William Hughes relates Impahla’s value creation story

This has been a year of significant change for Impahla. Last year we reported on our ten-year journey and our growth from 60 to 450 employees, from producing T-shirts to manufacturing high-class sportswear with the latest technology in terms of process and equipment.

A glance at our annual reports over the past number of years will reveal that first and foremost among our key business drivers is the servicing of our customers. Indeed, we took this so seriously that at one time we enjoyed an exclusive relationship with PUMA in South Africa – we produced exclusively for PUMA, and PUMA ensured Impahla had continuous orders. This all-eggsin-one-basket strategy worked while we built and strengthened our relationship with PUMA.

But its weakness as a business model has been revealed over the last two years. In an emerging market and under dynamic leadership intent on serving and growing its customer base, the relationship between manufacturing supplier and brand has to be seamless, flexible and, above all, trusting. Over the years, Impahla assisted PUMA ZA to grow its business by reacting quickly and cooperatively to a highly dynamic and constantly changing order pipeline.

On occasion, samples would need to be mocked up and delivered, small orders made to attract new clients, and rush deliveries made to sports teams left stranded by other suppliers (see box). This principle is only effective in a totally transparent and trusting relationship between supplier and customer. I define good business as being the creation of value for our customers and our stakeholders through close and co-operative relationships.

This philosophy has always been, and will always be, a key principle and foundation of our business as we create new relationships going forward. On Ronald Rink’s retirement from Puma at the end of 2013, we decided to approach him to take up the position of Chairman of Impahla, with a 10% shareholding in the business. He took up this post from 1 January 2014 and has already added immense value assisting us to grow our own marketing channels and brands, described here below.

Growing our own marketing channels and brands – BLK and Linebreak In 2014, we were approached by the previous licensee of BLK South Africa to manufacture the Cell C Sharks replica jerseys. The previous licensee then experienced financial difficulties and was not able to fulfil its contractual obligations, including payment for producing the replica jerseys.

WRS (World Rugby Specialists), the BLK brand’s principal, then offered the BLK sub-Saharan African licence to Impahla, including with it the obligation (and opportunity) to sponsor the Cell C Sharks Rugby Franchise.

Following a business feasibility study of this opportunity, the Impahla board decided to take up the challenge and Impahla became the official sub-Saharan African licensees from 1 January 2015. While there is no capital cost to acquiring the licence, the financial obligations include royalties to the principal and the Cell C Sharks Franchise, as well as the cost of sponsoring the Cell C Sharks Franchise, at R3.8 million (for the provision of kit) and R2.6 million cash in return for advertising and promotions.

Just before the end of the financial year (February 2015), we were also granted the sub-Saharan licence to manufacture and market Linebreak, a compression wear product. Crucial to both these opportunities is that we can manufacture the products locally. This puts us in the position where we can react quickly to a highly dynamic and demanding marketplace –a key service differentiator.

This development has fundamentally changed the nature and focus of our business from being a dedicated business-to-business supplier of product, to a company that develops the retail market for brands it represents as the exclusive agent in sub-Saharan Africa. And this is why you will notice on reading this report that we have added a sixth business driver to our table of material issues: ‘Growing our marketing channels and brands – BLK and Linebreak’.

Broadening our customer base

While we are growing our marketing channels and brands, we are also expanding further on our fundamental business principle – building existing and new business relationships. We made our name as a business-to-business supplier to one brand. Now our focus is on developing a broader business customer base of high-value brands.

Thus we began to respond more proactively to enquiries and are pleased to report that we are fulfilling orders from adidas, Asics, Merrell, Uzzi (Truworths) and the TFG Group, among others. While orders from PUMA have dropped off (largely because of our impaired relationship and the reduced margins on small orders), the brand itself remains a valued customer, accounting for some 29% of our production at year end.

A case of disrespect

Our most important value underpinning the way we do business with external stakeholders and internal stakeholders alike, is respect. This is supported by our Code of Conduct, which is properly entrenched in our company, both visibly, in the way we communicate, and in the way we behave. Sadly, the company experienced an incident in the year under review whereby an employee was insulted by one of our executive directors, Lena Jansen. Due process was followed by the company in dealing with this incident, the result of which was the dismissal of Lena Jansen as an employee and executive director, though she still retains her status as shareholder with 6.75% shareholding in the company (as at the time of publication).

This event has been a severe blow to the company, to me personally and indeed to all concerned. A key finding of our employee satisfaction survey was that employees regard Impahla as their family. I interpret this to mean a place where each individual can feel they are welcome, that they belong and that they are respected for just who they are. Therefore, my message to all our employees, suppliers, customers and other business partners is that we need to exercise the utmost respect for one another. Kind thoughts, words and deeds have a way of multiplying, so that we can become stronger as a family – the family of the beautiful flame lily that is our company logo.

Further growth

Our revenue increased 34% to R101.5 million (2013/14: R 76 million, 2012/13: R 61 million) with most of our product categories showing good growth, despite the significant reduction in business with PUMA. Particular highlights include our fabrics business, which doubled in turnover to R26 million, and the collars and trims product line, which showed 84% growth to R4 million. Both these businesses are part of our supply chain and therefore offer the company the security that they can also stand on their own.

We expect that in the future, the BLK and Linebreak brands will steadily use more internal products, for which demand the production team is now well positioned. The blank garments business line reduced this year to the point where maintaining stock did not justify the overhead. The 104% increase in turnover reflects our efforts to sell the stock and thus free up production space and capacity. Printing and embroidery, which reduced by 18%, has become more of an added-value business integrating within our supply chain.

Not only did revenue grow, but so did our profit. While we have not yet recovered to the operating profit margin of 9% that we achieved in 2012/13, we nonetheless achieved a 7% operating profit margin, well up from 2013/14, when we achieved a mere 1.8% operating profit margin. Likewise, our return on capital employed recovered from 8.5% last year, to 20.8%, though still shy of our performance in 2013 of 36.3%.

The capital cost of acquiring and supporting BLK, Linebreak and the Sharks Franchise was funded partially from an IDC grant (R3.0 million) and partly from cash, which increased our overdraft to R5.5 million, double the R2.8 million deficit of the year before. Funding the rapid growth of our business is a challenge that the current shareholders are aware of and are prepared to meet. Various options are being considered in order to ensure that we can support our ambition to grow our own channels and brands.

Bringing professionalism to our management structure

Following our rapid growth, as well as the modern demand for high-tech production that can respond rapidly to ever-shorter lead times, we realised that our current management team was too small and insufficiently qualified for the task. With the loss of our production director, Lena Jansen, we made the decision to appoint a new manufacturing director with overall responsibility for apparel production across all sites, as well as a professional planner, whose responsibility will be to plan and manage production schedules. Our aim is to deliver product against orders, on time, in full, at the right price and at the right quality.

Reflecting the changing nature of the business, we have opened an office at Golf Park, the business Mowbray, in order to grow and promote our BLK/Linebreak business. I have moved across to this facility, freeing up my capacity to focus on growing our own marketing channels and brands, as well as creating ‘space’ for our new manufacturing director to take full control of our apparel production.

Following the doubling in staff numbers in 2012/13, we have kept our staff reasonably stable, concentrating on rationalising production lines and adjusting to an ever changing mix in product demand. While our workforce is still more than double the complement three years ago, natural attrition saw an 8% decrease during this year.

We continue to work towards implementing a workers’ trust scheme at Impahla. Following on our initial advances to the Industrial Development Corporation (IDC) in the previous year, we again sought to find a way in which the IDC could assist Impahla in funding this structure. While we have not yet achieved a deal, we are nonetheless committed to establishing such a trust by the close of the next financial year.

Remaining transparent

Transparency is vital to the sustainability of Impahla, and we credit our success to our inclusive and transparent business model. In this report, we discuss our key risks and opportunities, and communicate how we run our business. It is written as much for ourselves as it is for our external stakeholders, for it serves as a yardstick against which we can measure and reflect on our progress from year to year.

I’d like to thank the board for its leadership and guidance, our management teams for their commitment, and all our employees for their continuous hard work – together making Impahla a successful business and a rewarding place to work. I look forward to another successful year and, as a team, overcoming the challenges we will face along the way.