Discom

Positioning

Discom aims to be the country's leading urban lifestyle brand specialising in African beauty and decorative homewares. The African beauty component focuses on ethnic hair care, which is supported by homeware merchandise and small electrical appliances. Discom's niche differentiates the brand from Clicks, which is positioned as a health and beauty-focused drugstore. Price continues to be a key factor in Discom's market and the brand strives to provide value for money through quality merchandise and constant innovation.

Review of the year

Sales increased by 11.0% to R975 million, driven by strong growth in higher margin merchandise categories of toiletries, electrical appliances and audio/video equipment. Comparable store growth was 9.2%.

The brand continues to be well managed, evidenced by improved margin, reduced shrinkage and expense growth being contained below sales growth.

This resulted in Discom recording its best operating profit performance for the past five years, lifting earnings from R4.2 million to R28.9 million.

The ongoing growth of higher margin categories, together with a decline in low-margin categories, has resulted in a shift in the mix and contributed to a higher overall margin.

The declining shrinkage trend in Discom is the result of several years of actively managing the challenge. This has included tightening front shop access to stores, heightened staff accountability, stricter employment screening and a concerted effort to build staff morale in the brand. Electronic article surveillance has been installed in some 60% of stores and this should be increased to around 90% in 2006.

Discom's strategy of dominating the ethnic hair care market continues to pay dividends. In the wet product segment, the brand offers the most extensive range of products in the market while in the dry hair market, which includes hair extensions, braids and wigs, Discom not only leads in size, but also fashionability, innovation and customer experience.

One of the major marketing campaigns undertaken during the year in support of the hair care positioning was the Discom Hair Africa Extravaganza at the Sandton Convention Centre, which once again received a highly favourable response from consumers and suppliers.

Discom showed a net increase in trading space for the first time in several years, opening 20 new stores and closing 14, including the relocation of four stores to improved quality trading space. Securing sites in mall stores remains a challenge for Discom, although some progress was made in these locations over the past year.

The growth in spending power of the middle market in South Africa has resulted in Discom's market segment becoming increasingly appealing to other national retailers, and competition continues to intensify.

Financial highlights and statistics

Strategy

The Discom brand has been rejuvenated and the focused strategy is ensuring that the business is realising its true potential. In the year ahead, Discom plans to further differentiate its core merchandise categories, as well as enhancing the product mix in new locations, which include mall stores.

Colour cosmetics and cosmetic accessories continue to offer attractive growth opportunities and the strategy includes extending the cosmetics offering to a larger number of stores in the year ahead as well as introducing private label brands and upgrading store displays. The customer experience in-store will also be upweighted with the introduction of African beauty consultants in the top 60 stores.

Growth in electrical appliances, electrical grooming and audio and video equipment is expected to continue, with the revamped private label electrical brand due for relaunch in December 2005.

Discom will also be enhancing its range of health and wellness products, which includes vitamins and food supplements.

The inland region, which accounts for 48% of sales but over 60% of operating profit, will be further expanded, with six new stores planned for the region in the 2006 financial year.

Prospects

Discom is expected to continue on its strong growth trend and realise further benefits from the brand's restructuring, while seeking to improve margin in order to enhance profitability in the year ahead.