The Group’s strategic intent has always involved an energetic business
in which the passion and proficiency of its people and its product offering,
stand head and shoulders above the rest
Since its foundation Italtile has believed in a future of great potential and promise, providing the business could deliver with passionate efficiency and meet society’s changing needs. That this has been achieved is borne out its latest annual results which notches up its 14th consecutive year of success.

The company has consistently operated with high levels of efficiency, imbuing a sense of passion in all its stakeholders. This has translated into a work and service ethic that can point to 14 years of sustained and steady growth as testament to the high value and superb reputation of the Group’s two brands, Italtile and CTM. Both brands embrace the philosophy that their product offerings, in diverse ways, offer the best fashion tiles and accessories for their respective markets. Italtile and CTM stores, always conspicuous to their stakeholders with their prominent position on the highways and motorways of the communities they serve, proactively go out of their way to provide a one-stop shop for all comers.

If an item on an Italtile showroom floor is the only one available, and the architect finalising a house for an upmarket customer wants it, he gets it: it is taken, there and then, off the floor and loaded on to his vehicle. Similarly, CTM, serving a different segment of the market, operates at a high energy level to ensure that whatever the customer wants anywhere in South Africa will be supplied. Customers can view products in situ, ensuring that their tactile senses are satisfied with the potential application of the products in their own home or work environment. Satisfied customers create further goodwill, strengthen reputation and make for continuing good business.

The flat, open structure of management, combined with the day-to-day involvement of all members of staff (who actively share in a profit incentive scheme and are encouraged to develop in their jobs) contributes to the excitement of being involved in a winning company that satisfies all stakeholders.

The company remains the pre-eminent retailer of ceramic tiles, bathware and related products, with broad consumer appeal resulting in a steady stream of consumers scanning its showrooms for products to meet their needs. This range of appeal extends from those at entry level and the DIY market, who are more likely to visit a CTM shop, to the niched, premium end and aspirational sector of the market that will probably eye the Italtile brand. That makes for the successful, vibrant company that is Italtile, with its brands spread throughout the country, Australia and in parts of the rest of Africa. The 93 CTM stores in South Africa, Africa and Australia, and eight Italtile stores in South Africa, are beacons of potential architectural applications that will speak to future generations of the fashion of tiles and ancillary products in use at the start of the 21st century.
System wide turnover for the Group rose 25%, from R1,57 billion in 2004 to R1,96 billion, while Profit before Taxation increased by 29% to R285,2 million. Trading profit increased 28%, from R213,7 million in 2004 to R274,5 million in the year under review.

The Group’s overall development has clearly not occurred in a vacuum. Its strategic intent has always involved an energetic business in which the passion and proficiency of its people and its product offering stand head and shoulders above the service and wares of the increasing numbers of competitors that have joined the market now that its potential has been recognised. This shows clearly in the positive approach to business and confidence in their products that exudes from every one of the Group’s outlets in the world. The careful and considered planning shows as well.

In the prior reporting period the Group had again outlined its strategic intent to ensure that it remained keenly competitive by upgrading its product and service offering to consumers. Running through this strategy was a seamless thread that saw the Group’s profile evolve from a niche tile merchant to a specialist home-enhancement fashion retailer, offering a comprehensive suite of tiling and bathroom products, available to consumers in an aesthetically pleasing shopping environment that contribute to an elegant and memorable shopping experience. This year’s results are a tribute to the success of that strategy, since increased volumes out of existing stores simultaneously drove growth. The emerging trend by consumers, as they graduate across the Group’s product offering to acquire a wider range of higher priced goods to enhance their lifestyle, also stimulated growth. The Group persisted with its policy of continually improving existing outlets and, in the case of new ones, building state-of-the-art stores that provided a relaxed shopping environment for every person entering its doors. People are invited into the stores to relax, enjoy and take in the wide product range. They enjoy the privilege of expert advice from staff who intimately know their product, are enthusiastic about its application and can assist in interior design or refer clients to appropriate specialists, as well as to other professionals such as architects and builders.

The acquisition, in the prior year, by the company of a distributor of taps, International Tap Distributors, and a distributor of tiling tools, Earlyworks, contributed to the growth of the bathware component of the Group. Now well integrated, these two distributors will further encourage growth.
Apart from these strategic factors, Italtile’s results were buoyed by its decision to keep prices stable, with no increases being implemented during the year under review. At the same time, the emerging black middle class and increasing numbers of previously disadvantaged people who now occupy executive positions in the private and public sectors are increasingly attracted to ceramic tiles and Italtile’s full product offering. The property and building boom further propelled the company to record levels, with growth clearly being volume driven as more people access the property market – many for the first time. Others “bought up” or made renovations to existing properties, and took advantage of low interest rates.

Retail trading conditions remained extremely positive, as the Group succeeded in harnessing the positive effects from the sustained growth surge of the residential and renovation sectors. In response to this favourable economic climate and in the face of low barriers to entry, a host of opportunistic entrants emerged as competitors, including some from non-traditional sectors such as hardware retailers and associated industry players. Italtile’s well-established infrastructure, its excellent supply chain and its keen knowledge of market needs ensured that such competition strengthened the company’s determination to best-in-class.

Restrained shipping capacity continued to impact on regular delivery of high mass, low value commodities, while the sanitaryware shortage persisted unabated. The Group was fortunate to benefit from its symbiotic relationships with traditional long-standing suppliers, thus ensuring consistency of quality and certainty of supply.

Italtile’s well-established franchising operations, and its relatively new joint venture initiatives, continued to inject eager, skilled black empowerment partners into the company. The increase in black ownership of stores reaped pleasing rewards, with the Group’s empowered franchises delivering a strong performance. This is attributable to the franchisees’ understanding of and affinity for the communities they serve. The Group’s empowerment partners will continue to play an integral role in penetrating major growth markets that are opening up as a result of the emerging middle class, whose numbers are increasing exponentially.

With an aggressive roll out of stores anticipated in the CTM brand in the next three to four years, particularly in traditional black residential areas, a further increase in the black empowerment stakes can be expected. At least two stores, in Botshobelo in Free State and Tembisa in Gauteng, are on stream to be opened in 2005/06.
As it moves into a new era of growth, the Group is aware that the aggressive competitor environment that has emerged during the past year will demand from Italtile a sustained, energetic and passionate commitment to improve its service and product offering still more. Both brands, Italtile and CTM, have a sound record of building customer loyalty. They have done this through integrity of service and the provision of attractive product offerings at keen prices. This will continue to be its focus as the Group cements its leadership position in the market. In addition, core competencies will be complemented through innovative solutions to the demands of stakeholders, and a service ethic that is unparalleled in the industry. Italtile’s existing consumers deserve no less, and the many new ones coming through its doors, based on their image of the company, will expect it.

Against this backdrop the Group forecasts a sustained growth potential in the tile and bathware markets. Nevertheless, the challenge remains to further optimise product and service offering so that the Group can benefit fully from a growing market. The Group’s offering is now firmly entrenched in South Africa as a home enhancement fashion product, with tiles being extensively used for both wall and floor cladding and ancillary products such as bath- and sanitaryware complementing the aesthetic tastes of the most demanding homeowner.

Retailers are being challenged to provide add-on value to cost conscious and discerning consumers. CTM outlets are thus focusing increasingly on the DIY market, with the toolshed inside the store providing the customer with everything he or she needs to complete any job associated with the product range. DIY videos are also in production, providing a step-by-step explanation of how the DIY aficionado should successfully tackle a job involving the Group’s products. Consistent with the philosophy for the CTM outlets in South Africa to be a one-stop shop for the consumer, the DIY focus will become sharper over time.

Italtile stores in South Africa are keenly positioned to provide innovative service and products to the prestigious top end of the market, providing a wide range of local and imported products, including top-of-the-range porcelain tiles from Italy, Turkey, China and Brazil, and ceramics from Spain and South Africa.

Running concomitantly with a spirited commitment to top quality service and products is the undertaking by the Group to continue its dynamic upgrade of stores. At the same time it is reinforcing its cost competitive policy with the introduction of a highly sophisticated computer warehousing system that will underpin and augment the franchise model. Some R25 million has been invested in a cutting edge logistics system designed to enhance distribution systems by eliminating logistics related costs and inefficiencies, and facilitating just-in-time deliveries. Implementation of the program is taking place at the time of going to press with this Annual Report (September 2005). It is anticipated that in due course this system will be extended to a wide range of suppliers, thereby enhancing the Group’s strategy of backwardly integrating its supply chain.

The tendency for people to spend more on improvements to homes and buildings in South Africa is replicating itself in some countries in the rest of Africa. The African Renaissance will be positive for the country going forward, and the Group is well positioned through its 16 CTM outlets in Botswana, Namibia, Swaziland, Lesotho, Malawi, Uganda, Tanzania and Zambia to take advantage of the growing interest in tiles and ancillary products.
The Group’s 12 Australian stores – in Queensland, New South Wales and Victoria – felt the impact of that country’s recessionary trading environment during the year under review. The three new generation stores, incorporating the modification of the traditional warehouse concept with the customer-friendly showroom, showed improved performances. This indicated an acceptance by consumers of the extended product range and state-of-the-art showroom facilities which have become a hallmark of the Group. Ongoing adverse trading conditions are likely to continue to retard growth in Australia, with no major improvement anticipated in the short term.
Italtile’s passion for holistic service and product delivery is underscored in the sustained enhancement of its property portfolio. The Group, which invested a further R100 million in property during the financial year, saw the carrying value of the combined South African and Australian portfolios rise to some R400 million. This policy will continue, particularly with an eye on the need for new investments in desirable locations that can optimally serve the growing and emerging middle class, which will be a substantial contributor to the business in the future. Amongst the challenges faced are the difficulties in obtaining appropriate properties at the right price. With the increase in the number of products available – not least the diversification of the range now on offer through the Group’s outlets – another challenge is to ensure that existing outlets can properly display goods so that consumers get a full picture of everything that is available.

Property will be developed with great care, however, ensuring that outlets are aesthetically and economically in tune to ensure the greatest productivity. As new properties are upgraded or developed the focus will be on ensuring a more streamlined operation in all shops, with the introduction of standardised layouts to improve the flow. The Group’s policy of continuing to position its outlets in prime, prominent locations continues unabated, supporting the Group’s positioning as a destination retailer offering best-in-class retailing experience.

Italtile has effectively put to bed the notion that building materials such as tiles can only be bought in warehouse environments, with its new stores showing a sparkling mix of architectural design and the passionate display of the wide range of products available. The emphasis on uniquely designed outlets for a discerning clientele paid off in the year when two new CTM buildings, in Bloemfontein and Windhoek respectively, received awards for their design.
With interest rates likely to remain at low levels in the foreseeable future and unlikely to increase to any great extent before the end of the 2006 financial year, prospects are promising. To this must be added the surge in buying power of the emerging middle class, with its discerning taste for quality and fashion – demands which Italtile can readily fulfil at keenly competitive prices. Italtile has the added advantage of an outstandingly reliable chain of supply that has been built over nearly four decades of solid growth. The Group believes that the growth that it has sustained in the past 14 years will continue, and that it will meet its financial objectives.
The loyalty of the Italtile Group’s stakeholders lies at the heart of our success. These people include our joint venture partners, franchisees, suppliers, staff, shareholders and, most of all, our customers. They all deserve my warmest thanks for making Italtile a special, dynamic environment, and for the innate challenge that comes with their loyalty, which spurs us on to ever greater achievements.
G A M Ravazzotti
Chief Executive Officer
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