outcomes
- Enticing store and online shopping environments
- Encourage brand cross-shopping
ACCOUNT MANAGEMENT
OUTPUTS
Business activity outputs and outcomes
- Balanced cash and account sales mix
- Account portfolio managed within acceptable risk levels
- Customer loyalty through understanding and reacting to customer information and purchase behaviour
OUTCOMES AND TRADE-OFFS
IMPACT OF BUSINESS ACTIVITIES ON CAPITALS
The outcomes of the Group's strong operational and financial performance as the business emerged from the constraints of the COVID-19 pandemic have created value for stakeholders, supported by the Group's Business Philosophy. The Group increased earnings to record levels, maintained its dividend payout ratio and continued to buy back shares despite the constrained trading conditions.
- Financial capital has been increased, owing to stronger retail sales growth, lower finance costs, increased interest income due to higher credit sales and interest rates, and the reduced credit loss allowance, offset by a slight increase in trading expenses. Given the strong performance, the Group has returned R3.2 billion of financial capital to shareholders through dividends and share buy-backs.
- Manufactured capital was reduced by the net closure of 14 stores across the Group and the consolidation of distribution and warehouse facilities in Office.
- Human, social and relationship and intellectual capitals deployed by the Group have all increased.
- The rate of depletion of natural capital has increased in line with the growth in business activity post the pandemic, however, the depletion is at levels which the Group believes are acceptable.
The impact of our business activities on the capitals is detailed below.
EXTERNAL FACTORS IMPACTING VALUE CREATION
Several factors that are partially or wholly outside the control of the Group could have a significant impact on value creation, preservation or erosion. The external factors influencing the Group’s financial performance and our response to these factors are addressed in the relevant sections throughout the Integrated Report.
STAKEHOLDERS AND SDGs IMAPCTED
FINANCIAL
CAPITAL
Continued access to financial capital through investor and financial market confidence
KEY OUTCOMES
| Key outcomes | 2022 | 2021 | |
|---|---|---|---|
| Return on invested capital (ROIC): Weighted average cost of capital (WACC) (times) | ✓ | 2.5 | 2.0 |
| Net (debt)/cash to equity (%) | ✓ | (9.2) | 9.3 |
| Diluted headline earnings per share up 49.2% (cents) | ✓ | 770.8 | 516.7 |
| Period-end share price (cents) | ✗ | 4 886 | 5 616 |
| Annual dividend per share up 44% (cents) | ✓ | 505 | 350 |
| Dividend yield (based on weighted average share price) (%) | ✓ | 9.0 | 8.8 |
| All medium-term financial targets met or exceeded | ✓ |
REFERENCES
STAKEHOLDERS AND SDGs IMAPCTED
MANUFACTURED
CAPITAL
Ongoing investment in the Group’s stores, distribution capability and e-commerce platforms to promote and sustain growth
KEY OUTCOMES
| Key outcomes | 2022 | 2021 | |
|---|---|---|---|
| Capital expenditure (Rm) | ✓ | 340 | 320 |
| Net stores closed | ✗ | 14 | 32 |
| Under-performing stores closed | ✗ | 29* | 58* |
| Stores renovated and extended | ✓ | 7 | 8 |
| Office trading space decreased (%) | ✗ | 4.4 | 22.0 |
| * | Including 2 (2021: 3) Office concession outlets. |
REFERENCES
STAKEHOLDERS AND SDGs IMAPCTED
INTELLECTUAL
CAPITAL
Expanding our market-leading brand portfolio and developing new and streamlining existing business processes and systems
KEY OUTCOMES
| Key outcomes | |
| Ongoing enhancements to order fulfilment processes for online shopping have improved the customer experience, reduced delivery lead times and lowered costs for Truworths. | ✓ |
| New merchandise financial planning system implemented in Truworths to plan sales, manage stock and markdowns across all divisions. | ✓ |
| Launched new Loads for Kids brand. | ✓ |
| Ongoing focus on systems integration and process enhancements to improve efficiencies within the combined in-house design centre. | ✓ |
| New software enables a wider range of data, features and predictive models to be used in the customer decision strategy. | ✓ |
| Launched new Office website homepage, site search optimisation and image optimisation. | ✓ |
REFERENCES
STAKEHOLDERS AND SDGs IMAPCTED
HUMAN
CAPITAL
Employment creation, employee development through skills training and workplace experience, and the promotion of fair labour practices
KEY OUTCOMES
| Key outcomes | 2022 | 2021 | |
|---|---|---|---|
| Salaries and benefits paid to employees increased (Rbn) | ✓ | 2.3 | 2.1 |
| Number of employees reduced | ✗ | 11 355 | 11 562 |
| Maintained black employee representation in South Africa (%) | ✓ | 94 | 94 |
| Strong, stable female representation (%): | |||
| Truworths | 74 | 74 | |
| Office | ✓ | 60 | 58 |
| Trained fewer people across the Group | ✗ | 10 555 | 10 884 |
| Significant overall investment in skills development (Rm) | ✓ | 117 | 118 |
| Higher skills development spend per employee (R'000) | ✓ | 10.3 | 10.2 |
| Maintained target of 30% female representation on the Truworths International board (%) | ✓ | 33 | 36 |
| No external referrals of unfair discrimination | ✓ |
REFERENCES
STAKEHOLDERS AND SDGs IMAPCTED
SOCIAL AND
RELATIONSHIP CAPITAL
Maintained positive relationships with stakeholders and invested in the well-being of the communities we operate in, through our various CSI initiatives
KEY OUTCOMES
| Key outcomes | 2022 | 2021 | |
|---|---|---|---|
| Truworths active account customer base increased 2.3% (m) | ✓ | 2.6 | 2.6 |
| Truworths loyalty customer base increased (m) | ✓ | 16.4 | 13.9 |
| Net promoter score: | |||
| Truworths | 53 | 52 | |
| Office | ✓ | 65 | 66 |
| Lower CSI distributions (Rm) | ✗ | 4.6 | 7.5 |
| Lower merchandise donations to socio-economic and enterprise development beneficiaries (Rm) | ✗ | 31 | 33 |
| Improved Broad-based Black Economic Empowerment (BBBEE) scorecard compliance (Level) | ✓ | 6 | 8 |
| Growing social media following - Facebook and Instagram: | |||
| Truworths (m) | 6.8 | 6.2 | |
| Office (m) | ✓ | 1.2 | 1.2 |
| Significant corporate tax payments (Rm) | ✓ | 909 | 687 |
| Concluded wage negotiations with South African Commercial, Catering and Allied Workers Union |
REFERENCES
STAKEHOLDERS AND SDGs IMAPCTED
NATURAL
CAPITAL
Depletion of environmental resources through our supply chain (indirectly) and own business operations (directly)
KEY OUTCOMES
| Key outcomes | 2022 | 2021 | |
|---|---|---|---|
| South African store electricity carbon emissions decreased (Wh per m2) | ✓ | 15.9 | 16.7 |
| Decrease in recycled plastic hangers (tonnes) | ✗ | 79.3 | 89.7 |
| Decrease in paper consumption (tonnes) | ✓ | 289 | 384 |
| Increase in recycled cardboard cartons due to focus on re-use (tonnes) | ✓ | 632 | 482 |
REFERENCES
FINANCIAL
CAPITAL
ACTIONS TO ENHANCE OR
MITIGATE OUTCOMES IN 2022
Ongoing active management of the Group's financial capital base through:
- Debt repayments of R743 million.
- Returned R3.2 billion to shareholders through dividend payments (R1.6 billion) and share buy-backs (R1.6 billion).
- Reinvestment of R340 million in capital infrastructure.
- Office revolving credit facility settled.
- Utilised revolving credit facility available to the Group (Truworths R700 million).
- Utilised bank overdraft facilities (Truworths R930 million).
KEY TRADE-OFFS
Financial capital is applied to sustain and grow our business, typically with positive impacts on manufactured, human, intellectual, and social and relationship capital, and negative impacts on natural capital.
MANUFACTURED
CAPITAL
INPACTIONS TO ENHANCE OR
MITIGATE OUTCOMES IN 2022UTS
- Capital expenditure of R269 million on stores, distribution centres and buildings.
- Continued consolidation of space and improving efficiencies through introducing new brands into existing stores and closing marginal/loss-making stores.
- Identity e-commerce website launched.
- Truworths websites migrated to new cloud-based platform.
- Identity larger format store concept launched.
- Secured rental reversions and lower escalations.
- Integration of Barrie Cline completed.
- Planning for development of new Truworths distribution centre.
- Consolidation of distribution centres in Office.
- 'Buy now, pay later' payment option launched on the Office website.
- Modernised store concept developed for Office to be implemented in all new and refurbished stores.
KEY TRADE-OFFS
Ongoing investment in the Group's store and distribution infrastructures requires significant upfront capital investment and has a negative environmental impact in general. The Group strives to minimise its environmental impact by building energy-efficient stores, and the new distribution centre will be a green-certified building. Furthermore our commitment to investing for growth will contribute positively to financial capital in the medium to long term.
INTELLECTUAL
CAPITAL
ACTIONS TO ENHANCE OR
MITIGATE OUTCOMES IN 2022
- Ongoing testing of new brand and store concepts.
- Regular review of account management, collections and acquisition strategies.
- Managing the Office turnaround strategy.
- Impact of business process alignment enhanced through further systems alignment between Truworths and Office.
KEY TRADE-OFFS
Ongoing investment in business processes and new systems is growing our intellectual capital, and indirectly benefiting our human and social and relationship capitals, but negatively impacting financial capital in the short term.
HUMAN
CAPITAL
ACTIONS TO ENHANCE OR
MITIGATE OUTCOMES IN 2022
- Reduced number of permanent and flexible employment positions in Truworths through natural attrition to avoid retrenchments.
- Focused on developing internal talent to demonstrate commitment to sustainable transformation in South Africa.
- Continued investment in personal protective equipment and other pandemic-related costs to increase safety of employees and customers.
KEY TRADE-OFFS
- Reducing the number of permanent and flexible employment positions through natural attrition has impacted negatively on our human capital but, in the current challenging trading environment, assisted to reduce the negative impact on our financial capital. It is believed that our human capital, and indirectly social and relationship capital, will benefit from this decision in the long term as opportunities for development and growth arise for remaining employees and the risk of retrenchment is reduced.
- Our commitment to the training and development of our employees reduces our financial capital but leads to increased human and intellectual capital. This will ensure that our employees are equipped to provide our customers with superior quality, aspirational fashion merchandise, and provide world-class customer service that will ultimately increase the value created for our shareholders.
SOCIAL AND
RELATIONSHIP
CAPITAL
ACTIONS TO ENHANCE OR
MITIGATE OUTCOMES IN 2022
- Entered into new CSI initiatives and partnerships to achieve a broader spread of investment across identified focus areas.
- Continued focus on and regular communication with suppliers about BBBEE compliance and progress.
- Continued to donate merchandise to Taking Care of Business (formerly known as The Clothing Bank) which strengthens the relationship.
- Extended list of merchandise donation beneficiaries to include U-turn, an organisation that equips homeless people with the ability to overcome homelessness.
- Engaged regulators on key matters, including National Credit Regulator, Department of Employment and Labour, Department of Trade, Industry and Competition, and revenue authorities.
KEY TRADE-OFFS
- Through our commitment to socio-economic, supplier and enterprise development we are trading financial capital in the short term to boost social and relationship capital through the upliftment of communities and the development of our local supply chain.
- The tough consumer environment is impacting negatively on the credit score of new applicants, resulting in a reduction in the number of risk-approved applications. In order to grow the active account base, the Group is required to increase marketing spend and invest in the development of new credit products and strategies.
- In the current tough economic climate, our focus on containing costs through the negotiation of prices with suppliers and landlords, and by limiting the use of external service providers where work can be performed in-house, arguably weighs on our social and relationship capital in an effort to limit the reduction of our financial capital. This will however increase our human and intellectual capitals as in-house skills grow and develop.
NATURAL
CAPITAL
ACTIONS TO ENHANCE OR
MITIGATE OUTCOMES IN 2022
- All SA stores renovated during the period fitted with energy-efficient lighting as well as electricity meters.
- Partner with organisations that recycle or re-use damaged goods or convert fabrics into garments for resale.
- All suppliers required to commit to good environmental practices.
- Materials associated with merchandise are recycled or re-used where possible, while the business continues to seek ways to limit packaging on merchandise.
- Measures implemented to decrease carbon emissions in supply chain.
- Electricity reduction targets set.
- Renewable energy is being introduced where possible.
- Measures to reduce water consumption introduced at all facilities and stores.
- We consume natural resources and fossil fuels in the production, packaging and transportation of our merchandise, which impacts negatively on natural capital in order to increase financial capital, and indirectly all the other capitals of value creation.
- Various environmental initiatives (installation of energy meters to track energy consumption, renewable energy at owned locations, LED lighting, water-saving initiatives, reducing and reusing packaging, plastics, paper and landfill) are aimed at reducing our impact on natural capital, often at a cost to financial capital, at least in the short term.