Conversation with Joint Chief Executive Officers
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Mark Levy and Brett Levy
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BLUE LABEL IS A DISTRIBUTOR OF DIGITAL GOODS, UTILISING ITS VIRTUAL RAILROAD SYSTEM
We continue to deliver our strategic objective of distributing electronic tokens of value in emerging markets. The distribution of physical and virtual tokens is achieved through the rollout of Point of Sale (POS) devices and is supported by sophisticated proprietary back-end technology. We are strategically expanding our range of products and services, while simultaneously increasing our distribution footprint.
In South Africa, we distribute a variety of categories of products and services: prepaid airtime, starter packs, data, prepaid electricity and water, ticketing for events, sports and transport, lotto, and financial services, such as merchant acquiring, bill payments and money transfers. In a replication of the South African business model, we operate in India and Mexico.
Blue Label is a lifestyle enabler. Through the deployment of a myriad of different types of touch points, we deliver products and services in an effective and efficient manner, allowing consumers to transact when and where they choose. We facilitate convenient and suitable payment types – be it cash, EFT, debit and credit cards.
Blue Label has built a virtual railroad with our proprietary platforms, comprising AEON, Postilion and AMS as the enabling carrier for transactions, which in this analogy are the tracks and locomotive. Each additional product is another carriage on the locomotive. Incremental costs are minimal, because the heavy lifting to establish the distribution network is already in place, which results in profit margins filtering straight through to the bottom line. The speed of launching and delivering new products is unparalleled.
The importance of distribution is that the operator of the last mile of the channel determines merchandising techniques and pricing, as the POS terminal is located in the last mile of the channel.
HOW WE OPERATE
The business model is based on strategic partnerships, underpinned by long-term contracts. Operations are grouped into four main business segments: South African Distribution, International Distribution, Mobile and Solutions. The South African segment remains the predominant contributor to the Group’s profitability, derived mainly from the prepaid airtime, starter packs, data and the electricity businesses. The strategy of the International segment is to pursue growth opportunities across our global footprint, presently though an associate in India and a joint venture in Mexico.
Income is derived from three main pillars: the sales of commodities (such as airtime, electricity, water and tickets), annuity transactions (from our SIM card base, contractual Vodacom starter packs, location-based services and other subscription services) and interest earned on surplus cash generated.
The commission structure is based on long-term contracts with the network operators, covering payment terms, annuity and commissions receivable. The commissions received are shared with merchants in the distribution channel.
THE EVOLVING TELECOMS LANDSCAPE
There are a number of trends evolving in the industry worldwide, which influence our strategy and our operations.
South Africa: The emphasis on voice communication is rapidly moving to m-commerce as trends in data consumption increase. We do not differentiate when selling airtime, be it for voice or data consumption.
The growth of data will be infinite, as more and more data or content becomes available and is downloadable 24/7, exceeding consumer time spent on voice. Blue Label, as a South African distributor, has enviable lines of sight into a number of sectors, such as banking, retail, consumer and telecommunications.
We observe a changing landscape:
| • | telcos are becoming banks – with money transfers, while banks are becoming telcos – through aligning with MVNOs, |
| • | competitive pricing among the MNOs, |
| • | consolidation through M&A activities – infrastructure, co-location and radio access sharing among the networks – spurred by the realisation of the costs involved in upgrading 4G to 5G connectivity, |
| • | margin compression due to this competitive pricing and consolidation, |
| • | the rise in the economic status of internet enabled millennials (people born after 1980), |
| • | the exponential availability of inexpensive smart phones, as the growth in mobile data, e-commerce and m-commerce continues to outstrip that of voice, and |
| • | the intensified interest in South Africa as a destination by international mobile phone producers. |
The focus of the MNOs is forever evolving. In 2003 their goal was to maximise the number of base stations in service. Soon thereafter followed the chase for subscription numbers, which led to massive penetration of users and which now touches 144% of South Africa’s population, on inclusion of multiple SIM cards per user. Around 2014, the MNOs recognised the importance of introducing product and service distribution into the distribution channel. The importance to the Group is that we manage the last mile of the distribution channel as well as the products and services that are introduced.
India has a population of about 1.3 billion people, of which approximately 65% are unbanked. The new government continues to create a positive economic environment, with the Reserve Bank of India driving its financial inclusion programme.
Oxigen Services India continues to benefit from the country’s exponential growth in e-commerce and m-commerce, as the business capitalises on its strategic shift into financial services. In this dynamic market, recent M&A deals have reinforced the value of Oxigen’s distribution network and banking enabled infrastructure.
Mexico has a mobile phone penetration of around 67% in a market serving a population of approximately 121 million.
Structural and fiscal reforms have resulted in increasing competition among the networks. In September 2014 Blue Label Mexico implemented a strategic decision to become a multi-carrier – for all networks. Although this initially came at a cost, as the dominant player immediately reduced commissions, which resulted in an exacerbation of losses, it has taken us approximately nine months to recover. Only recently has the reduction been more than offset by an increase in both terminal activity and commissions earned from the other carriers. Our stated game plan is heading in the right direction to yield some of the anticipated returns in order to mitigate future losses.
MEASURING OUR PERFORMANCE
We do not gauge revenue as our only measure of performance. We believe growth should also be measured by gross profit achieved. Due to the nature of and the methods in which we sell and distribute our products and services, we find ourselves acting as an agent more often than not. This results in only the commission earned and not the face value of the sale being included in revenue. These products and services include electricity, ticket sales and PINless products. If the gross value of PINless products were to be included in the revenue line, Group revenue would have effectively increased by 17% as opposed to 13%.
Revenue increased by 13% to R22 billion and was achieved organically and through contributions made through the acquisitions of RMCS and Viamedia. Gross profit increased by 22% to R1.64 billion supported by margin increases from 6.96% to 7.46%.
Our financial position remains robust and liquid, with accumulated equity increasing to R3.9 billion, net of accumulated dividends paid to date totalling R704 million. Net asset value equated to R5.79 per share. Operations continue to generate strong levels of cash, enabling the group to deliver its strategy, as well as to conclude strategic acquisitions and to declare dividends to shareholders.
DEEPENING OUR PRODUCT RANGE
TicketPro is South Africa’s second largest ticketing solution for transport and events, such as sports, entertainment, concerts, lifestyle shows and expos. TicketPro’s focus this year included increasing its market share, gaining brand recognition and striving for market differentiation, through product and technology innovation.
Prepaid water: In taking product to the population, we are replicating the successful prepaid electricity model in the distribution of prepaid water e-tokens. In this regard, there is continued dialogue between ourselves, municipalities, water boards, water meter suppliers and service providers, township developers, closed communities and other special interest groups, with a view to maximising on this vast potential. We have a long runway ahead as awareness campaigning continues, while meters and technology at municipalities are upgraded. It is clear that our proprietary technology is a differentiator in this market.
RETAIL STRATEGY IS UNFOLDING
The Group continues to capitalise on its existing base by identifying opportunities to further the footprint in the formal retail sector in South Africa. In 2014 the acquisition of RMCS afforded us access to new distribution channels for the sale of both RMCS and the Group’s ranges of products and services, principally to the Edcon Group.
This year, in a strategic partnership with the Edcon Group, we established the Edgars Connect stand-alone stores. Edgars Connect retails cellular products and services, hardware and accessories and any products requiring a SIM connection. Its focus is towards serving the “Internet of Things”.
STRENGTHENING OUR FOCUS ON MARKETING
We are evolving our marketing approach to ensure that we deliver technology, products and services which are required by our merchants and consumers. Extensive research and perception studies assist us in identifying new opportunities in order to entrench our distribution footprint in formal retail, independent, petroleum forecourts, corporate or low-cost device channels. These results enable us to develop tailored service offerings to merchants and consumers, leveraging our unique strengths to do so.
TECHNOLOGY IS THE CORNERSTONE OF THE BUSINESS
We have established that successful product launches are underpinned by strong distribution capabilities, especially ones that can cater for ever-changing levels of sophistication in modern products and services. We continue investing in technology to ensure our distribution platforms perform optimally across the Group.
Acquisitive and organic growth enables us to consolidate and optimise various technology landscapes, as well as share technology skills, know-how and resources, locally and across our international operations.
We have embarked on implementing a Group-wide Information Security Management System in order to enhance current governance, compliance and security processes. This also takes cognisance of relevant changes in legislation, such as POPI and CPA.
ENTREPRENEURS IN THE CORPORATE ENVIRONMENT
As entrepreneurs operating in a mainstream business environment, we continue striving to retain and instil our “can-do” ethos and creative culture across the Group:
| • | our achievements in building the Group are unique, |
| • | the Blue Label Values (see page 3) were selected and ranked by the staff. We celebrate achievements by embodying our values in a charter that ensures their longevity in our working culture, and |
| • | when launching new products and services, we consider the needs of the consumer and then take a 5-P approach: preparation, product and packaging, pricing, public relations & promotion, and position in market. |
We believe that entrepreneurs and entrepreneurial spirit are ageless, timeless and tenacious.
| Brett Levy | Mark Levy |
| Joint Chief Executive Officers |
23 October 2015