Conversation with Joint Chief Executive Officers

Blue Label is more than a telecoms company

When we established Blue Label in 2001, we considered ourselves as virtual distributors – rolling out a myriad of different touch points, enabling the distribution of secure electronic tokens of value and the delivery of numerous financial services through that platform.

We are a one-of-a-kind South African company, now distributing prepaid airtime and electricity with a growing number of financial services on offer, e.g. merchant acquiring, money transfers and remittances, transport and event ticketing, loyalty and reward programmes, while gaining a footprint in India, Mexico and the UK.

We are able to take first-world products and services to third-world consumers and facilitate transactions in a manner that is convenient and suitable to them – be it cash, EFT or debit and credit card. It is these capabilities which differentiate us as a lifestyle enabler to consumers.

The prepaid business model

The word prepaid is often perceived as a poor man’s mechanism for the purchase of goods and services. The convenience and budgetary control of this method of transacting has extended to all classes of the economic pyramid.

We continue to observe that prepaid is a convenient method of payment for consumers. They are now able to purchase Blue Label’s products anywhere and anytime. Prepaid provides for forced discipline in budgeting, ensuring no surprises at month-end, as is so often the case in the post paid world.

The term prepaid has evolved into words such as ‘pay-as-you-go’ or ‘capped’ – the latter particularly favoured in Australia and the USA – mainly to detract from the stigma created by the word prepaid. Another development is ‘hybrid’, which is post paid with a specified monthly limit, and when exhausted, is immediately sequenced by a prepaid top-up for the same goods or services.

The key to distributing products and services in emerging markets is to ensure that they are available as a prepaid offering, not necessarily as a replacement, but as an alternative to post paid. This empowers a whole new group of consumers and our distribution to them is the cornerstone of our business.

Blue Label is a virtual railroad delivering prepaid goods and services

The theme of this year’s integrated annual report is around emphasising the important role that distribution plays in the economy and how we leverage the ‘last mile’ of the distribution channel. Whoever manages the ‘last mile’ of the channel, actually owns the whole distribution channel. Since the point of sale terminal is always located in the ‘last mile’, the person managing it decides what products and services may be sold from it.

Our business is about the distribution of secure electronic tokens of value and services, and can be compared to a virtual railroad. If a product can be digitised, it can be distributed by us. We commenced building our virtual railroad with the proprietary AEON platform, as the enabler for transactions, which in this analogy, are the tracks and locomotive. Each additional product is another carriage on the train. Incremental costs are minimal, because the heavy lifting to establish the distribution network is already in place, resulting in profit margins filtering straight to the bottom line.

Growth in operating performance – South Africa

The South African business remains the predominant contributor to the Group’s revenue and profitability, with prepaid airtime at the core.

Today, net profit is derived from three main pillars: the sales of commodities (such as prepaid airtime and electricity), income from annuity transactions (from our SIM card base, contractual Vodacom starter packs, and location-based value adding services and subscriptions) and interest earned on surplus cash. When we listed six years ago, interest earned contributed significantly to profitability. The hybrid of a piecemeal decline in interest rates and additional product offerings has reduced the interest component of profitability to 4%.

Over the years we have aggressively innovated and adapted our business model to prevailing circumstances. Examples are the introduction and rapid uptake of prepaid electricity, which now accounts for 9% of Group gross profit. Our cash resources have enabled us to capitalise on bulk purchasing opportunities, yielding discounts in excess of interest rates.

Approximately 84% of our revenue is generated from the informal sector, made up of independent stores, wholesalers, spaza shops, and mom & pop stores. We serve over 100 000 of these types of stores through focused distribution, whilst further customers are reached via a fleet of trucks and accompanying foot soldiers. The remaining 16% is derived from the formal sector, principally the large multi-channel retail chains.

International distribution

Our operations in Mexico and India are both rolling out high-specification devices to meet financial services requirements in each market, particularly for commercial banks and merchant acquirers.

In Mexico our co-shareholder Grupo Bimbo, one of the world’s largest bakeries, will enable Blue Label Mexico to reach its roll-out target of 123 000 POPs by mid-2014 calendar year, through the utilisation of their distribution capabilities to their vast customer base. We expect that further capex will be required to support this extensive roll-out.

As the telecoms recharge business in India is characterised by wafer-thin airtime margins, the shift in focus is towards becoming a versatile payment solutions provider, underpinned by arrangements with the State Bank of India, ICICI Bank, Yes Bank, Union Bank and the National Payments Corporation of India, amongst others.

Revenue, gross profit and cash

We should not see our increase in revenue as a proxy for the Group’s growth. We believe growth should also be measured by gross profit achieved, as there is an increasing trend for us to act as an agent on sales of certain products. This means that only the gross profit or commission earned, and not the face value of the sale, is included in the revenue line.

The distribution of “PINless top-ups”, as an alternative mechanism for the vending of prepaid airtime, continues to escalate. This shift in consumer buying patterns impacts on our treatment of the revenue generated thereon, as only the gross profit earned on such sales is included in revenue (and not the product’s face value). The same approach applies to how we account for electricity sales, where we act as the agent on behalf of the utilities and not as principal. Only the commissions earned and not the face value of these sales is included in revenue. If the gross sales in PINless airtime was imputed into revenue, the increase in revenue would have equated to 6% for the year.

Gross profit increased by 5% to R1.3 billion supported by gross profit margins increasing from 6.45% to 6.70%.

The balance sheet remains robust with reserves accumulating to R3.2 billion.

Strategic acquisition and alliance campaigns continue

In delivering on our stated M&A strategy, the Group acquired Panacea Mobile in two tranches, the first for 51% of the company during the course of the financial year with the balance of 49% shortly thereafter. A majority stake was purchased in Blue Label Engage. Recently we purchased TicketPros, a ticketing engine, which heralds our entry into event and transport ticketing. When combined with NFC, loyalty and reward cards, ticketing makes a powerful tool in the hands of supporters and commuters alike, whilst enhancing marketing channels for sponsors and brand owners. We continued purchasing prepaid airtime bases and also acquired a postpaid base. These bases are highly lucrative as a portion of their annuity revenue tends to remain in perpetuity.

Cellfind entered into a strategic alliance with TeleCommunication Systems with a view to extending LBS services and expansion into new markets in sub-Sahara Africa.

Entrepreneurial vs corporate culture

We continually strive to retain and instil our entrepreneurial culture across the organisation based on the following ethos:

•	our story is well documented and so we like to share the journey of building up the business thus far;
•	we lead from the front and recognise that we are symbols of the Blue Label culture. Our joint CEO roles make it easier for us to retain visibility throughout the organisation; and
•	the Blue Label values (see page 8) were each selected and ranked by our staff. We celebrate achievements across the Group by embodying our values in a charter that ensures longevity in our working culture.

Mark Levy Brett Levy
Joint Chief Executive Officers