OPERATIONAL REVIEW

Musica

Review of the year

Musica’s performance slowed dramatically in the second half of the financial year and turnover was 5.9% lower as the decline in the CD and DVD markets accelerated. The brand was further impacted by selling price deflation of 2.4% for the year and a lack of new CD and DVD releases. Customers are increasingly price conscious in the current tough economic climate as reflected in sales of lower-priced merchandise.

In this environment Musica performed well to maintain market share despite the net closure of four stores.

While CD and DVD sales declined by 13.8% and 9.4% respectively, Musica achieved good growth in the newer merchandise categories. Sales of technology and lifestyle merchandise, which includes digital accessories, headphones and portable speakers, cellphones and airtime, increased by 60.7%.

Despite experiencing price deflation, gaming sales grew by 11.4%, driven mainly by the launch of new hardware including PlayStation Move, Xbox Kinect and Nintendo 3DS.

The Clicks ClubCard accounted for 44% of sales in Musica while the basket value of ClubCard holders was on average 25% higher than non-holders. Cardholders earn points and cash-back vouchers on Musica purchases and these are redeemable in Clicks stores.

	Sales	Contribution	Market
	change	to sales	share*
Performance summary	(%)	(%)	(%)
CDs	(13.8)	48	41
DVDs	(9.4)	28	27
Gaming	11.4	17	9
Technology and accessories	60.7	7
* Aquidneck/GfK.

During the year five new stores were opened and nine stores closed, with the chain ending the year on 148 stores.

An automated merchandise replenishment system was introduced and the initial benefits include improved management of product quality and ranging for stores, and a headcount reduction in the merchandise department.

The strength of the brand is reflected in customers again voting Musica as the coolest music retailer in the Sunday Times Generation Next Awards 2011 and as the best music store in The Times/ Sowetan Retail Awards. Musica received a grand prix award in the interactive communications category at the annual Loerie Awards for marketing and advertising.

Strategic focus areas for 2012

Entertainment retailing will remain challenging as downloading continues to impact the physical formats.

Musica continues to be reshaped to maintain profitability and cash generation. Decisive action has been taken by management to improve terms with suppliers and to adopt a robust approach to lease renewals with landlords on both base rentals and lease duration. A further 10 stores will be closed in the new financial year.

Further space will be allocated in stores to the growth categories of technology, accessories and cellular.

ClubCard participation will be increased through exclusive offers to drive sales in Musica and to enhance loyalty to the brand.

Management will continue to focus on tight control of expenses and working capital and the outlook for performance is reflected in the medium-term operating margin target being revised to 3% to 4% (previously 5% to 6%).