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  Economic
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Impact/risk |
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Comment |
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Response |
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General economic
conditions, including
certain political, social and
environmental conditions
in South Africa |
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In an economic downturn consumers are forced to limit
expenditure, particularly on non-essential needs. This could have an
adverse effect on revenue and profitability.
The depressed interest rate environment affects the revenue
earned from treasury.
While South Africa features a highly developed financial and legal
infrastructure at the core of its economy, it has high levels of
unemployment, poverty and crime. Particular considerations
include how the Government addresses political tensions and social
and economic problems, the extent to which its efforts will be
successful, the political, social and economic consequences of such
efforts, and the effect on businesses of the continuing integration
of the local economy with the economies of the rest of the world, in
particular Brazil, Russia, India, China and South Africa. |
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It has been the group’s experience over the last 10 years that the diversity of its mix of products and
services and distribution channels has limited its exposure to economic downturns. The bulk of the product
mix consists of goods, the demand for which thus far appears inelastic. Consumers appear to be unwilling to
reduce spending on utilities, transport and even airtime. In this regard the group’s products are bought
rather than sold.
The group has negotiated early settlement discounts and bulk purchase discounts with its suppliers to
compensate, in part, for the loss of interest revenue from treasury activities.
Blue Label believes that economic sentiment is positive in the areas in which it operates. In the past it has
taken courageous decisions to terminate business activities in areas where returns have not delivered
appropriately when compared to other competing opportunities. The group continues to consider expanding
its operations beyond South Africa, India and Mexico with particular focus on other emerging markets,
typified as large and fast growing with low penetration markets. |
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Changes in regulatory
environment |
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Consumer Protection Act (CPA) governs suppliers and
consumers in relation to, inter alia, the supply of goods and
services in the ordinary course of business for consideration;
the promotion of goods and services and the promotion of the
supply thereof in South Africa. This act impacts the majority of
the group.
Protection of Personal Information Bill restricts the ability to use
personal information of individuals. If promulgated it could affect
the outbound sales campaigns of the group’s call centres and
the revenues earned by Blue Label Data Solutions. |
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The group has made a number of changes to its business practices to comply with the provisions of the
CPA. The most significant changes pertained to the group’s prepaid vouchers. In terms of the CPA these
vouchers will not expire until the earlier of the date of redemption or three years after the date of issue. This
requirement necessitated the upgrade of the group’s technology to allow for vouchers to remain valid for a
period of three years.
Revenues earned from the Solutions segment are not significant to overall group income.
Regulations under the bill are unclear and could exempt certain activities. The group’s call centres and data
aggregator have developed affinity campaigns in which permission is obtained to use personal information.
The call centres continue to pursue inbound campaigns which will not be affected by the proposed legislation.
The group’s data aggregator has renewed its certification from the Direct Marketing Association that it
adheres to best practice. |
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Financial
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Impact/risk |
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Comment |
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Response |
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Margin compression |
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Network operators determine the margins to the prepaid airtime
distribution channel. Blue Label may not always be able to pass on
to the retailer or customer any margin compression enforced by
the network operators. |
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Management is confident that based on the terms of the group’s customer agreements and business model
it should continue to be able to pass on any margin compression to the distribution channel. Any margin
compression is also likely to force inefficient distributors out of the distribution chain, a trend welcomed by
management. |
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Reduction of inter-connect fees |
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Parliamentary intervention has reduced cellular inter-connect
fees, and is likely to promote further decreases in the
immediate future.
This, in turn, has led to some lowering of cellular airtime prices. It
is expected that downward pressure on the networks’ prices is
likely to continue. Lower pricing may lead to both margin
compression by the networks and decreased spend by consumers. |
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The group continues to monitor the situation, but believes that it should be able to pass margin compression onto
the distribution channel. At this stage it would appear that networks are passing on the majority of the benefits of
lower pricing to contract subscribers. The decreases in prepaid call rates that the networks have thus far
implemented have not affected group turnover.
It is management’s view that prepaid customers currently consume less airtime than they require, but as much as they are able to afford. It would therefore appear likely that prepaid consumers’ spend should remain the same, but consumers will receive more value for that spend. |
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Non-exclusivity of various
supply, distribution and
WASP agreements |
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Certain of the group’s supply, distribution and WASP
agreements are non-exclusive and can be terminated at
relatively short notice. This type of agreement is standard
in the industry. |
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Management is committed to growing the group’s footprint by increasing its points-of-presence (touch points)
and owning the entire technological value chain, which drives the group’s products and services. Presently
the group’s points of presence number some 140 000 in South Africa alone and nearly 1 million across the
world. This has placed the group in a strong position in the distribution chain.
Relationships with and service to suppliers and customers are of paramount importance. The consolidation
of the South African distribution segment allows for an increased focus on client relationships and
management and specific CRM initiatives have been implemented. |
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Elimination of the middle
man |
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In most industries a wholesaler is at risk of being eliminated
from the supply chain if the supplier elects to supply the
customer directly. |
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From inception, the objective of the Blue Label group was to become a one-stop destination for the supply
and distribution of all of the networks’ offerings. This would provide both convenience and efficiency to the
retailer and customer. Furthermore the technology and footprint developed by the group allows retailers to
earn additional revenue by the introduction of additional products. This would make it difficult to
disintermediate the group.
No single network can offer this complete solution.
The introduction of the sale of prepaid electricity, and its phenomenal uptake in South Africa, would seem to
be proof that it remains difficult to eliminate the middle man, who continues to rely on Blue Label as the
neutral aggregator in both the prepaid airtime and electricity markets. |
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Disaster recovery and
continuity of business |
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The group has developed proprietary technology supporting the
rollout of its bouquet of products and services. The group’s
infrastructure connects into some of South Africa’s major
banks, utility companies and telecommunication operators and
switches both debit and credit card electronic funds transfer
transactions and e-token products for some of the country’s
leading retailers and petroleum companies. The effective
continuous operation of this infrastructure is critical to the
company’s service delivery. |
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Management recognises the importance assigned to IT in its corporate governance systems.
The management team in the Technology segment is being strengthened. The group has compiled a formal
Business Continuity and Disaster Recovery Plan which provides guidance for the restoration of Information
Technology facilities. The plan describes the IT framework and procedures to be activated in the event of a
disaster. The major goals of the plan are to:
- minimise interruptions to the normal operations;
- limit the extent of disruption and damage;
- minimise the economic impact of the interruption;
- establish alternative means of operation in advance;
- train personnel with emergency procedures; and
- provide for rapid restoration of service.
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Social
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Impact/risk |
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Comment |
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Response |
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Inability to attract and
retain key and qualified
employees in whom
intellectual capital
resides |
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The group’s future performance will depend largely on the
efforts and abilities of its key personnel and employees. The
existing management at Blue Label pioneered the mass prepaid
market and established the group’s business model. Blue Label
future success will depend, in part, upon its ability to continue
to attract, retain, motivate and reward personnel, including
executive officers and certain other key technical employees. |
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The joint chief executive officers and co-founders, are both substantial shareholders and are passionate and
dedicated to the sustainability and growth of the group.
Key members of the management team are bound by service and restraint agreements and in many
instances are shareholders of Blue Label. Executive management has implemented talent management and
succession planning in key areas of the group. Appropriate skills transfer activities are ongoing through on
the job and other training programmes.
The Remuneration and Nomination Committee has approved remuneration policies which include long-term
retention benefits and incentives. In addition, key components of the group’s remuneration policy have been
adjusted to focus on retention. |
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