G r a s

GrassRoots Business Plan
Specialists in Landscaping and Environmental Rehabilitation Services
“GARDENING HELPS
HAPPINESS BLOOM LIKE A
FLOWER “
Includes: Research & Company Valuation
BUSINESS CONSULTANTS INTERNATIONAL
Research & Corporate Finance Specialists
Associate to stockbrokers LPC Manhattan Moela
Jacques Magliolo
MD: Strategy & Research
e-mail: [email protected]
website: www.magliolo.com
Cell: 072 210 2139
Work: +27 11 656 9387
eFax: 086 640 6085
4th Floor, South Office Tower
Hyde Park Shopping Corner, Hyde Park
PO Box 41966, Craighall, 2024
9387
October 2006
GrassRoots Indicative Valuation
This Report is Private & Confidential
VALUATION
@ end-June 2007
■ R30.5 million
■ Effective pe of 3.4x
October 2006
Report by: Jacques Magliolo
+27 (011) 656 9387
Cell
:
:
Fax
:
086 640 6085
E-Mail
:
[email protected]
Web Site
:
www.magliolo.com
Address
:
4th Fl, South Office Tower
Hyde Park Crn, Hyde Park
Tel
Business Consultants International
+27 (0) 72 210 2139
JSE SMALL CAP INDEX
JSE ALL SHARE INDEX
Comment
‰
Valuation during this current bullish economic and commercial property market is favourable for
GrassRoots.
‰
A fair market value is calculated using ratios (indices of small cap market, all share, industrial and property)
and the related index of commercial listed company SABLE. This was done as there is a strong correlation
between commercial property growth and landscaping buisiness in South Africa. The full assessment of the
valuation is explained in this report. This company equates to a valuation of between R26.5 million and
R34.3 million. This value does not take into account the potential of listing the company. Under such
conditions, the company would be rated on a much higher price earnings ratio. The pe ratio used is
2.9 times (min) to a higher 3.8 times.
‰
The Business Consultants International (BCI) valuation uses a combination of industry discounted
cash flow and price earnings ratio to determine a fair and realistic value. These issues are based on
research, from global to the South African economic, property and landscaping markets.
‰
BCI believes that the company could raise capital for expansion via either private equity or a listing on AltX.
‰
It is assessed that GrassRoots should enter into an alliance with a partner to establish long-term competitive
advantage, as the South African unlisted landscaping market is highly competitive. There are no listed
landscaping businesses in South Africa.
‰
Research suggests that GrassRoots will initially lack critical mass, i.e. it should acquire a smaller competitor
to boost Balance Sheet strength and size of turnover and profit levels. The company also does not
currently meet King II criteria to make it a long-term viable entity.
‰
Correlation analysis: A strong link exists between GrassRoots and GDP growth, R/US$ exchange rate and
property sector growth. The latter is crucial and thus outlined in this business plan and valuation.
Research and advice is thorough, but BCI disclaims all liability for any inaccuracies or omissions.
GrassRoots
Business Plan Conducted by:
Contents
GRASSROOTS INDICATIVE VALUATION ___________________________________ 1
■ CONTACT DETAILS _______________________________________________________ 3
■ GENERAL DATA _________________________________________________________ 3
■ CORPORATE ADVISOR ___________________________________________________ 3
■ NATURE OF BUSINESS ___________________________________________________ 3
■ BUSINESS & CORPORATE SUMMARY _______________________________________ 4
■ ABBREVIATIONS USED IN THIS REPORT ____________________________________ 4
■ GROUP GROWTH STRATEGIES ____________________________________________ 5
■ BRIEF RESEARCH CONCLUSIONS __________________________________________ 5
PREFACE ____________________________________________________________ 12
■ REPORT METHODOLOGY ________________________________________________ 13
INTRODUCTION _______________________________________________________ 16
■ CONCLUSIONS _________________________________________________________ 18
BUSINESS PLAN HIGHLIGHTS ___________________________________________ 19
■ Executive Summary______________________________________________________ 19
INTRODUCTION TO THE BUSINESS OF LANDSCAPING ______________________ 21
■ DEFINITIONS ___________________________________________________________ 21
■ A MULTI-BILLION RAND INDUSTRY ________________________________________ 21
■ DISCUSSIONS WITH GLOBAL LANDSCAPERS _______________________________ 22
¾ Control Expenses ______________________________________________ 22
¾ Managing the Labour Supply _____________________________________ 23
¾ Marketing expedites Growth & Profitability _________________________ 24
¾ Use Good Equipment ___________________________________________ 25
¾ Collections ____________________________________________________ 25
GLOBAL & REGIONAL RESEARCH _______________________________________ 26
■ MACRO-RESEARCH _____________________________________________________ 26
■ Agriculture/gardening and landscaping _____________________________________ 27
¾ General competitive outline ______________________________________ 27
¾ Counter-seasonality to Europe. ___________________________________ 27
¾ Biodiversity ___________________________________________________ 28
Page 8 of 130
GrassRoots
Business Plan Conducted by:
¾ Marine resources _______________________________________________ 28
¾ Competitive input costs _________________________________________ 28
¾ Deregulation and market freedom _________________________________ 28
¾ Trade agreements ______________________________________________ 28
■ THE ROLE OF AGRO-INDUSTRIES (BIG AND SMALL) _________________________ 29
¾ Major research and technology trends _____________________________ 29
¾ Strategic node comparisons______________________________________ 29
■ ENVIRONMENTAL CHANGE IN SOUTH AFRICA ______________________________ 30
■ GLOBAL MARKET PROPERTY ANALYSIS ___________________________________ 33
■ HOUSE PRICE TRENDS: OVERSEAS AND IN SOUTH AFRICA___________________ 35
■ SOUTH AFRICAN MACRO-ECONOMIC & HOUSEHOLD SECTOR OVERVIEW ______ 39
■ HOUSE PRICES IN 2005/6 _________________________________________________ 39
¾ Middle-segment housing_________________________________________ 39
¾ Affordable housing _____________________________________________ 40
¾ Luxury housing ________________________________________________ 40
¾ Regional house prices___________________________________________ 40
¾ Some recent provincial trends include:_____________________________ 42
¾ Building costs and new and existing house price trends ______________ 43
¾ Land prices____________________________________________________ 44
¾ Mortgage finance _______________________________________________ 44
¾ Affordability of housing _________________________________________ 44
¾ Outlook _______________________________________________________ 45
■ POTENTIAL SIZE OF THE SOUTH AFRICAN HOUSING MARKET ________________ 45
¾ Conclusions & Latest Property News ______________________________ 46
COMPETITOR ANALYSIS _______________________________________________ 48
■ Competitive Comparisons ________________________________________________ 48
■ Positioning Strategy and Competitive Edge __________________________________ 49
■ Current situation analysis_________________________________________________ 49
■ SWOT ANALYSIS ________________________________________________________ 50
¾ STRENGTHS___________________________________________________ 50
¾ WEAKNESSES _________________________________________________ 51
¾ OPPORTUNITIES _______________________________________________ 51
¾ THREATS _____________________________________________________ 52
¾ COMMENT ____________________________________________________ 52
THE THREE PHASES OF GRASSROOTS’ PLANNED GROWTH ________________ 54
■ PHASE ONE: CONSOLIDATION ____________________________________________ 54
Page 9 of 130
GrassRoots
Business Plan Conducted by:
¾ Proposed Approach_____________________________________________ 55
¾ Subsidiaries ___________________________________________________ 56
¾ GrassRoots’ Corporate Objectives ________________________________ 56
■ PHASE TWO: THE FRANCHISING DEALERSHIP CONCEPT _____________________ 57
¾ INTRODUCTION ________________________________________________ 57
¾ PREFACE: WHY BUY A LANDSCAPING FRANCHISE BUSINESS? ______ 58
¾ Franchise Business Changes the Landscaping Terrain _______________ 59
¾ STEPS IN GRASSROOTS’ FRANCHISING ___________________________ 59
¾ BUYING A GRASSROOTS’ FRANCHISE ____________________________ 62
¾ THE LANDSCAPING FRANCHISE DEALERSHIP CONCEPT ____________ 62
¾ THE DEALERSHIP AGREEMENT __________________________________ 63
■ PHASE THREE: GROWTH AND EXPANSION _________________________________ 66
¾ Target Client Base ______________________________________________ 66
¾ Services Clusters_______________________________________________ 67
¾ Market Share __________________________________________________ 69
¾ Expansion into Africa ___________________________________________ 69
GRASSROOTS’ SPECIFIC INTERNAL STRUCTURES ________________________ 72
■ GRASSROOTS’ BUSINESS PROCESSES____________________________________ 72
¾ Preparing For Future Growth _____________________________________ 72
GENERAL COMPANY INFO ______________________________________________ 75
¾ Management Team Gaps_________________________________________ 76
■ CURRENT COMPANY STRUCTURE_________________________________________ 77
■ LONGER TERM STRUCTURE ______________________________________________ 79
■ STRATEGIC PROPOSAL: COMPANY STRUCTURE ____________________________ 80
¾ The Chairman’s Office___________________________________________ 80
¾ Conclusions ___________________________________________________ 82
■ STRATEGY AND IMPLEMENTATION – SUMMARY_____________________________ 82
■ STAFF INCENTIVES TO ENSURE COMPANY SUCCESS AND LONGEVITY ________ 82
■ EXIT STRATEGIES _______________________________________________________ 83
■ STRATEGIC FUTURE REQUIREMENTS______________________________________ 83
INDUSTRY ANALYSIS __________________________________________________ 85
■ The factors influencing residential living trends ______________________________ 85
■ The impact of the factors driving residential living trends ______________________ 86
■ SCENARIO THINKING ____________________________________________________ 88
¾ Scenarios _____________________________________________________ 89
■ Merging SWOT with scenario thinking ______________________________________ 90
Page 10 of 130
GrassRoots
Business Plan Conducted by:
¾ Process of SWOT_______________________________________________ 90
¾ Technological issues ___________________________________________ 90
¾ Socio-economic issues __________________________________________ 90
¾ Environmental issues ___________________________________________ 91
¾ Conclusion ____________________________________________________ 91
RISK-TO-SUCCESS PROFILE ____________________________________________ 92
■ Risk ___________________________________________________________________ 92
■ GrassRoots’ key to success outweighs RISK.________________________________ 92
■ Market Trends __________________________________________________________ 94
¾ Market Analysis Summary _______________________________________ 94
¾ Market Overview _______________________________________________ 95
¾ Market Needs __________________________________________________ 95
■ MARKETING STRATEGIES ________________________________________________ 96
FINANCIALS __________________________________________________________ 99
■ KEY VALUE DRIVERS ____________________________________________________ 99
■ FINANCIAL ASSUMPTIONS ______________________________________________ 100
■ FINANCIAL FORECAST: FIRST TWO YEARS ________________________________ 103
¾ Factors to Consider In Forecasting _______________________________ 103
¾ Lessons learned from scenario simulation_________________________ 103
¾ Two Year Forecast _____________________________________________ 103
BBEE: A STRATEGIC ISSUE ____________________________________________ 105
COMMUNICATIONS & INVESTOR RELATIONS PROGRAMME ________________ 107
GRASSROOTS’ VALUATION ____________________________________________ 109
■ Stage One: Industry Research & Appraisal__________________________________ 110
■ Stage Two: Determining Gross Value ______________________________________ 111
■ Stage Three: Discount Rates _____________________________________________ 113
■ Calculation of Fair Value _________________________________________________ 118
APPENDICES ________________________________________________________ 119
■ ABOUT THE ANALYST: JACQUES MAGLIOLO ______________________________ 119
■ BUSINESS PLAN QUESTIONS ____________________________________________ 120
■ SUMMARY: MARKET CAPITALIZATION & PROPERTY VALUATION _____________ 122
■ STATISTICS USED IN FORECASTING ______________________________________ 123
■ Abbreviations and Acronyms _____________________________________________ 125
■ THE GRASSROOTS LANGUAGE: GLOSSARY OF LANDSCAPING TERMS _______ 125
Page 11 of 130
GrassRoots
Business Plan Conducted by:
Preface
AIM OF
BUSINESS
PLAN:
Obtain research to plan for future company growth.
Determine strategy and set up a corporate structure to account
for forecast company growth and establish methodology to
prevent corporate problems in future.
Obtain a valuation.
Let’s start with the basics: Which of the GrassRoots’ correlations can be ignored?
In the past decade, South Africa achieved many successes, including greater political stability and
greater economic freedom. Property investments in South Africa reflect this more positive attitude,
showing an actual total return of 15.1% last year. South African commercial real estate
outperformed 16 other major countries. The real estate boom in South Africa and low interest
rates continued to encourage homeowners to feel confident, buying houses, farms and commercial
properties.
But interest and inflation rates have started to climb. The war In Lebanon and global interest
rate hikes may have changed the global environment. The question is whether such circumstances
have changed the local business environment and, in turn, the property market. The commercial
property sector is the most important correlations and thus used extensively throughout
this report.
However, short-term changes to land and government strategy are negligible and tend to be
established over five year periods.
The following is thus sufficient for this report:
■
During the past three years, the Agriculture and Agro-processing sectors have engaged in
several intense working sessions, with a mandate to ensure that future opportunities
presented by research and technology will address the social and economic challenges South
Africa faces with regard to the performance of the agriculture and agro-processing sector.
■
The work focused on a variety of activities on the value chain, such as on-farm and beyondthe-farm gate activities, which include food processing, distribution, marketing and supportive
industries, such as flower growing, gardening on large scales and environmental
rehabilitation; the latter being a service that GrassRoots intends to offer.
■
Research conclusions: Mostly, the quality of life of the majority of the citizens of South
Africa, the new policies of governance, the nation's performance in global competitiveness,
and future challenges in the primary sector of the South African economy have been positive.
o
Often government’s choices in creating a healthy balance were made after in-depth
consultation with the private sector, organised agriculture, labour and civil society.
As a nation there is a need to continually analyze needs relating to future
opportunities for both wealth creation and the improvement of quality of life.
BCI believes that the work done by these groups highlight the important direction that the country
is taking in relation to the primary sector of the economy. Policy changes would take medium to
long term to implement and thus is an important long-term profit driver for GrassRoots. However,
Page 12 of 130
GrassRoots
Business Plan Conducted by:
the financial forecasts have been limited to two years and thus the primary sector is not taken into
account in this document. There is no doubt that South Africa can reach new heights of global
excellence for a long time to come.
REPORT METHODOLOGY
This report serves as a broad information document to determine the viability of GrassRoots to
pursue growth strategize and, possibly list on the JSE Securities Exchange’s AltX in the two to
three years. This document sets out the operations of the group to date, financial details of the
operations in the near future, including prospects and financial forecasts for the next two years.
Forecasts for years after that are complete guesswork, given the staggering level of commercial
property development expected in the two years prior to the 2010 world cup.
BCI undertakes this assessment in relation to global and South African market conditions. It also
contains details of directors and management that are disclosed together with summarized
financial information and valuation. Details of the factors used to complete a valuation are set
out in this report.
BCI has not spent time at the offices of GrassRoots in East London, but is satisfied that the
information contained in this report is accurate at the date of publishing, and any material
matters arising from the date of publication will be disclosed in additional appendices. BCI is also
satisfied that the directors have met all conditions set out with regard to information requested.
NOTE: GrassRoots has signed a strategy mandate with BCI to assist the company to
implement strategies outlined in this business plan.
It is also stressed that this commissioned work is a research, business plan and valuation, but
does not include a full independent financial audit. It should be noted that full financial statements
are not disclosed in this report, but can be obtained from management. This report contains the
salient features relating to complete research, which should be read in its entirety for a full
appreciation of the extent and importance for the group.
PARTS
The report is split into numerous parts:
1
2
3
4
5
General investor and company information
Global and local industry analysis
General company information
Pertinent issues relating to Franchising
Strategic proposals
NOTE:
‰
This business plan is based on information received from management.
‰
This business plan was commissioned by GrassRoots, with the express purpose of providing
them with a “broad” overview of the company and its operations and to determine how sound
and viable its corporate structure is, given the rapid changes in both the general business
environment, commercial property and franchising sectors.
‰
As such, time constraints meant not being able to undertake independent industry and local
surveys to determine the viability of the company’s branding strategies. This is crucial, as the
company’s formal branding strategy is relatively new and – as with most marketing
strategies - expensive and time consuming to implement. The current effort is to raise
the awareness of the “GrassRoots” product in South Africa.
Page 13 of 130
GrassRoots
Business Plan Conducted by:
‰
Therefore, the conclusions are based on desk research into the company’s industry potential in
South Africa, both current and in the near future.
‰
This is not a prospectus and future share price forecasts have not been attempted. The focus
of this report is thus to determine GrassRoots’ viability as a major landscaping
enterprise in South Africa over the next three to five years. Note that according to the
strategy, “not viable” does not necessarily mean outright rejection. It may mean viability after
certain conditions are met by management. These would be set out in the report.
‰
Statistics: There are numerous instances where latest statistics are not available and thus
estimates have been used. A more in-depth analysis of the UK and US property markets
were undertaken, given the similarities of those countries’ property markets to South
Africa.
‰
All questions posed to management during the business plan process is set out in the
appendices and answered throughout this report.
‰
In conducting research on the property industries, literally hundreds of documents were
perused, from World Bank archives to United Nations and IMF research projects to the US
Congress Library to South African databases. In almost every document, an overwhelming fact
emerged:
For sub-Saharan Africa to satisfy growing economic demand, new businesses
are being built, new hotels are springing up and productivity is booming.
Therefore, a significant increase in demand for property, both private and
commercial services, is forecast. Consequently, demand for landscaping will
mirror this growth within the stated regions.
■
Industry analysis takes place on a top-down approach; from the global markets to regional
(Africa), followed by sub-regional (neighbouring countries) and completed by an analysis of
South Africa.
■
This norm was made more difficult in that major global corporations consider South Africa as
part of Africa, which is a specific emerging market trading bloc, namely the EMIA - Eastern
Europe, Middle East, India and Africa.
■
This part of the research became more valuable when it was determined that South Africa’s
economy was expected to continue to boom, expounding the need to provide
individuals and companies with property and related services..
‰
The BCI methodology undertaken in this project is based on a four phase approach, as set
out below.
‰
This document concentrates on the first three phases, namely research, due diligence
and business plan. Implementation (last phase) will follow; as stated in the BCI
Mandate.
Page 14 of 130
GrassRoots
Business Plan Conducted by:
The research phase included: Global and domestic environmental influences, trends on property
and related industries. The essence was to determine what and how GrassRoots will be affected in
the future and thus assess its viability as a major competitor in South Africa.
In the increasingly competitive global world of business, companies face huge constraints due to
progressively saturated marketplaces, rising costs due to skills shortages and emerging market
jitters.
At GrassRoots, management brings together top-notch experience and the latest technology to
deliver comprehensive solutions for complex problems. These are, however, relatively new and
needs to be assessed to determine whether such structures are suitable in a changing
environment.
With its headquarters in East London, GrassRoots aims to become a leader in South
African Landscaping and related services business. The company aims to offer its services
that will result in considerable savings for individuals and companies looking for landscaping
services for their properties (residential and commercial). As African economies move into
knowledge-based ones, empowering staff to perform their core competencies and functions are
fast becoming a challenging reality. As such, people excellence becomes a key to an
organization's competitive advantage. It has been stated that staff will be empowered within
the company; such details are looked at in this report.
To achieve a desired balance between growth plans and empowerment ideals, GrassRoots has
undertaken to contract BCI to conduct a full research into trends (locally and worldwide), supply
demand factors, economic growth patterns and a financial assessment as to the viability of
GrassRoots as a going concern. Consequently, Magliolo (BCI’s MD: Strategy and research) uses
the research as basis for the assumptions used to forecast earnings trends for GrassRoots,
particularly when undertaking a valuation of the business.
Full research was conducted by Business Consultants International
Page 15 of 130
GrassRoots
Business Plan Conducted by:
Introduction
The business plan compiles a variety of official and proprietary information in a format that allows
the company owner to quickly benchmark the strength of the landscaper within a specified region
and the world as a whole. While attention has been made to provide the most recent information
available, the analysis presented in this document covers global markets, African and South
African outlook for property as corporate landscaping is an integral part of the business of
GrassRoots. For each year reported and forecast, estimates and assumptions are provided as set
out in this report.
Using econometric models that project fundamental economic dynamics, demand estimates are
created. Note that the study does not discuss the specific players in the market serving the
landscaping demand, nor specific details at the product level. The study, therefore, is strategic in
nature, taking an aggregate and long-term view, irrespective of the players or products involved.
It is therefore aimed at determining whether there is an investment opportunity in this market; thus,
a thorough analysis is aimed at establishing viability of the project. In addition, the property
business in Africa was assessed and summarised in this report. The UK and US markets were
analyzed and factors, that could influence the South African market, were assessed. These factors
are also set out in this report.
The local property market can best be described as highly efficient and profitable, with various
fields that are, however, not cyclically simultaneous. This means that the factors (supply and
demand) that influence commercial and residential property are not the same. Research indicates
that residential property cycles are strongly followed by commercial property. GrassRoots’
income stream is affected by the latter, which is now in a bullish phase.
This fits in with discussions held with GrassRoots. The company is expected to be strong
in providing landscaping services to corporate South Africa, but aims to profit from the
residential side during the next five years. The method of development is in its infancy and
GrassRoots would benefit from an organizational structure that includes strategic
implementation methodologies.
GrassRoots is focused on two key elements, namely:
‰
‰
Strong emphasis on quality and efficient services.
Professionalism towards staff, clients and shareholders.
Under globalization, the future success of the property market is inextricably linked to the
worldwide growing focus towards South Africa having an efficient and professional service. This
has been highlighted in recent months, with the World Cup 2010 coming to South Africa. However,
property (across all sectors) is being reviewed by the ANC-controlled government. The proposal of
a property charter has not been finalized.
‰
Therefore, companies that do not take cognizance of expected changes in legislation
will be negatively affected during the next two years.
The report covers the government’s demands and takes cognizance of future trends in its strategy.
The aim of the research is to provide analysis at a global level, summarising and explaining the key
drivers highlighted by the statistics on consumer trends, distribution and consumption occasion
analysis, competitive information and analysis of product and service innovations.
Page 16 of 130
GrassRoots
Business Plan Conducted by:
Therefore, trends in the US/UK property industries are used to determine GrassRoots’ current
prospects to provide commercial property owners with landscaping services. For the future, how
will expansion into additional South African regions affect profitability. These trends are also
important for industry associations and watchdogs.
To accomplish this task, research included analysis of numerous JSE Securities listed companies.
In fact, the top 80 companies’ property portfolios were assessed and are set out in the
Appendices. An entire, untapped market is the possibility of approaching these companies with a
proposal to offer landscaping services.
This would take extensive research and strategic investigation. BCI believes that this is
possible, but only with a team of strategists that would include auditing and legal due
diligences and a proposal to list; funds would be needed to launch such a vast project.
THE VALUE OF THE TOP 80 LISTED COMPANIES IN SOUTH AFRICA = R1,855 billion
This strategy has not been included in this business plan.
In addition, BCI believes that it is possible to draw a connection between property and some
important drivers that set the stage for long-term shareholder value creation; of importance, when
GrassRoots is ready to list on an exchange. Stock prices are affected by a variety of factors, many
are external and beyond the control of individual companies. However, BCI found that landscaping
services can stimulate five key shareholder value drivers:
‰
‰
‰
‰
‰
Revenue growth
Profit growth
Asset efficiency
Employee satisfaction
Customer satisfaction.
The analytical framework, that assesses Shareholder Value forms BCI’s basic methodology to
organize the analysis of this unique business opportunity for GrassRoots. Companies today should
formally and systematically analyze their businesses on a regular basis to determine the conditions
under which they operate, as this form of research can have the greatest contribution to
shareholder value.
Unfortunately, many South African companies ignore this practice and often become a statistic.
Consequently, 66% of small to medium sized businesses fail within the first three years of
operation in South Africa (SSA).
WHAT GRASSROOTS NEEDS:
Either an investor/s and/or partner or working capital to expand rapidly, yet efficiently.
‰
‰
Strategic industry experience (preferable).
‰
Corporate finance assistance to draft a prospectus, corporate profile, IR plan and branding
strategy.
‰
A board that conforms to King II.
‰
A Board, which will have an independent Chairperson, and include someone to represent staff.
‰
Performance contracts with management team.
Page 17 of 130
GrassRoots
Business Plan Conducted by:
‰
In the event that the management fails to exceed the 'worst case scenario' financials, the
management contract lapses. The future of the management team will then be decided by the
board.
‰
Three to five year restraint of trade in the shares.
CONCLUSIONS
■
The GrassRoots method of business is expected to satisfy demand for landscaping
services in local property industries.
■
It also offers promising applications in other industries and geographical markets and
GrassRoots’ ceo Mdu Madikane is respected by colleagues and the industry as a
whole.
■
BCI has observed Madikane at its company’s office. There is no doubt that staff and
colleagues respect him.
■
The BCI assessment, therefore, is that this is an exciting and lucrative business that
could grow significantly in the near future, but with stipulations – as outlined in this
report.
NOTES:
Page 18 of 130
GrassRoots
Business Plan Conducted by:
Introduction to the
Business of Landscaping
DEFINITIONS
■
Landscape designer: someone with the knowledge to achieve maximum beauty and
functionality on any landscaping project. Landscape design takes into account much more
than just choosing plants. In addition to designing landscapes, a good landscape designer will
also consider how landscaping plans fit into the surrounding area and neighbourhood, which
designs will best meet landscaping needs, and how to keep maintenance and upkeep to a
minimum. Hiring an experienced landscape designer is the first step towards designing
the ideal landscape for commercial and residential properties.
■
Landscape horticulture involves both the growing of ornamental plants (trees, shrubs,
vines, groundcovers and herbaceous perennials) and their use in designed, constructed
landscapes. Such designed environments are not just “pretty;” they add functionality by
modulating temperature, abating noise, reducing glare and increasing privacy and security.
Closely associated with the art of gardening, landscape horticulture also involves the science
of plants and the business associated with producing and using these plants. Landscape
horticulturists must know many different kinds of plants and their basic characteristics; how
they grow, develop, reproduce, and adapt to different environments as well as the optimal
growing conditions for specific plants and potential problems associated with them, such as
pests and diseases.
A MULTI-BILLION RAND INDUSTRY
The landscape horticulture industry is a multi-billion Rand business. In 2004, the quantity of seeds
grown in South Africa was an estimated US$250 million (R1.7 billion). It is estimated that these
official UN Statistics may be 30% lower than actual statistics.
Add to that figure the sale of the final product, design levels and the value of farming, the estimated
figure is a total gross value (production) of R68-billion, with farmers' income amounting to R70billion.
A heightened awareness of the impact on the environment has resulted in the development of
landscapes that enhance the relationships between human-made and natural areas. Industry
professionals are committed to stewardship, working to pass on to future generations a healthy,
sustainable environment and an appreciation for the protection and management of natural
ecosystems.
The following table highlights the value of the estimated size of the domestic market for seed and
other planting material of selected countries (in US$ million)
Page 21 of 130
GrassRoots
Country
Business Plan Conducted by:
Size of domestic market
Country
Size of domestic market
USA
5,700
Egypt
140
China
4,500
Belgium
130
Japan
2,500
Chile
120
1,930
Serbia &
Montenegro
120
France
Brazil
1,500
Nigeria
120
Germany
1,000
Finland
103
India
1000
New Zealand
90
Argentina
930
Slovakia
90
Italy
780
Switzerland
80
Canada
550
Paraguay
70
Russian Federation
500
Tunisia
70
Korea
400
Uruguay
70
Australia
400
Bangladesh
60
Mexico
350
Portugal
60
Taiwan
300
Ireland
60
Spain
300
Israel
50
Poland
260
Kenya
50
United Kingdom
257
Colombia
40
Turkey
250
Bolivia
35
South Africa
250
Zimbabwe
30
Netherlands
208
Peru
30
Czech Republic
200
Slovenia
30
Hungary
200
Saudi Arabia
18
Denmark
170
Zambia
15
Austria
170
Ecuador
12
Morocco
160
Malawi
10
Sweden
155
Dominican
Republic
7
Greece
140
Uganda
6
Total = 26,776 *
Source: UN Documents. This total represents the sum of the commercial flower seed markets of the listed
countries. The commercial world seed market is assessed at approximately US$30 billion.
DISCUSSIONS WITH GLOBAL LANDSCAPERS
Running a profitable landscaping business may seem simple enough. However, the formula
is much more complicated than it appears, and the development of revenues and control of
expenses are not simple matters. BCI conducted brief off record discussions with landscaping
experts in the US and UK. The following is a sample of discussions held. These have been taken
into account in drafting this business plan.
Control Expenses
The first thing landscape contractors have to determine is their costs.” This is according to
Steve Glover, who operates Symbiot Business Group, Salt Lake City, Utah, a company that
provides landscaping consulting and other services to the industry. Glover is former co-owner of
L&L Landscape Services, San Jose, California, which he and his partner sold in 1999.
Page 22 of 130
GrassRoots
Business Plan Conducted by:
“You need to track your expenses.” This is the sentiments of many others. “You can’t make any
money if you don’t know what your expenses are.”
The reason is simple, but is often overlooked by newer landscape contractors and other
entrepreneurs: Profitability is not simply the money one collects — revenues — it’s
revenues minus expenses.
Many unprofitable or barely profitable landscape contractors do not have a budgeting and
estimating system that enables them to project expenses a year in advance. This is
according to Tony Bass, president of Bass Custom Landscapes, Bonaire, Georgia. Such a
budgeting and estimating system enables landscape contractors to recover their expenses and still
have money left over for profit.
Knowing one’s costs will help avoid getting hurt in bidding wars. A landscape contractor with low
expenses can do some jobs profitably that landscape contractors with higher expenses would lose
money on.
In calculating expenses, consider not only obvious items like labour and telephone expenses, but
also downtime; the landscape contractor’s own time and equipment repairs and depreciation.
Downtime is important because it represents an “opportunity cost.” Even if there’s no labour
expense during downtime, idle equipment doesn’t do the landscape contractor any good.
Additionally, overhead costs like utilities and rent still accumulate even if there is no business. So,
minimizing downtime helps ensure revenues are coming in while expenses are being incurred.
Similarly, it is important to know the time the landscape contractor puts in on each job, whether as
an active participant, someone who oversees the work, in bidding the job and collecting money, or
in other facets. The landscape contractor’s compensation, including salary, benefits, etc., need to
be factored in when bidding a job.
Managing the Labour Supply
Labour will often be a landscape contractor’s largest expense, and biggest headache, according to
landscape contractors.
“Having qualified staff is an endless topic.” Kurt Kluznick, owner of Yardmaster, Inc., Painesville, Ohio. Some landscape contractors take on the work, but don’t have the people to handle it.
You have to have good, talented labor and an ample supply of it. Attracting and keeping labour,
particularly good labour, is a problem throughout the industry, and GrassRoots plans to offset
these problems in a two fold manner:
■
■
Through a franchise dealership concept; outlined in this report.
Share incentive scheme; to keep staff within the holding company and in its
subsidiaries.
James River Grounds Management, Inc., Richmond, Virginia, can fill only about 10% of its annual
labour needs through local hiring, according to Maria Threadgill, vice president. Therefore, the
company turns to the government’s H2B program to bring in foreign workers on temporary visas to
fill the 90% company’s labour needs.
That’s scary, particularly in an immigration-unfriendly South Africa.
On the other side of the employment coin are the ambitious workers who have an eye on owning
their own business some day. These workers and managers are a concern because they can
become the landscape contractor’s competitors. One way to prevent that from happening,
according to Glover, is to compensate top employees well, enable them to take on additional
Page 23 of 130
GrassRoots
Business Plan Conducted by:
responsibilities (with additional compensation) as they progress, and explain some of the
challenges of running one’s own business.
For example, upper management controls much of the decision-making at some companies. Some
potential employees, those who want to make many of the decisions themselves, won’t fit in at
such a company.
The company’s culture may also change as the firm evolves. This change should be reflected in
hiring decisions as well. If a company exits one part of the business to specialize in another, for
example, it will need to look more aggressively for people competent in the new specialty.
Marketing expedites Growth & Profitability
In addition to the labour challenge, landscape contractors must deal with the challenge of building
and growing a business. Marketing is critical.
“If you count on the Yellow Pages alone for your marketing and promotion, you’ll die a quick and
ugly death,” Kluznick says.
Potential customers who use the Yellow Pages to find contractors are typically price shoppers. If
they buy at all, they buy on the lowest price, which may result in a loss for the landscape contractor
who keeps bidding lower just to get the business.
Though it often comes to mind first, price isn’t the hook on which to sell a job, Kluznick said. “You
need to have the ability to sell on value, not on price. There are always lower prices.”
Part of commanding higher prices is running a professional business, a concept the
landscape contractor can relate to the consumer directly and indirectly by the way he
dresses when bidding a job, the use of preprinted forms, and the appearance of a vehicle
with the company’s name on it, etc.
These have all been taken into account in the implementation strategy; to be outlined to the
management of GrassRoots once this business plan has been accepted by GrassRoots
executive team.
Everyone is a self-proclaimed expert. But some of the landscape contractors offering low prices
aren’t responsive. They do not return phone calls, may not finish the job or may not show up at all.
Some customers have been burned by unprofessional landscape contractors in the past (i.e.,
someone not finishing the job), so professionalism is important to help assure them that they will
be making the right decision this time.
To sell on value, a landscape contractor must be able to offer something different than his
competitors. Some landscape contractors specialize in water features. Others specialize in
design. Others specialize in maintenance. Still others specialize in other areas or in a combination
of services.
While landscape contractors may be specialists in a particular area, one way they can grow the
business is by hiring people with expertise in different areas, whether it is in different types of
landscaping, or in different areas of business (e.g., accounting, marketing, sales).
A landscape contractor’s fleet of trucks can be one of his best marketing tools, Bass said.
He recommends making sure trucks are all well-maintained, showing company signage.
Page 24 of 130
GrassRoots
Business Plan Conducted by:
Use Good Equipment
Invest in top-of-the-line, high productivity equipment. The higher the productivity you can get from
the equipment, the more jobs you can complete. If a landscape contractor thinks he can go out
with equipment that’s not cutting edge, he’s setting himself up for a big disappointment.
Collections
Once the work is completed and the customer is satisfied, there are still no profits until you receive
payment. Any money collected in advance or while the work is in progress helps make sure you
have the money to pay ongoing expenses of labour, while also helping to ensure receivables are
kept to a minimum. Always require a deposit, typically 25% of the bill, for any work. If it’s a small
project, he collects the rest upon completion.
Bass added that it’s important to bill immediately. Too many landscape contractors wait for a while
after completion before presenting the bill. Glover recommends being very aggressive in collecting
any money due.
Following the above suggestions, and generally educating yourself in good business skills, will go
a long way towards making a landscape company profitable.
GrassRoots Landscapers offers a full in-house landscape service from project inception through to
completion. Each landscape design is uniquely developed for each client, ensuring that full design
potential for each project is reached. At GrassRoots, management is well versed in both soft and
hard landscaping designs. Their innovative garden designs range from indigenous, tropical,
Japanese and desert.
As well as designing and constructing beautiful private gardens, GrassRoots handles commercial
landscaping in office parks, shopping centers etc. They are constantly improving the quality and
value of their service to clients by utilising the latest techniques and quality materials.
They are based in East London and intend to cover four regions in the next two years, namely
Gauteng, KwaZulu-Natal, Eastern Cape and Western Cape. GrassRoots works within the African
social context; creating work opportunities for small and medium enterprises within tender
proposals.
GrassRoots supports local sustainable development planning in the context of national
priorities and global challenges. Their contribution focuses on the biophysical aspects of
sustainable development, integrated strongly with social and economic aspects.
NOTES:
Page 25 of 130
GrassRoots
Business Plan Conducted by:
Global & Regional
Research
MACRO-RESEARCH
(Introduction for foreign investors)
South Africa occupies the southern tip of Africa, its long coastline stretching more than 2 500km
from the desert border with Namibia on the Atlantic coast southwards around the tip of Africa and
then north to the border with sub-tropical Mozambique on the Indian Ocean. The low-lying coastal
zone is narrow for much of that distance, soon giving way to a mountainous escarpment that
separates it from the high inland plateau. In some places, notably the province of KwaZulu-Natal in
the east, a greater distance separates the coast from the escarpment. Although the country is
classified as semi-arid, it has considerable variation in climate as well as topography.
The great inland Karoo plateau, where rocky hills and mountains rise from sparsely populated
scrubland, is very dry, and gets more so as it shades in the north-west towards the Kalahari
Desert. Extremely hot in summer, it can be icy in winter. In contrast, the eastern coastline is lush
and well watered, a stranger to frost. The southern coast, part of which is known as the Garden
Route, is rather less tropical but also green, as is the Cape of Good Hope - the latter especially in
winter. This south-western corner of the country has a Mediterranean climate, with wet winters and
hot, dry summers. Its most famous climatic characteristic is its wind, which blows intermittently
virtually all year round, either from the south-east or the north-west.
South Africa has seven major terrestrial biomes,
or habitat types - broad ecological life zones with
distinct environmental conditions and related sets
of plant and animal life.
The eastern section of the Karoo does not extend
as far north as the western part, giving way to the
flat landscape of the Free State, which though still
semi-arid receives somewhat more rain. North of
the Vaal River the Highveld is better watered and
saved by its altitude (Johannesburg lies at
1 740m; its annual rainfall is 760mm) from
subtropical extremes of heat. Winters are cold,
though snow is rare.
Further north and to the east, especially where a
drop in altitude beyond the escarpment gives the
Lowveld its name, temperatures rise: the Tropic of Capricorn slices through the extreme north. This
is also where one finds the typical South African Bushveld of wildlife fame.
The deep interior provides the hottest temperatures: in 1948 the mercury hit 51.7ºC in the Northern
Cape Kalahari near Upington.
Page 26 of 130
GrassRoots
Business Plan Conducted by:
Average temperatures in ºC
Summer
Winter
Cape Town
20
12.6
Durban
23.6
17
Johannesburg
19.4
11.1
Pretoria
22.4
12.9
By far South Africa's biggest neighbour is the ocean - or two oceans, which meet at the
southwestern corner. Its territory includes Marion and Prince Edward Islands, nearly 2 000km from
Cape Town in the Atlantic Ocean.
The cold Benguela current sweeps up from the Antarctic along the Atlantic coast, laden with
plankton and providing rich fishing grounds. The east coast has the north-to-south
Mozambique/Agulhas current to thank for its warm waters. These two currents have a major effect
on the country's climate, the ready evaporation of the eastern seas providing generous rainfall
while the Benguela current retains its moisture to cause desert conditions in the west.
Several small rivers run into the sea along the coastline, but none are navigable and none provide
useful natural harbours. The coastline itself, being fairly smooth, provides only one good natural
harbour, at Saldanha Bay north of Cape Town. A lack of fresh water prevented major development
here. Nevertheless, busy harbours now exist at Cape Town, Port Elizabeth, East London, Durban
and Richard's Bay.
On dry land, going from west to east, the country shares long borders with Namibia and Botswana,
touches Zimbabwe, has a longitudinal strip of border with Mozambique to the east, and lastly
curves in around Swaziland before rejoining Mozambique's southern border. In the interior, nestled
in the curve of the bean-shaped Free State, is the small mountainous country of Lesotho,
completely surrounded by South African territory.
There are only two major rivers: the Limpopo, a stretch of which is shared with Zimbabwe, and the
Orange (with its tributary, the Vaal) which runs with a variable flow across the central landscape
from east to west, emptying into the Atlantic Ocean at the Namibian border. In so dry a country,
dams and irrigation are extremely important: the largest dam is the Gariep on the Orange River.
The total land area of South Africa is slightly more than 1.2 million square kilometres, and it
measures some 1 600km from north to south and approximately the same from east to west.
The legislative capital is Cape Town, the administrative capital is Pretoria, and the biggest city is
Johannesburg. A good rail and road system links all major centres.
Agriculture/gardening and landscaping
General competitive outline
South African agriculture and flower markets have a number of competitive advantages, making
the country both an important trading partner and a viable investment destination. Worldclass infrastructure. South Africa has three deep-water ports, three international airports, a network
of roads and railways, well-developed cold chain facilities, and a sophisticated financial sector.
Counter-seasonality to Europe.
South Africa's counter-seasons to Europe, the country's primary export market for horticultural and
floricultural products, is a major competitive advantage. South Africa is the closest major southern
hemisphere producer of horticultural and floricultural products to Europe, and has significantly
shorter shipping times than its rivals.
Page 27 of 130
GrassRoots
Business Plan Conducted by:
Biodiversity
South Africa's diversity of climates - tropical, subtropical and desert - allows for a vast and varied
array of floral products.
Marine resources
South Africa has almost 3,000 kilometres of coastline, which is commercially used for conventional
harvesting and for mari-culture and aqua-culture.
Competitive input costs
While South Africa boasts infrastructure comparable to first world countries, its cost structure is
decidedly third world. At around 1.7 US cents per kilowatt hour, it has one of the cheapest
electricity costs in the world. Labour rates are also competitive.
Deregulation and market freedom
In the 12 years since the end of apartheid in 1994, South African agriculture has evolved from a
highly regulated and protected industry to one free from all constraints, unsubsidised by
government and capable of competing with the best in the world.
■
The Marketing of Agricultural Products Act of 1996 dramatically changed agricultural
marketing in the country by closing agricultural marketing boards, phasing out certain import
and export controls, eliminating subsidies, and introducing import tariffs to protect South
African farming from unfair international competition.
o
While a fairly radical process to some old-style producers in South Africa,
deregulation has ensured a leaner and stronger agricultural/floral industry, with
farmers and agribusiness able to position themselves as players in a globally
competitive environment.
o
Phasing out controls and closing marketing boards led to a short-term shortage of
essential services formerly provided by the boards and cooperatives, such as
storage, grading, deliveries, value adding, information dissemination and research.
As a result, specialised marketing support institutions, such as the South African Futures
Exchange (Safex) and the Agricultural Futures Market of the JSE, were established to provide
much-needed price risk management mechanisms.
Trade agreements
South Africa's agriculture/floral and agribusiness sector are benefiting from increased market
access to its key trading partners, the EU and the US, as well as to sub-Saharan countries,
through a number of trade agreements:
■
African Growth and Opportunity Act - extends to South Africa and other sub-Saharan US
generalised system of preference (GSP) benefits for more than 1,800 items beyond the
standard GSP list of 4,600 items. The Act remains in force until 30 September 2008.
■
EU-SA Free Trade Agreement: commits the EU to the full liberalisation of 95% of South
African imports over a 10-year transitional period from 2000, while South Africa is to liberalise
86% of EU imports over a 12-year transitional period.
■
EU-SA Wine and Spirits Agreement: improves access for South African wine and spirits to
the European market, applying an annual duty-free tariff quota of 42 million litres.
■
SADC trade protocol: The Southern African Development Community (SADC) trade
protocol, which came into effect in September 2000, provides for the phasing down of tariffs
of 11 of the 14 SADC member countries. Participating countries are from the sub-Saharan
Page 28 of 130
GrassRoots
Business Plan Conducted by:
region, excluding Angola, the Democratic Republic of Congo and Seychelles. This trade bloc
has a combined population of around 135-million.
■
South Africa Customs Union: Under the present Sacu agreement, participating member
countries South Africa, Botswana, Lesotho, Namibia and Swaziland have totally abolished
internal tariff.
THE ROLE OF AGRO-INDUSTRIES (BIG AND SMALL)
Major research and technology trends
Developed countries, such as the UK, are characterised by advancement through the development
and utilisation of innovative technologies. In South Africa, the characteristics and trends in
agricultural and floral technology have been complex, and have been overlaid by socio-economic
conditions. Two distinct sectors are apparent, a high-technology developed sector and a resourcepoor sector, which requires a different technology application profile for development.
Within the more highly developed agricultural/floral sector of South Africa, awareness and use of
high levels of technology are advanced. However, most of the technologies have been found to be
product and process technologies, with few support and information technologies. About 30% of
technologies are imported, primarily from the more developed countries. South Africa therefore
tends to be an adapter and user of technologies developed elsewhere, with a somewhat
limited innovation base. This provides GrassRoots with an opportunity to train and develop
entrepreneurs with locally designed systems to innovate landscapes and land reclamation
technologies.
However, the adaptation of the imported technologies has allowed South Africa to process,
transport and market products to discerning markets within South Africa as well as the most
developed world economies. This has placed the South African agricultural/floral sector well
ahead of other developing countries, and comparable to developed nations, even though a
sector of the rural community is unable to participate, because of various constraints. Technology,
and in particular information systems, will need to be developed so that advantage may be
taken of an as yet under-utilised potential.
The skills base of South African agriculture and floral does not compare well with that of
developed nations. There appears to be an insufficient number of people with high skill levels. The
more developed the sector becomes, the more critical this component will be when
competitiveness, particularly in the higher technology area of value-adding is considered.
Trends in technology in the developed economies need to be considered. Populations of those
countries are aware of product safety, storage, the influence of consumerism and integrated
production as it affects the sustainable interaction of agriculture and floral on the environment. The
importance of consumerism is clearly seen in the increasing popularity of notions such as
"products of origin" and traceability requirements among consumers. Environmental and social
characteristics of products are important consumer requirements. These factors dictate
acceptability of products and production practices as well as technological processes, which
become even more important when one considers the cross-border movement of products for
trade and other purposes. GrassRoots is to conduct research in cross border trade during
its third phase of expansion. The success of South Africa in relation to other producers of such
products will depend on the extent to which the local industry can harness the technologies needed
to compete.
Strategic node comparisons
These South African sectors contain elements of both a highly developed, technology-based
economy, and one that is less developed and resource-poor.
This complicates the
benchmarking analysis.
Page 29 of 130
GrassRoots
Business Plan Conducted by:
The trend as a whole, however, is clearly one of a country placed between a developed and
developing one, with movement towards one of further development. This is particularly so if one
takes into account that large numbers of rural, resource-poor members of the population have the
potential, if the correct drivers are used, to move rapidly towards the developed sector. This is the
aim of GrassRoots; through its Franchise Dealership methodology.
This trend would appear to dictate that development of innovative technologies locally, and will be
necessary to maintain the current situation and improve the socio-economic development of the
population.
It is also observed that while primary agricultural and floral production is highly efficient
and at an internationally competitive level, secondary processes, including processing and
manufacturing, are less efficient in the local environment. To fully capture the added value of
the downstream processes, technology development will have to be directed towards such
processes to increase efficiency and enhance international competitiveness.
GrassRoots believes that the Franchise concept will enable individuals to increase
productivity and innovation to bolster the downstream income flows.
ENVIRONMENTAL CHANGE IN SOUTH AFRICA
Please note that this section of the state of the environment report will be expanded in future to
include more comprehensive description of the following drivers of environmental change:
■
■
■
■
■
■
■
■
Energy
Mining
Manufacturing
Transport
Agriculture
Settlements
Tourism
Recreation
For now, this section contains a brief overview of the causes of environmental change, which
could affect the long-term potential of GrassRoots’ revenue stream.
It is important to understand the causes of environmental change, to be able to develop and
implement strategies that will encourage sustainable practices and discourage harmful ones within
the floral, horticultural and land-related markets. Experience from developed countries has shown
that costs of prevention of environmental damage are very much lower than costs of rehabilitation
or repair of degraded areas, or the costs associated with loss of species and ecosystems for good.
In order to promote sustainable behaviour patterns, it is therefore critical to start with improving
understanding of natural resources and systems and what causes them to become depleted and
degraded. Once this is understood, we can formulate and implement sustainable development
strategies, monitor impacts, and evaluate and change policies accordingly.
This section attempts to outline the general causes of environmental change, and to depict the
inter-connectedness and complexity of all aspects of human activities in a simplified way. This
section also summarises how the driving forces have changed in South Africa recently, and how
they will continue to change and influence GrassRoots’ profitability. In later editions of this
report, this section will be expanded to show how specific activities contribute to environmental
change.
Environmental change in South Africa comes from both national and international driving
forces. International driving forces include trade, Conventions, and standards. National driving
Page 30 of 130
GrassRoots
Business Plan Conducted by:
forces are population growth, employment, equity and economic growth. Together these forces
influence the country's macro-economic policy.
Macro-economic policy also provides a framework for sectoral policies, and the enforcement of
these policies determines resource use patterns. Population pressures and gaps in
understanding of natural processes add to the problem, by increasing the demand and use of
natural resources, without planning for the consequences to the integrity of the natural systems on
which all life on earth depends. Changes in macro-economic policy are needed, to improve the
meeting of needs, while minimising the harmful impacts on the environment, and converting
resource use to sustainable levels do that we can continue to use resources and meet our needs.
The following figure shows the pattern of forces that are at the centre of environmental change.
1. International driving forces include trade, conventions, and standards. South Africa
needs to trade with other countries in order to bring in foreign exchange, and to grow the
economy through exporting more goods than are imported. Needing to trade internationally
encourages production within the country. Historically, this led to conversion of large
areas of natural habitat to areas of agricultural/floral production. In order to increase
the quantity of exports, cheap methods of manufacturing were used, which often had
polluting effects.
a. South Africa has also ratified several international agreements and
conventions. These can become powerful forces driving national policy and
behaviour patterns.
2. National driving forces that have led to the current situation include the need for
economic growth and job creation, self sufficiency, and exports. The large population also
puts pressure on macro-economic policy to provide for basic human needs and achieve
economic growth.
3. Historically in South Africa, the macro-economic and sectoral policies that resulted from
these forces included settlement policies, discrimination of access and subsidisation. For
example, agricultural and floral farming was reserved for commercial farmers, while
subsistence farmers were forced into homeland areas. Conservation measures were
Page 31 of 130
GrassRoots
Business Plan Conducted by:
typically to restrict access to protected natural areas, alienating large sections of the
population from environmental issues such as wildlife conservation.
4. The resource use patterns that resulted were exploitative, and the problem was
compounded by a large, unevenly distributed demand. Industry and agriculture used
energy and water wastefully, as there were no incentives to use natural resources wisely,
or to recycle. The high densities of low-income population in the homelands, forced
unsustainable resource use. The large population, and failure of the government to enforce
regulations put added pressure on natural resources.
5. These activities created large distortions in the economy and distribution of wealth.
Large sections of the population were driven to live in informal settlements without formal
services such as water supplies and sanitation, due to the imposed low income levels.
Levels of resource use were unsustainable, and environmental degradation was
widespread.
6. The combination of degradation and depletion of resources, and unmet basic human
needs acted together to force change in national needs. The high population growth rate
also contributed to national pressure for policy reform.
7. International pressure for social and political reform in South Africa, and a greater
global awareness of environmental issues became the predominant international driving
forces. The international community placed trade restrictions on South Africa, and
excluding her from the global community. The combination of degradation and depletion of
resources, and unmet basic human needs, including political enfranchisement, acted
together to force change in national governance. The change in political dispensation
resulted in a new Constitution, new macro-economic and framework policies, and law
reform. These changes all brought about new emphases on environmental goods and
services, and new management strategies.
8. National needs which, in addition to international forces, act to change macroeconomic policies in South Africa include:
a.
b.
c.
d.
e.
the provision of basic needs for all South Africans
equity
employment creation
economic growth
improved quality of life
9. Reforms in Macro-economic policy that have followed from these national and
international driving forces, are documented in the Growth, Employment and Redistribution
(GEAR) Framework Strategy. GEAR focuses on creating jobs, combating inflation,
increasing exports, creating equity, and growth in GDP.
10. GEAR has in turn driven changes in sectoral policies, and in many cases these focus on
sustainable practices.
11. As these policies are relatively new, changes in resource use patterns have yet to be
determined. However, expected changes are more responsible use of water and energy,
less exploitative use of resources such as fish, greater ownership and concern for the
environment, reductions in pollution and waste, and investment in alternatives to natural
resources.
12. The current state is one of uncertainty, as many policies are new and the impacts of
their implementation are not yet evident. Furthermore, implementation depends on
adequate capacity amongst government officials. In many cases this is lacking, as is the
Page 32 of 130
GrassRoots
Business Plan Conducted by:
capacity for policing and enforcement. Only once implementation has been effective can we
evaluate the current state resulting from policy reforms, and generate pressure for further
reform, if required.
This system of environmental change is dynamic, responding to ever changing and developing
international and national priorities and pressures. As understanding and awareness of driving
forces and their impacts grows (both nationally and internationally), so policies and practices
become more sophisticated, and if enforced, they produce successful results. These results in
themselves are wrought by, and create, further changes in behaviours and resource use patterns,
market demands and needs, requiring further changes in policy.
GLOBAL MARKET PROPERTY ANALYSIS
This research is directly pertinent to GrassRoots and the ultimate forecast and
valuation; both residential and commercial property trends were assessed.
BCI analyzed the US property market, exploring recent trends to determine similarities to the
South Africa property market. Three key forces have negatively influenced demand for US
commercial property market over the past five years:
■ Sublet space increased due to a curtailing of company growth.
■ The chain reaction of this pullback developed into a full blown recession.
■ The impacts of September 11 had further recessionary effects.
Understandably, different property types react in different ways to economic circumstances.
Certain property types, such as Industrial property, are closely correlated to the US economy. This
Page 33 of 130
GrassRoots
Business Plan Conducted by:
is no different to SA where the manufacturing sector serves as an important barometer for
industrial property, being closely correlated to the domestic economy.
US Industrial property rents tend to follow supply, which follows demand; as such, there is less
risk of overbuilding due to supply alone. The risk of industrial property is, therefore correlated with
the economy or demand side of the market.
Offices have a different pattern: in the past 30 years in the US, there were two big office building
booms and five demand cycles. Office rents clearly move with supply and not demand, the risk in
office property investment is associated with a periodic ‘self overbuilding’ that is not related to
economic demand shocks.
The sectors that drive office demand are somewhat insulated from economic cycles and the risk of
investing has more to do with the intrinsic overbuilding risk of its own cycle, rather than the broader
economic or systematic risk. Office space cycles will not be led by supply, but by fall-offs in
demand, implying that the office cycle will look more like the industrial cycle. It will take
some time for the same to be said about the SA commercial property market.
The short-term employment impact on growth is a question of timing as to whether companies
will lease space as part of their investment for future growth, or whether they will wait until the need
for space becomes pressing. In the US, sublet space returned to the market and, therefore
dwarfed any positive growth in demand or ordinary let space demand. The distinction between
vacant and available space has also been in the news; the implication for markets with high
availability is that the potential for higher future vacancy exists.
This distinction is not explicitly measured in SA, but could offer further insights into the
office sector if adopted.
The CBD markets of the US tend to house the professional sector and have been under less
vacancy and absorption pressure than the suburban nodes. With the largely suburban tech sector
having seen the worst of performance, the risk still exists for the corporate sector and the future
performance of the CBD’s remain a concern.
On the retail front, neighbourhood centres have a high correlation to the US economy, but
regional centres do not. In fact, there is little evidence of a long-term relationship between regional
centres and the economy; perhaps this is owing to its propensity to ‘cannibalise’ market share – a
phenomenon used to describe regional centre dominance in the SA retail property market.
Debate has occurred regarding the impact of ‘superstores’ on shopping centres in the US. This
threat to large shopping centres is owing to the potential vacating of superstores to nearby areas this can create a huge vacuum that is difficult to fill - further influenced by the potential ripple effect
of the loss of line shops to the new location. There is a niche for both price and convenience;
traditionally super-centres are regarded as less convenient than more serviced focused
neighbourhood/ convenience centers.
However, it is recognised that the superstore can create a retailing node and synergy that can
serve existing adjacent community/neighbourhood centres. In the past, questions have been posed
in the US about how the public debt and equity market would bring more discipline and efficiency
to the construction of commercial real estate – the transparency of these markets regarded as
vehicles increasing market efficiency. In SA, the disjuncture between private and institutional
development markets, is seen as one factor boosting supply.
As in the US, improvements to lending market/risk management will ensure moderation in lending
and prevent a huge oversupply of capital and new construction. Interestingly, the US long-term
average commercial vacancy rate is 13.1%. By comparison, the Johannesburg 10-year
Page 34 of 130
GrassRoots
Business Plan Conducted by:
average A-Grade vacancy stands at 7.25% - in a range falling between 6.5% - 12.5% for the
major sub-markets.
In SA, it is generally accepted that the total of R70bn in property has been amassed by
institutions over three decades.
Note that a strategy proposed by BCI is to target the Top-80 listed companies in South
Africa: valued at R1.8 trillion.
SA Property:
■ Total Market size: 316.1 million m² (40% CBD, 60% Suburban)
■ Total vacancy: 14.2% (14.8% Suburban)
■ Total new construction: 7.2 million m²
Managers find it difficult to reduce these values, because of the damage it could do to the
endowments or pensions of their policyholders in the short term. The outlook in the US can be
stated as follows: office demand recovery is set to improve during the course of 2006 with a real
rent turn in 2007. The supply of space is expected to recommence following a period where supply
has not been excessive, but rather where available stock has been the result of low demand. This
view on timing must be balanced against a re-rating of some 39 office markets in September,
primarily on account of local economic performance forecasts.
The downgrade for growth naturally leads to a decrease in expected absorption impacting on
rentals and vacancies. Rent in the US is declining, but is still not under as much pressure as
compared with the early 1990’s period, where the pressure was more sustained. US Real Estate
as an asset class has, however, been on the receiving end of increasing flows of capital through
2002, generally on account of floundering equity markets.
Similarly, the inflation hedge qualities of property continue to see SA investors engaging in direct
and listed property. In so doing, greater attention to the long-term inflation trend and shortterm inflation cycles, will need to be paid. These have been taken into account in
conducting this business plan and valuation.
HOUSE PRICE TRENDS: OVERSEAS AND IN SOUTH AFRICA
Over the past few years, residential property prices have surged to record highs in many countries
around the globe, albeit not in Japan and Germany.
Real price growth of more than 50% in total has been recorded since the mid-1990s in countries
such as Australia, the UK and the US.
Page 35 of 130
GrassRoots
Business Plan Conducted by:
Two important factors are believed to have contributed to the housing boom in these countries:
■
Historically, low interest rates as a result of low inflation and the strong performance of
property, because of the underperformance of other asset classes, such as equities.
■
As a result, new home-buyers in the abovementioned countries have increasingly committed
themselves to larger mortgage loans as property prices have soared, while existing homeowners have increased their loans to turn the massive capital appreciation on their properties
into cash for consumption purposes. Additional homes have also been bought in South Africa
as investments.
In view of these developments, the global housing boom of the past number of years is regarded
as the biggest financial bubble in history. Taking into account the extent of house price growth
across the world over this period, as well as the number of countries involved, this boom is
arguably unrivalled. In some countries, property market indicators, such as the ratio of house
prices and mortgage debt-to-income levels, have reached record highs.
Against the backdrop of these developments, how does South Africa compare
internationally?
Between 2000 and 2005, the South African residential property market also experienced strong
average price growth of 20% per annum in nominal terms and almost 14% per annum in real
terms. During this period the market was driven by a wide range of factors, including the lowest
inflation since the 1960s and the lowest interest rates in more than 20 years, causing real house
prices to increase to all-time highs in 2005. This performance came after many years of mediocre
growth from the mid-1980s up to the late 1990s because of political uncertainty and poor economic
growth. Property prices have probably been catching up with other asset prices since then.
As a result, the ratio of house prices to the level of remuneration in South Africa has increased
significantly since 2000, but was in 2005 still below the all-time high reached in 1984. An increase
in this indicator implies that house prices are increasing at a faster rate than remuneration.
Page 36 of 130
GrassRoots
Business Plan Conducted by:
In Australia, the UK and the US, the strong performance of house prices during the past number of
years pushed the house price-to-income ratio to record levels. However, with house price growth
significantly lower in Australia and the UK over the past two years, mainly as a result of earlier
interest rate increases, the house price-to-income ratios stabilised during the past year in these
two countries, but are still high according to historical standards.
In view of rising property prices, low interest rates and equity withdrawals from mortgage accounts
by households for consumption other than just housing, the ratio of mortgage debt-to-household
disposable income increased to record levels in the UK and the US, as well as in South Africa. The
cooling of the South African residential property market during 2005 and the early stages of
2006 can probably be ascribed to housing becoming generally less affordable.
Furthermore, the current phase of slowing down in the local property market is occurring without
any interference (such as higher interest rates) on the part of the monetary authorities in an
attempt to cool off and "stabilise" the market, unlike what has happened in Australia and the UK.
These trends and developments in the local property market are not an indication of a
bubble bursting, but are regarded as a quite normal manifestation of the forces of demand
and supply at work in a free market environment.
A significant increase in the property market over recent years has resulted in an accompanying
increase in the level of investor activity taking place in the market. While the presence of investors
in the residential property market emerged noticeably when property prices increased, the recent
softening of house price growth highlights the importance of their role.
Typically, investors in residential property hold a higher probability of selling their property when
the market is expected to decrease than those whom reside in their homes. Due to the impact of a
declining market on investment yields, investors are more likely to depart from this market than that
of homeowners, thus creating further volatility in the movement of house prices. This impact
is particularly attributable to the number of investors participating in the market (see following
diagram).
Following the recent boom in the property market, the presence of investors owning two or three
properties has increased substantially, while those owning more than three properties also felt the
effects of an increase in demand in the property market. According to data from the Deeds Office,
the graph above illustrates the number of investors present in the residential property market over
the past decade. It is noticeable that a large rise in the number of persons owning two
properties has occurred during the recent property boom.
Page 37 of 130
GrassRoots
Business Plan Conducted by:
This can be attributable to the rise in
affordability and credit extension by
homeowners, thus taking advantage of
the higher yields available from
possessing a secondary property.
Capital yields are available through
either the re-sale equity realized from
higher house prices, or the rental
income assigned to the property
(rental income highly dependent on the
area in which the property is situated).
Furthermore, due to a combination of
decreased interest rates, income tax cuts and property increasing in asset class value, the number
of investors participating in the market increased over time.
According to the graph above, the proportion of investors participating in the property market has
risen increasingly over the past five years. In addition, the percentage of those owning more
than one property has also increased, although at a slower rate. This indicates that a higher
percentage of investors have participated in the recent property market boom, resulting in a lower
number of properties per investor. This can mostly be attributed to a rise in the number of property
owners purchasing their first investment property.
Note the differential between average house prices for the total residential market and the investor
market. Although varying in value, the gap between average house prices and investment
properties has diminished over the past two years. This further highlights that a larger number
of participants are prevalent in the market. Where investment property has increased in value,
the overall average for house prices has experienced a higher growth rate. This may indicate that
whereas speculation in the investment property market may exist more commonly, an increase in
speculation within the overall market during a boom may have a similar effect - thus, tightening the
gap between the investment market and the aggregate market.
Yields gained from investment properties are higher in the middle sector of the property market
for reasons such as a higher likelihood of rental income and a high demand for affordable housing
to provide for the strong emerging middle class in South Africa. As a result, demand for
investment property increased alongside overall house prices from 2003 to 2005.
Last year saw the beginning of the consolidation in the residential property market. Previously
attracted to a market of healthy capital gains owing to increased house prices and appealing rental
incomes, 2005 observed the true presence of property investors in the residential property market.
The number of investors owning two properties (although decreasing slightly from 2004) was 258%
higher than those owning three properties.
This may point to the fact that as of late, together with a softening property market and
sharp increases in house prices, the attractiveness of property as an asset class has
subsided.
As a result, one may expect that the number of investment properties per investor may settle lower
than in previous years, as the level of gearing per investor declines.
Page 38 of 130
GrassRoots
Business Plan Conducted by:
SOUTH AFRICAN MACRO-ECONOMIC & HOUSEHOLD SECTOR OVERVIEW
In 2005, the South African economy is estimated to have grown by 4.9% in real terms. This was
the 13th consecutive year of positive real economic growth. The strong economic performance of
the past year was, to a large extent, the result of buoyant domestic demand, mainly driven by a
strong rand exchange rate, low inflation and the lowest interest rates in more than 20 years.
Despite significantly higher international oil prices in 2005, which at times led to fears of inflationary
pressures in the economy, the South African Reserve Bank withstood the temptation to raise
interest rates. In the third quarter of 2005, the ratio of household debt to disposable income
increased further to an all-time high of 63.4%. Continued high growth in private sector credit
extension, on the back of the low interest rates and strong consumer demand, was largely
responsible for this further increase in the household debt-to-income ratio.
The ratio of household saving to disposable income remained at 0.2% in the third quarter of 2005.
The low interest rates of the past two years, which offered no real incentive for households to
increase savings, together with high levels of consumer demand, largely contributed to this low
savings ratio.
Seasonally adjusted annualised growth in the real disposable income of households
increased by 6.1% in the third quarter of 2005, which was somewhat lower than the 6.4%
recorded in the preceding quarter. This development can be ascribed to real economic growth
being lower at a seasonally adjusted annualised rate of 4.2% in the third quarter of last year
compared with 5,4% in the second quarter, whereas CPI inflation was higher at 3.9% in the third
quarter compared with 3.2% in the second quarter.
The following macro-economic and household sector related developments occurred in the fourth
quarter of 2005:
■
Domestic fuel prices declined in reaction to lower international oil prices and a stronger rand
exchange rate.
■
Both headline consumer price inflation and CPIX inflation (headline CPI inflation, excluding the
effect of mortgage interest rates) edged lower during the course of the fourth quarter.
■
The Reserve Bank’s Monetary Policy Committee kept the key monetary policy interest rate, the
repo rate, unchanged at its December 2005 meeting. As a result, commercial banks’ lending
rates (the prime overdraft rate and the mortgage rate) were also left unchanged. Again, it is
stressed that this has changed and interest rates are now rising.
■
Growth in domestic private sector credit extension, especially mortgage advances, remained
high, at levels last seen in 1988.
HOUSE PRICES IN 2005/6
Middle-segment housing
In 2005, the average price of houses in the so-called middle segment of the residential property
market (houses of 80m²- 400m² and priced at up to R2.2 million) increased by 21.9% year-on-year
(y/y) (32.2% in 2004) to about R700,200 in nominal terms. In real terms (after adjustment for
inflation), house prices increased by 17.9% last year, compared with a growth rate of 30.4%
recorded in 2004.
In the fourth quarter of 2005, nominal house prices in the middle segment increased by an average
15.7% y/y to about R733,200. This was the lowest nominal growth in any quarter since the second
quarter of 2002, when a growth rate of 14.4% was recorded. In real terms, house price growth
Page 39 of 130
GrassRoots
Business Plan Conducted by:
came to 11.6% y/y in the final quarter of last year. In both nominal and real terms the year-on-year
growth in house prices was down on that of the third quarter, when it was respectively 19.7% and
15.2%.
In the three middle-segment categories, house price growth was as follows in 2005:
■ Small houses (80m²-140m²): nominal 18.5% and real 14.7 higher.
■ Medium houses (141m²-220m²): nominal 23.5% and real 19.5% higher.
■ Large houses (221m²-400m²): nominal 24.2% and real 20.1% higher.
Affordable housing
In 2005, the average price of houses in this category (houses of 40m²-79m² and priced at
R193,000 or less) increased by 15.1% y/y in nominal terms compared with growth of 19.7% y/y in
2004. In real terms, this represents an increase of 11.4% y/y compared with price growth of 18.1%
in 2004.
In the final quarter of 2005, nominal house prices in the affordable category increased by 8.6% y/y.
The increase in the preceding quarter was 15% y/y. In real terms, house price growth in this
category came to 4.7% y/y in the fourth quarter of last year, compared with y/y growth of 10.7% in
the third quarter.
House price growth in the affordable market segment continued its downward trend, with both
nominal and real year-on-year growth declining further in the fourth quarter of 2005. The
affordability of housing probably also had an impact in this market segment during this period.
Luxury housing
In both nominal and real terms the year-on-year growth in house prices in this market segment was
down on that of the fourth quarter of 2005, when it was 16.3% and 12.2% respectively.
House prices in the affordable category increased by only 3.9% year-on-year in the first quarter of
2006. This represents price growth of 0.4% year-on-year in real terms. In the luxury segment of the
market, house prices declined by a nominal 2.4% year-on-year in the first quarter of 2006. This
was the second consecutive quarter of declining house prices in the luxury category. In real terms,
house prices in this segment of the market declined by 5.8 percent year-on-year in the first quarter
of the year.
Nominal growth fell by 10%.
Looking ahead, lower nominal growth in house prices of around 12% is projected for this year
compared with an increase of 22.1% recorded in 2005. This is according to Standard Bank and
Absa Property experts and confirmed by BCI independent research.
In 2006 house price growth will mainly be driven by the combined effect of the affordability
of housing, especially for first-time and low- to middle income buyers, significantly lower
transfer duty on property since March 1 2006, and interest rates, which are expected to
remain low (despite marginal increases over the next twelve months).
Regional house prices
This research offers a window into regional property trends, which can be used by
GrassRoots as a template for future growth opportunities and strategies; target the more
prosperous regions to offer landscaping ether directly or trough Franchise Dealerships.
At a provincial level, nominal year-on-year growth in house prices in the middle segment of the
housing market varied between 40.3% and 19.1% in 2005. Real prices increased by between
Page 40 of 130
GrassRoots
Business Plan Conducted by:
35.7% and 15.2% last year compared with 2004. The following price rises occurred in the various
provinces in 2005:
■
■
■
■
■
■
■
■
■
Limpopo: 40.3% nominal and 35.7% real.
Mpumalanga: 30.8% nominal and 26.5% real.
Western Cape: 26.5% nominal and 22.4% real.
Eastern Cape: 26.0% nominal and 21.9% real.
Free State: 24.0% nominal and 19.9% real.
KwaZulu-Natal: 23.0% nominal and 18.9% real.
North West: 20.3% nominal and 16.4% real.
Gauteng: 19.9% nominal and 16.0% real.
Northern Cape: 19.1% nominal and 15.2% real.
In the country’s major metropolitan areas, nominal house price growth of between 28.0% and
18.7% was recorded in 2005. Real price growth in these areas varied between 23.8% and 14.8%
last year compared with the previous year. Price growth in the metropolitan areas was as follows in
2005:
■
■
■
■
■
■
Bloemfontein: 28.0% nominal and 238% real.
Cape Town: 25.9% nominal and 21.8% real.
Port Elizabeth/Uitenhage: 22.6% nominal and 18.6% real.
Pretoria: 19.8% nominal and 15.8% real.
Greater Johannesburg: 19.4% nominal and 15.5% real.
Durban/Pinetown: 18.7% nominal and 14.8% real.
Note: Higher prices of properties sold in Gauteng offers greater opportunity and higher
valuations than stated in this report.
In February, for example,
house prices grew by
21.95% from the year
before compared with
growth in excess of 36%
towards the end of 2004.
But as usual, these
aggregated growth rates
mask
noticeable
differences
across
provinces. For example,
there has been continuous
and gradual acceleration
in property price growth in Gauteng, while there has been substantially more volatility in the growth
of property prices in the
Eastern
Cape
and
Limpopo. In contrast,
house price growth in the
Free State appears to
have remained relatively
low and stable until it
experienced
a
sharp
increase in 2005.
This
suggests
that
although national factors
may have a similar
Page 41 of 130
GrassRoots
Business Plan Conducted by:
impact on provincial property markets, each province is nevertheless susceptible to its own
internal factors, which in turn contribute to determining its reaction to nationwide factors such as
the increasing popularity of property as an investment. While some of the key drivers of house
prices, notably interest rates, are the same across the country, the provincial differences such as
income are expected to cause variation in house price behaviour across the provinces.
Indeed, provinces such as the Eastern Cape and North West have similar income levels (around
R20,000 per capita) and similar house prices. Elsewhere, however, the expected positive
relationship between house prices and income appears to be absent. For example, KwaZulu-Natal
(KZN) and the Free State enjoy similar income per capita levels (R29,942 and R26,975 per year
respectively), although their average house prices differ markedly (R351,313 and R262,596
respectively). Similarly, Limpopo and the Western Cape have similar average house prices
(R368,333 and R360,000 median house prices respectively), but their income per capita differs
substantially (R211,395 and R247,500 respectively).
This suggests that there
are
more
factors
contributing to house
prices
in
different
provinces.
For example, in the two
instances
mentioned
earlier, the differences in
urban/rural status could
play a meaningful role,
while factors such as the
presence of tourists in
KZN, for example, could
contribute
to
different
house price growth.
Factors other than income that could cause differences across regions include the extent of
urbanisation, the role of tourism and foreign home ownership, and other economic factors such as
the structure of production in the local economy and spatial phenomena.
Some recent provincial trends include:
■
The Western Cape experienced relatively strong house price growth in 2000 and 2002 before
it levelled off in 2003 and 2004. House prices subsequently rose rapidly during the latter part of
2004 and in 2005. The strong increase in prices and activity in 2002 could have been
influenced by the sharp depreciation of the rand exchange rate towards the end of 2001,
especially since foreigners and tourists play an important role in this region. For example, in
2002 almost a third of the South African residential properties bought by foreigners were in the
Western Cape. The subsequent decline in activity in the previous year, combined with very
high prices and price growth, may reflect the relatively limited supply of houses in this region,
which enables sellers to raise prices.
■
House price growth in the Eastern Cape remained on a steady path during 2005, growing at
33% in the third quarter. There was a decline in the number of houses sold (as in all other
provinces), but it still ended at a level in line with the number of houses sold between 1999 and
2001, suggesting that the market has probably been normalising rather than collapsing.
This region is relatively poor, with the second lowest income per capita (R20,845 in 2003,
second only to the North West with an income of R19,651 per capita) as well as the second
highest proportion of people living in poverty (36%, following 38.1% in the Northern Cape).
Page 42 of 130
GrassRoots
Business Plan Conducted by:
■ The Northern Cape includes a large rural area and, as such, property prices tend to be
relatively low compared to more urbanised provinces. For example, its median house price of
R247,500 in the third quarter of the previous year was well below that of Gauteng (R411,395).
This is also a relatively stable market, perhaps less influenced by economic changes than, say,
Gauteng. Over this period, the Northern Cape recorded a relatively stable growth path (apart
from the growth spike in the third quarter of 2005) and also less fluctuation in the number of
transfers taking place.
■ The Free State recorded an increase in house price growth of almost 50% in the third quarter
of 2005. This experience is similar to that of the Northern Cape, where generally stable growth
rates were followed by a catch-up period. Also (and again in line with the Northern Cape
experience), the Free State saw a decline in the number of houses sold, but this was less
steep than in most other provinces. This suggests that although the Free State experienced
the effects of the boom in the property market, it was not affected as much as other provinces
were.
■
KwaZulu-Natal's housing market includes a large number of coastal properties, which
generally sell at a premium relative to inland property. Consequently, its median house price of
R295,000 in the third quarter of 2005 exceeded that in all provinces except Gauteng
(R411,395). House price growth of more than 55% was recorded in the third quarter of 2005.
The number of houses sold declined following a spike in 2002, which could, as in the Western
Cape, at least partly have been the result of a relatively weak exchange rate, which spurred
purchases by foreigners.
■ The growth path of house prices in North West Province differs from most provinces. The
province recorded above-average growth prior to the recent property market boom, with house
price growth close to 20% during 2001 and 2002. Thereafter, growth surged in 2004 before
subsiding in 2005, when the national house price growth rate peaked. This can be at least
partly attributed to movements in the rand exchange rate and commodity prices, which play a
crucial role in the mining sector that in turn is an important driver of the economy of the North
West Province.
■
Gauteng recorded house price growth of 48% during the third quarter of 2005. This
follows more than five years of strong growth. Although the correlation between economic and
house price growth is generally not very strong, the stability in house price growth in this
province is in line with its economic growth path, which has been less volatile than in other
provinces. Gauteng has the highest provincial median house price of R411,395.
■
The housing markets of Mpumalanga and Limpopo have recorded vigorous price growth
since 2004, while the drop off in the number of houses sold in this region corresponds to the
national trend in the property market. Both provinces enjoy relatively stable GDP growth, which
supports the continuous growth in house prices.
Building costs and new and existing house price trends
The average increase in the cost of building a new house in the middle segment of the housing
market was 14.3% in 2005. This was well above the average headline CPI inflation rate of 3.4%
last year, reflecting an active building and construction sector over the past 12 months. Factors
such as a strong demand for building materials and skilled labour in view of the demand for new
housing during the course of last year have contributed to this development. However, the
nominal y/y growth in building costs continued its downward trend throughout 2005. This
can be ascribed to the entrance of many new developers and building contractors into the property
market during recent times, which led to greater competition.
The average price of a new house amounted to about R739,700 last year, which was a
nominal 10.2% and a real 6.5% higher than in 2004. The average price of an existing house was
Page 43 of 130
GrassRoots
Business Plan Conducted by:
about R692,400 in 2005 (a nominal 24.8% and a real 20.7% higher than in the previous year). This
made it about R47,300, or 6.3%, cheaper to buy an existing house than to build a new one in 2005.
In the fourth quarter of last year, the cost of building a new house increased by a nominal 12.1%
compared with the same quarter in 2004. The average price of a new house increased by a
nominal 6.8% y/y to about R759,500 in the final quarter of 2005. The real increase was 3.0% y/y.
In the fourth quarter of 2005, the average price of an existing house increased by a nominal 17.6%
y/y to about R727,900, which brought the real price increase to 13.4% y/y.
The nominal price difference between new and existing houses declined to about R31,700, or
4.2%, in the fourth quarter of last year. This is the smallest difference since the 5.6% recorded in
the second quarter of 1989. The year-on-year increase in the building cost of new houses in the
various categories was as follows in 2005:
Type of home
Size of home
Nominal Price Real Price
Small houses
80m²-140m²
13.4%
9.7%
Medium houses
141m²-220m²
15.5%
11.7%
Large houses
221m²-400m²
12.2%
8.6%
Affordable housing
40m²-79m²
17.2%
13.4%
Luxury housing
>R2.2 million - R8.2 million
9.1%
5.5%
Land prices
In 2005, nominal residential land prices increased by 34.2% to about R241,100 on average,
compared with growth of 41.9% in 2004. This represents real growth of 29.8% last year (39.8% in
2004).
In the fourth quarter of 2005, nominal land prices increased by 25.1% y/y to about R257,500 on
average. Real growth of 20.7% was recorded on a year-on-year basis during that quarter. The
scarcity of suitable and properly serviced land for residential development has been a problem for
some time, especially in the rapidly growing urban areas of the country. These conditions are not
expected to materially improve in years to come. Along the coast, residential land with good views
also increased significantly in value over the past few years. As a result of the supply of and
demand for vacant land to a large extent moving in opposite directions in these areas, prices are
expected to escalate even more in future.
Mortgage finance
Commercial banks’ variable mortgage interest rates were at 10.5% at the end of 2005 after lending
rates had been reduced by 50 basis points in April last year. Based on an average house price of
R733,169 in the middle segment of the market in the fourth quarter of 2005, the monthly
repayment on a new mortgage (100% over a 20-year repayment period at a variable mortgage rate
averaging 10.5%) amounted to R7,320. In the same quarter of last year, the comparable
repayment was R6,540, calculated at an average house price of R633,605 and a mortgage rate of
11% in that quarter. The difference of R780 between these monthly repayments can be ascribed to
house prices being 15.7% higher in the past quarter than they were a year ago, whereas the
mortgage rate was 50 basis points lower than in the fourth quarter of 2004.
Nominal growth in total mortgage advances was still well above 20% at the end of 2005. However,
the gradually declining trend in mortgage advances growth since October 2005 is most probably
the result of the still slowing residential property market. Talk of higher interest rates late last year
could also have had an impact in this regard.
Affordability of housing
Based on interest rate and house price trends in the fourth quarter of 2005, the average mortgage
repayment and the qualifying gross income levels were 11.9% up on the same quarter in 2004.
Although housing is, in general, still less affordable than a year ago according to this analysis, the
Page 44 of 130
GrassRoots
Business Plan Conducted by:
declining trend in the year-on-year growth rates of these variables since the first quarter of 2005 is
an indication that affordability has not increasingly deteriorated during the course of last
year.
The house price-to-remuneration ratio increased further in the second quarter of 2005 (most
recent remuneration data available), whereas the repayment-to-remuneration ratio remained
almost the same in the second quarter compared with the first quarter. This development in the
repayment to-remuneration ratio can be ascribed to slower growing house prices and stable
interest rates, whereas growth in remuneration was almost 8% y/y in the second quarter of last
year.
An increase in these two variables implies that house prices and mortgage repayments
have increased at a faster rate than remuneration and that housing has, in effect, become
less affordable. This is yet another crucial trend that has to be taken into account by
GrassRoots in it development and strategic plans for enhanced growth during the next
three years.
Outlook
■
The current declining trend in both nominal and real house price growth is forecast to continue
in 2006. Lower nominal growth in house prices of between 10% and 12% is projected for
this year compared with 2005. This lower price growth will mainly be driven by the combined
effect of the affordability of housing, especially for first-time and low- to middle-income buyers,
and interest rates, which are expected to remain low over the next 12 months.
■
House prices continue to be supported by relatively sound consumer fundamentals and a
benign economic outlook. Despite a rise since the end of 2002, South Africa's household debt
repayment to income ratio is still not punishingly high, which suggests that they have some
scope to further increase their exposure to the housing market. However, their rate of debt
accumulation could slow in due course.
■
Further consolidation in house price growth is expected next year as a result of:\
o
The reduction in pent-up demand after several years of brisk buying
o
The fading impact of previous interest rate cuts and expected higher rates in
2006/7.
o
Recent above-trend growth that has created a high base from which future growth
rates will be calculated.
Nevertheless, nominal income is expected to grow at around 10% in 2006. Since house prices are
not inaccessible, they should at least keep pace with this growth in income.
POTENTIAL SIZE OF THE SOUTH AFRICAN HOUSING MARKET
Against the background of various supporting factors, such as a strongly growing economy, low
inflation and interest rates, the residential property market performed particularly well during the
past few years. Based on the abovementioned housing market performance at a national level
since 2000, the potential size of the housing market in South Africa and the various regions
can be determined.
This analysis takes into account average house prices at the lower cut-off point of the size range
for the small (80m²), medium (140m²) and large (220m²) categories of housing, average annual
household income, and the number of households in each region that can afford to buy a house
under certain assumptions.
Page 45 of 130
GrassRoots
Business Plan Conducted by:
In an attempt to determine the potential size of the housing market at different levels, the average
price of residential properties at the bottom end of each of the small, medium and large size
categories is taken (determined according to the lower cut-off point in terms of the size range of
houses in each category). After which the minimum gross income is calculated that a household in
each region should earn to qualify for a 100% mortgage on a residential property, of which the
monthly repayment does not exceed 30% of the gross monthly income.
Note that statistics for the above factors are not all available for 2005/6. The latest statistics have
thus been used, as follows:
From these calculations, the number of households per size cut-off that are above the minimum
annual qualifying income in each region is determined. This number, or percentage, of households
is regarded as the potential size of the housing market in each region.
Based on this analysis (2004/5):
■ 1.8 million households in South Africa (or 14.4% of the total number of 12.5 million) were able
to afford a residential property of 80m²+ in 2004/5.
■ In 2004/5, the potential market size for houses of 140m²+ was 1.3 million households, or
10.4% of the national total.
■ The potential market size for houses of 220m²+ is 1.0 million households, or 8.3% of the
national total in 2004/5.
The relatively low percentage of households that were able to afford a house at the
abovementioned size limits in 2004/5, was the result of a skewed distribution of income in the
country. Just more than eight million households in South Africa (64.4% of the total) earned an
income of up to R54,000 per annum in 2004/5; about 2.4 million households (19.5% of the total)
earned an income of between R54,000 and R132,000 per annum in 2004/5; around 1.3 million
households (10.5% of the total) earned an income of between R132,000 and R360,000 per annum
in 2004/5; and about 700,000 households (5.6% of the total) earned an income of R360,000+ per
annum in 2004/5.
In each of the three categories of housing, Gauteng was the province where the largest
percentage of households could afford to buy a house of the abovementioned sizes. This is
due to Gauteng being the province that has the highest level of income per household.
The Eastern Cape was the province where the smallest percentage of households could
afford to buy a house in any of the three categories, mainly because this province had some of
the lowest levels of income per household last year.
In the case of the major metropolitan areas in South Africa, Johannesburg North and West were
the areas where the highest percentage of households in all three categories were able to
afford to buy a house, followed by Pretoria. Cape Town emerged as the metropolitan area in the
country where the smallest proportion of households could afford to buy a house of 80m²+, 140m²+
or 220m²+. This can most probably be ascribed to house prices being, on average, relatively high
in the Cape Town metropolitan area, whereas income levels were lower compared with some other
metropolitan areas in the country.
Conclusions & Latest Property News
■
House prices have showed relatively strong growth in all the provinces and metropolitan
regions over the past few years, but diversities in terms of growth in house prices and,
especially, the level of and growth in household income during this period create a different
impression of the state of the property market in the various the regions.
■
The potential size of the housing market in South Africa can be regarded as relatively small.
Page 46 of 130
GrassRoots
Business Plan Conducted by:
■
This is the result of a much skewed distribution of household income in the country,
implying that a large percentage of households earned relatively low levels of income.
■
Clear signs of a moderation in demand conditions in the residential sector have
emerged in a Statistics SA survey conducted before the recent 0.5% rise in the
mortgage rate.
■
Building activity slowed down during the second quarter of 2006. As a result, tendering
competition increased, which lead to a deterioration of profit margins. Lower work
volumes also resulted in a slowdown in the employment of workers on site. In the nonresidential sector of the building industry, demand conditions remain solid; which is
POSITIVE FOR GRASSROOTS.
■
Building activity levels and the availability of new building work currently experienced
by non-residential building contractors continue at relatively high levels. Because of
the favourable demand conditions prevailing, tendering competition is comparatively
weak and healthy growth in the profitability of companies was reported. Contractors
expect short-term business conditions to remain favourable.
■
After having accelerated by 17.5% in 2005, building costs, as measured by the BER
Building Cost Index (which is an analysis of accepted tender prices), increased by
6.2% in the first half of 2006. In view of the sharp rise in building costs last year and
the fact that overall building activity is showing signs of losing momentum, the
expectation is that building costs are likely to rise at more moderate rates in the year
ahead.
NOTES:
Page 47 of 130
GrassRoots
Business Plan Conducted by:
Competitor Analysis
The property market (and thus related services such as landscaping) is a highly competitive one in
South Africa. This is indicated by the number of JSE Securities Exchange listed companies in
South Africa (see valuation). However, it is relatively easy to be profitable during a strong bull
market, where income levels rise, interest and inflation rates remain low and opportunities for a
ballooning black middle-class continue to surpass expectations. It is a strategically different matter
to be profitable, grow and expand operations in a market that has seen property sales fall, interest
rates rise and economic difficulty start to affect all levels of housing affordability. The beauty about
GrassRoots is that the company will profit from both residential and commercial cycles.
Note: There are no listed landscaping businesses in South Africa.
Competitive Comparisons
Note that there is still work in progress with regard to effective conditions. Below is list of some of
the potential competitors identified:
•
•
•
•
•
•
•
•
•
•
Evergreen Lawns
Idube Landscaping
Creative landscapes
Real Landscapes
Golf Data
Greenscapes
Real Langa Landscapes
King Fisher Landscapes
Top Turf Group
Classic Gardens - GP
With the exception of Real Langa, all the above have the following common strengths,
weaknesses, threats and opportunities:
Strengths
■
Good track records
■
Fair private sector networks
■
Viable cash flows
■
In-house landscaping and horticultural
expertise
■
Developed systems in place
Threats
■
Lack of empowerment credentials
■
Failure to appropriately remunerate
employees, as they are vulnerable to
manipulation by competitors
■
Lack of rapport with communities as
well as understanding of their plight.
■
Weaknesses
■
Lack of business development strategy
as they are dependent on their networks
for work.
■
Failure to embrace the new market
conditions relating to Governments
transformation agenda.
Opportunities
■
Access to credit and overdraft facilities
■
Understanding of the industry with
regard to the supply chain network and
research data
Conclusion: Real Langa is a BEE company that was established by Real Landscapes and
Laphumilanga Landscapes in Port Elizabeth. It has empowerment credentials, but it is not
aggressive in the business development strategy.
Page 48 of 130
GrassRoots
Business Plan Conducted by:
Positioning Strategy and Competitive Edge
GrassRoots has positioned itself as the preferred specialist service provider of selected
landscaping products and services. GrassRoots’ competitive edge and Unique Selling Propositions
(USP) are based on the following key success factors:
■
The company is the only established 100% BEE landscaping company in the Eastern Cape
Province (see full BEE strategy later is this document)
■
It is unique and innovative in its approach to empowerment.
■
They have carefully researched and clearly identified target markets.
■
The company is client friendly oriented.
■
They have developed accredited training manuals within the landscaping industry as well as
commitment to effective skills transfer and development.
■
GrassRoots will aggressively build its brand by emphasizing its competitive edge and USP.
Current situation analysis
South Africa has weak cutting-edge, value-adding technologies for the eventual penetration of local
floral products to international markets. Furthermore, South Africa's linkage to international
markets and R&D communities is relatively weak compared to that of the leading economies of the
world. Problems associated with unclear intellectual property rights (legislation and enforcement)
delays progress in this regard. Gardening, landscaping and related services still depends mostly
on outsourced research and technology development, even though the local infrastructure has
been used effectively to either adopt or adapt foreign technology.
On another level, limited seeding money and the diminishing skills base for value-adding
technologies affect the development of such technologies even further. However, government- and
private-sector partnerships, using the developed R&D infrastructure, provide opportunities for more
cutting-edge development throughout the value chain.
■
Continuous development of new products: The weakness of value-adding technologies
and also a lack thereof have had a negative impact on the consistent and continuous
production of new products. The lack of commitment by the role players has resulted in a lack
of funding for research to develop this area, even though South Africa's economic base is
relatively strong. The lack in appropriate human resource development and market research
has further impeded development in this area.
■
Market development: Linkages between R&D and the consumer are presenting a threat to
the development of flower markets in South Africa. The development of products to cater for
specific markets (certain market groups) can become an attractive opportunity for future
market development. Aspects of market development that require attention are information
systems on consumer choice, market segmentation and technical matters such as packaging
technologies and appropriate equipment for small-scale operations. At present, the market
is segmented, with poor distribution systems to serve low-income consumers with
inadequate consumer education.
■
However, GrassRoots believes that is can manage to exploit these market trends. A
good capital base through funding will give GrassRoots an added advantage for market
development in South Africa. The limited base of integrated skills in R&D, extension,
technology transfer and training has caused setbacks in market development for the
Page 49 of 130
GrassRoots
Business Plan Conducted by:
landscaping industry. GrassRoots believes that its Landscaping Dealership Franchise method
of business growth will answer many of these market needs.
Market acceptance for environmentally sustainable products
■
Cost of entry into the markets: Broader access to the markets (local and international) is
limited by the cost of entry, resulting in significant barriers, especially for SMMEs. This limits
(and will continue to limit) competition for GrassRoots.
■
Centres of excellence: A decreasing institutional capacity, skills base and funds are
seriously threatening the sustainable capacity for the country to perform relevant and
innovative R&D. This has been characterised by poor linkages between institutions involved
in R&D and technology transfer (extension) resulting in a gap between R&D and practical
application. South Africa's strength is its strong, world-class R&D infrastructure which, in spite
of limited skills, creates opportunities for the development of centres of excellence in priority
areas for horticulture. Competent universities and industry could form strong links around
areas of competence creating an opportunity for the development of these centres.
■
Conclusion: A critical assessment of the current situation of horticultural R&D in South Africa
shows that opportunities exist for a range of R&D interventions. The challenge is to assess
the weaknesses inherent to the current R&D system and to address the threats from global
economic trends that prevent growth and development.
■
Future economic trends and directives (local and international) will determine the innovation
of R&D in South Africa.
SWOT ANALYSIS
The strategist’s aim in asking directors to conduct a SWOT analysis is not a theoretical exercise.
Such a section tends to be placed in a business plan and seldom forms part of a thorough analysis
of management, shareholders, staff, investors and target markets.
The aim, therefore, is to assess whether management is ready for the future. After discussions with
GrassRoots it was determined that management are, in fact, aware of all issues that are pertinent
in significantly growing a company?
The BCI conclusion is that GrassRoots has all the right elements and financial foundation to take
the company to a higher plateau, but only if it is undertaken in a sensible and strategic manner. For
instance, the company today may have all the right elements (financial) to list on South Africa’s
AltX, but would management be ready for the vast array of corporate governance issues that come
with a listing? Would the directors be able to meet media and analysts’ questions with skill enough
to answer without revealing price sensitive information?
STRENGTHS
■
■
■
■
■
■
■
■
■
Highly skilled and experienced management among the key role players in the landscaping
industry
Financial sustainability
Clearly identified target market
Innovative approach to Landscaping solutions
“One-stop” shop for landscaping and related services
Significant black ownership and management
Allied with creative talent
Understanding of the socio-economic realities of the communities in which the company
operates.
Clearly defined vision and mission statements underpinned by clear core competencies,
business objectives and strategies.
Page 50 of 130
GrassRoots
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
Business Plan Conducted by:
Sound strategic advice from a highly reputable and experienced Advisory Board.
CEO has absolute control of the business.
Good service levels, with the ability to satisfy market demands.
Barriers to entry: High skills and capital costs of creating, marketing and branding a unique
service.
Skills shortage in the industry, requiring poaching from the other landscapers.\
Enthusiastic and professional directors.
Customer care and relationship building part of the proposed plan.
Competitive fees in the global context.
Good reputation of the directors and owners.
Exceptional analytical and technical skills in global market strategy, analysis of domestic,
business and political environments, technology and proven track record in the landscaping
markets.
Ability of directors and consultants to work independently or in a team.
Ability of directors and consultants to work under high pressure.
Excellent communication skills.
Good ability to analyze and develop market information.
GrassRoots is positioned to rapidly secure BBEE contracts in continental Africa.
The company will be able to establish a leading position in the marketplace before potential
competitors attempt to replicate GrassRoots’ concept (Franchise Dealership).
The company is small enough to customise pricing plans for its clients, depending upon the
size and length of contract.
The company is small enough to offer exceptional service and thus break the trend for many
frustrated home owners, who often receive poor service.
WEAKNESSES
■
■
■
■
■
■
■
■
■
■
■
■
■
Relative new market player
Lack of solid long term financials.
Potentially high debt levels could inhibit creation of shareholders wealth.
Current inability of operations to achieve design capacity, which with the high fixed costs
inhibits profitability of any future project. This could be resolved with the proper corporate
advice, documentation and shareholding.
Limited resource available.
Limited opportunity in budget to develop business.
Lack of a strong brand name outside Eastern Cape and outside South Africa. It will take
extensive marketing in order to establish the company throughout South Africa.
The company will be subject to fluctuations in business and economic cycles.
The company’s rights in individual countries may become jeopardized by political issues from
time to time.
The company needs more skilled workers in its operations, which are difficult to get and
expensive.
Cash flow problems inherent in small companies; particularly in the initial stages.
It does not have a Big Brother to support it in its ventures, with financial muscle.
Stigma of small capitalisation shares in the South African stock exchange market.
OPPORTUNITIES
■
■
■
■
■
■
■
Huge demand for effective and sustainable empowerment initiatives especially that which
impacts and filters through to GrassRoots citizens
Job opportunities (High levels of unemployment)
Trend towards privatization of government landscaping functions
Urban renewal and economical tourism development
Building of new schools
Increase in private development projects e.g. the East London IDZ (Industrial Development
Zone), Cintsa Golf Estate Development, etc.
The Greening Of The Nation programme
Page 51 of 130
GrassRoots
■
■
■
■
■
■
■
■
■
■
Business Plan Conducted by:
The 2010 Soccer World Cup
Aggressive environmental rehabilitation programmes
Expanding local and global property markets, which require landscaping services.
To attract investment, the risk factors need to be tempered with investment incentives.
Database marketing.
Local and global markets offer endless opportunities.
Strong potential to compete in niche markets: while South African service providers have, in
the past, not often been able to achieve significant economies of scale, it has successfully
been able to penetrate niche markets with higher value-added products.
Regional and international trade agreements will open new opportunities in supply chain
optimization and sourcing, as well as new opportunities to market services capabilities.
The local service sectors are receiving increasing national government attention in relation to
policy issues and planned support measures. The DTI has elevated these sectors to priority
status in terms of industrial policy and strategy, and both national and local government
acknowledge the potentially vast benefits that the promotion and well-being of these sectors
may hold, in terms of employment creation.
The company intends to exploit the fact that South Africa has a very poor service record. This
is in view of several other value added markets that would boost GrassRoots’ revenue.
THREATS
■
■
■
■
■
■
■
■
■
■
■
Exchange rate fluctuations that create uncertainty around the acquisition of equipment and
machines.
Late Payment & Bad Debts: This is a huge threat to a business of this nature where service
and implementation costs are high and expended during execution of the contract, with little
resource to recover the costs once the job is complete. This particular threat is becoming
much more prevalent in the South African economy and non-payment and delayed payments
can be the death knell of a business.
Vulnerable to price fluctuations and market volatility.
Lack of extensive branding may lead to perception that this product is elitist.
South African industry is no longer able to hide behind protectionist barriers, and its exposure
to the "world economy" has lead to the free flow of competing products and services into the
Southern African market.
Labour market legislation, while mostly good in its intentions, is often seen to be unsuitable to
developing country conditions, especially in the light of a generally abundant labour supply.
This has made the formal labour market inflexible, and has constrained formal employment
growth.
The current fluctuations in the R/US$ exchange rates make any project risky.
The normal risk factors inherent in any business venture can be minimized by a capable
management team. The management team assembled by GrassRoots has the experience
necessary to compensate for these risks.
As part of GrassRoots’ policy of being a market driven company, industry and market
research will be conducted on a continuing basis. This will alert management to any changes
needed in their strategy, and allow the necessary corrections to be implemented.
Newer technologies rendering equipment and systems deficient or obsolete.
A price war could result in undercutting by the foreign multi-nationals, who can afford to
poach key technicians and staff.
COMMENT
■
Considering the relative strengths and weaknesses, the opportunity for success is readily
apparent.
■
This potential exists, because of the factors discussed in this and other sections of this
business plan. Simply listed, they are:
Page 52 of 130
GrassRoots
Business Plan Conducted by:
o
The political and economic changes currently taking place in Africa (African Union,
Nepad etc) provide a more stable environment for commercial activities such as the
sale of residential property and commercial opportunities (shopping centres) in such
regions.
o
Technological advances in broadcasting allow entrepreneurs access to larger
markets on a cost efficient basis.
o
An emerging market that is ready to embrace a new concept, while empowering its
own people, can become self-sufficient.
o
The need for organizations to be able to promote the property service industry and
related products on a scale and in ways that was previously not possible.
■
GrassRoots is able to build a successful Brand and its training programme is advanced and a
definite benefit to the company. A more comprehensive branding strategy is also required.
■
At present ceo Madikaneboth is available to discuss personal issues with staff, but the work
load can become prohibitive and these personal open door policies will become difficult to
implement in future.
■
Other aspects of the business will also suffer if delegation of some duties is not undertaken.
■
The launch and use of an internet web site is high priority. This must be seen as a start to
client liaison and not the ultimate end.
■
An incentive scheme has been discussed, but needs to be implemented to compliment future
growth plans.
■
In certain instances, the company’s strengths are also weaknesses. For instance, the
Franchise concept is an extremely profitable potential, but has yet to be exploited. In addition,
the company has a strong sales team, but needs additional working capital. An improved
corporate structure can resolve many of these issues.
■
One of the greatest strengths of the company is the ceo, but lack of long term management
contracts means that continuity is in question. BCI has set out a possible corporate structure
to offset these issues.
■
Key threats stated by GrassRoots include economic and other environmental factors. These
can be offset and have been set out in this report.
NOTES:
Page 53 of 130
GrassRoots
Business Plan Conducted by:
Appendices
ABOUT THE ANALYST: JACQUES MAGLIOLO
Magliolo has been an investment and corporate strategist for the past 17 years. His experience
includes stockbroking, financial journalism and columnist, editor, business development and
corporate strategy.
Before setting up his own consultancy, Business Consultants International, in 2000 he was a
director and head of research at Global Capital Securities - a South African stockbroker. As team
leader, he provided institutions and private clients with industry research, analysis, presentations
and reports.
His responsibilities involved strategic analysis of global market trends, regional political and
economic assessments, industrial company analysis, identifying arbitrage opportunities in warrants
and equities and structuring client portfolios. The strategic analysis of global trends was used to
determine which sectors (and thereby companies) would be best suited for client’s asset
allocations. It is this experience that drew Magliolo to write the latest South African MBA textbook
entitled Jungle Tactics: Global Research, Investment & Portfolio Strategies (Heinemann, 2003).
He is also the author of Share Analysis and Company Forecasting (Struik, 1995), The Business
Plan: A Manual for South African Entrepreneurs (Zebra Press, 1996), The Millionaire Portfolio
(Zebra, 2003) and A Guide to AltX (Zebra, 2004). His latest book, Become Your Own Stockbroker,
published by Struik in 2005, is today a bestseller.
Magliolo concentrates on assisting entrepreneurs to restructure their firms to become more
efficient and ultimately profitable. He has developed a four phase approach to corporate
intelligence (outlined in Jungle Tactics), which includes global market research, due diligence,
business plans, corporate profiles and implementation strategies.
Magliolo is an associate of LPC and his clients are from both listed and private firms. Advice to
clients is on long-term basis – helping them through the entire process to achieve business goals.
Recent projects include:
Industry and market research: Global, regional and local.
‰
Listed and private company analysis
‰
Strategic global trend analysis
‰
Business Plans/due diligence & prospectus
‰
Strategic Implementation documentation
‰
Corporate advice
‰
Page 119 of 130
GrassRoots
Business Plan Conducted by:
BUSINESS PLAN QUESTIONS
Financial Statements
‰ Detailed income statement, cash flow and balance sheet (annual reports) for the past three
years and the current year to date. Plus forecasts for as many years as you may have.
‰
All supporting schedules to the above financial statements for the periods listed.
‰
These schedules should be split by major product line, if available. There should be separate
schedules for local and international markets.
‰
Accounts receivable per major customer for the past three years.
‰
Physical inventory summary or detailed breakdown of inventory (raw materials, work in
process, labour and overhead) for the past three years.
‰
Accounts payable by vendor for the past three years.
‰
Listing of accrued expenses for the past three years.
‰
State tax returns for the past three years.
Marketing
Customer order reports. This is split up per customer and product line for a period of at least
three years.
‰
‰
Listing of shipments by customer and product line for the past three years and the current year
to date.
‰
Listing of outstanding customer contracts and outstanding customer bids for the domestic,
export and international divisions.
‰
Description of all manufacturer's representative organizations, agreements and commission
schedules.
‰
List of buying sources: domestic, export and international.
‰
List of customers, contracts and outstanding payments.
‰
Products, services, sales and pricing strategies
Personnel
Management and shareholder structures, plus group organogram
• Local
• International
‰
‰
All employment contracts or agreements.
‰
All bonuses, deferred compensation, share option schemes, profit sharing and retirement
programmes.
‰
All pension plan documentation, including actuarial reports, tax returns and funding
requirements for the past three years.
Page 120 of 130
GrassRoots
Business Plan Conducted by:
‰
Schedule of hourly wage rates and number of personnel at each rate.
‰
Organization chart of salaried personnel.
Contracts and Agreements
All contracts or agreements with:
‰
•
•
•
•
Vendors and customers
Employees
Unions
Other third parties
‰
All recent (within three years) appraisals of property, machinery and equipment.
‰
A list of machinery and equipment. Please provide information on:
•
•
•
•
Assets owned
Financed
NAV of assets
Values of assets (depreciated and net)
‰
All outstanding insurance claims.
‰
All patents, copyrights and license agreements.
‰
All lease or purchase agreements for machinery and equipment, vehicles and property.
‰
Legal descriptions of all property, including deeds, title reports and title insurance
documentation, together with documentation of any lien thereon.
‰
List and description of all outstanding litigation or anticipated litigation.
‰
Is Union contract transferable? If yes, then description of mechanics of making transfer, such
as required approvals.
Page 121 of 130
GrassRoots
Business Plan Conducted by:
Abbreviations and Acronyms
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
ARC: Agricultural Research Council
CSIR: Centre for Scientific and Industrial Research
DACST: Department of Arts, Culture, Science and Technology
DEAT: Department of Environmental Affairs and Tourism
DoE: Department of Education
DTI: Department of Trade and Industry
DWAF: Department of Water Affairs and Forestry
FAO: Food and Agriculture Organization
FRD: Foundation for Research Development
HR: Human resources
ICT: Information, Communication Technology
IDRC: International Development Research Centre
IPR: Intellectual Property Rights
MCST: Ministerial Committee on Science and Technology
NAFCOC: National African Federated Chamber of Commerce and Industry
NAFU: National African Farmers Union
NARS: National Agricultural Research System
NDA: National Department of Agriculture
NGO: Non-governmental Organisation
NRF: National Research Foundation
NRM: Natural Resource Management
NRTF: National Research and Technology Foresight
NRTA: National Research and Technology Audit
NSI: National System of Innovation
PDA: Provincial Department of Agriculture
R&D: Research and Development
R&T: Research and Technology
SABS: South African Bureau of Standards
SACOB: South African Chamber of Business
SAAU: South African Agricultural Union
S&T: Science and Technology
STEEP: Social, Technological, Environmental, Economic and Political.
SWOT: Strengths, Weaknesses, Opportunities and Threats
THRIP: Technology and Human Resources for Industry Programme
SMME: Small, Medium and Micro-enterprises
WRC: Water Research Commission
THE GRASSROOTS LANGUAGE: GLOSSARY OF LANDSCAPING TERMS
■
■
■
■
■
■
■
■
■
■
Acidic soil: When the soil’s pH is below 7,0
Adventitious roots: Roots growing from the plant’s stem, above ground level.
Aeration: Allowing more air into by loosening the soil.
Alkaline soil: When the soil’s pH is above 7,0
Alpine: Plants originating from the Alps. Informally it refers to rock garden plants, dwarf
shrubs and conifers.
Alternate: When a leaf arise first on the one side of the stem, and the next leaf on the other
side of the stem.
Annual: When the plant’s life cycle start and end in one growing season.
Anther: The stamen’s pollen-bearing part.
Apex: The growing tips of stems and roots.
Aquatic: Plants that use water as growing medium.
Page 125 of 130
GrassRoots
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
Business Plan Conducted by:
Areole: The hairy or spiny, modified side shoots found on cacti.
Asplenium: A genus of ferns.
Auxin: Growth hormones present in plants.
Axil: The angle between the top-side of a leaf and its stem, from which flower buds or
growths appear.
Balled roots: When the root ball of shrubs or young trees get wrapped in sacking/plastic
sheeting, retaining the soil and preventing drying out of the roots.
Basal cuttings: When a cutting is taken close to where the shoot joins a branch or older
shoot.
Bed: Plots of cultivated soil ready for gardening.
Bedding plant: Plants, usually annuals, used for temporary gardens.
Biennial: When the plant’s life cycle needs two growing seasons.
Biennial bearing: Certain fruit trees only carry significant crops in alternate years.
Bigeneric: when you cross two different genera’s, you get a bigeneric hybrid.
Bipinnate: foliage that are made up of various segments, which are also divided into
segments.
Blanching: when excluding light by means of inverted pots, paper or earthing plants up, thus
improving their flavour.
Bleeding: the loss of sap from plant tissue after a cut or pruning.
Bloom: (a) flower, or (b) fine powdery coating.
Bolting: early running to seed.
Bottom heat: when, usually through electrically heated cables, applying heat from below to
encourage root formation.
Bract: leaves that bear a branch of an inflorescence or flower in its axil.
Brassica: this plant genus includes various veggies, like cabbages, cauliflowers, turnips etc.
Break: growing from auxiliary buds. Pinching out encourages breaking.
Broadcast: when spreading fertilizers or seed evenly over areas.
Bromeliad: pineapple-like plants, originating from tropical America.
Bud: a growing point on a shoot from which flowers or foliage may develop.
Budburst: when buds of deciduous plants open in spring.
Budding: propagation by inserting one plant’s bud into the bark of another (the rootstock). If
a union occurs, the bud develops the characteristics of its own plant, while the rootstock
provides a strong root system.
Bud drop: when due to lack of water or nutrients, the buds of fruit trees drop off before
forming fruit.
Bulb: modified shoots of shortened stems, enclosed by leaf-bases or plump, scale-type
foliage.
Bulblets: the small offsets attached to a parent bulb.
Cactus: succulents belonging to the Cactaceae.
Calcareous: lime-like or chalk-like.
Calcifuge: when a specific plant rejects conditions of lime and/or chalk.
Calyx: the outermost part consisting of sepals that protects and surrounds other parts during
the bud stage.
Cambium: this is found between bark and wood and is the tissue responsible for active
growth.
Cane: slim woody stem.
Carpel: part of the ovary, which develops into fruit.
Chlorosis: the yellowing or whitening of leaves where there’s a shortage of chlorophyll.
Cloche: similar structure to a cold/garden frame.
Cold frame: small-scale glasshouse, consisting of a frame and removable glass panels.
Compost: decomposed organic matter.
Complete fertilizer: fertilizers consisting of nitrogen, phosphorus and potassium.
Cordate: when leaves, for instance, are heart-shaped.
Corm: dumpy, enlarged underground parts of a stem that stores food in the central tissue.
Corolla: found on the inside of the flower, consisting of fused petals.
Corona: the crown part of flowers such as the daffodil.
Page 126 of 130
GrassRoots
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
Business Plan Conducted by:
Cotyledon: the part of a seed that forms the first leaves.
Crocks: broken clay-pot pieces used to improve drainage.
Cross-pollination: when pollen is transferred from one plant to another’s stigma.
Crown: the basal section from where root- and shoot growth happens.
Cultivar: plant varieties that has been cultivated.
Cultivation: general care and maintenance for plant growth.
Curd: the immature flower heads on brocolli- or cauliflower plants.
Cutting: used in propagation. When taking a piece of stem, root or leaf to root and form new
plants.
Cycad: primitive palm-resembling plants.
Damping off: a soil fungi disease causing seedlings to rot, wilt and die.
Dead-heading: when faded flowers are manually removed.
Deciduous: when trees or shrubs loose their foliage at the end of growing seasons.
Decumbent: when a section of the stem lie on the soil before growing upwards.
Dentate: when a leaf, for instance, has a coarsely-toothed edge.
Disc: the flower’s center, around which the petalled florets are arranged.
Die-back: when, through drought, disease or water-logging, young shoots and larger
branches die.
Digitate: leaves with finger-like leaflets.
Disbudding: when side-buds get removed.
Dioecious: unisexuality where male and female reproductive parts on different plants.
Dissected: when petals of leaves are deeply cut into segments or lobes.
Division: separating bulbs, perennials and other clump-forming plants, thus increasing stock.
Dormant: usually during autumn and winter when no growing occurs.
Double flower: flowers with vast numbers of petals.
Drainage: the passing-speed of water through soil.
Epigeal: rest on the ground.
Epiphyte: non-parasitical plants using other plants for support.
Espalier: shrubs or trees growing flatly against walls or on a trellis, with branches trained
horizontally.
Etiolation: plants that, due to insufficient light, grow distortedly with small leaves, long stems
an abnormally long internodes.
Evergreen: plants remaining leafy throughout all seasons.
Eye: immature or undeveloped buds.
F1 Hybrid: the first generation of hybrids after crossing two varieties.
Falls: an iris’ outer, pendulous petal segments.
Floret: the individual small flower that form part of large flower clusters.
Foliar fertilizer: fertilizers that can be applied to the plant’s foliage.
Forcing: manipulating flowers, vegetables or fruit to mature before their normal time.
Free-flowering: plants that flower generously.
Fronds: the foliage of palms and/or ferns.
Gall: outward, abnormal growths, seen sometimes on shrubs and trees and caused by
bacteria or pest irritation.
Genus: a collection of allied species.
Glabrous: hairless and smooth.
Glasshouse: structures made mainly of a frame and glass, protecting plants from extreme
weather.
Grafting: when propagating by inserting one plant’s scion into another plant (rootstock) close
to ground level. The scion will grow leaves if the graft takes and eventually grow to produce
flowers and fruit.
Growing on: when cultivating a plant in pot or container until it’s strong enough to be planted
out into the garden.
Hardening off: the acclimatization of seedlings.
Hardy: hardy plants tolerate and survive frost.
Heel: when pulling a side-shoot away from the main stem an expanded base of old wood or
stem pulls off with the side-shoot.
Page 127 of 130
GrassRoots
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
Business Plan Conducted by:
Herbaceous: plants that do not form unyielding woody stems.
Hilum: a scar on the seed’s coat where the seed was attached to the plant.\
Hip: a rose bush’s fruit.
Honeydew: secretion left on leaves by insects.
Hoof and horn: organic fertilizer.
Hose-in-hose: flowers, growing in pairs, that seem to grow from the center of the other.
Humus: decomposing animal or vegetable matter in its last stages, when brownish black.
Humus consists of a water insoluble part (humin), the fibrous part, and a water soluble part
which are split into two fractions by definition, a heavy fraction, water soluble only at alkaline
pH above 8, called humic acid (the black tarry substance in the compost heap for the layman)
and a light fraction, water soluble at any pH, called fulvic acid (the honey coloured streak you
get when you run water through the compost heap - people have started to call it compost
tea).
Hybrid: crossing two individual species.
Hydroponics: when soil is excluded as a growing medium.
Hypogeal: underground.
Inflorescence: arrangements of flowers on a single stalk.
Laciniate: leaves, for instance, that are cut into slim segments.
Lanceolate: lance-shaped leaves.
Lateral: side-shoots, growing from larger stems.
Leader: those shoots at the end of main branches and stems.
Leggy: when a plant, usually through age or lack of light, has become spindly and drawn.
Lifting: when digging up plants.
Loam: fertile soil with balanced amounts of sand, silt, clay and humus.
Lobed: petals, leaves or bracts that stay united although divided into different areas.
Monoecious: plants that have female- and male flowers.
Meristem: the growing part of a plant where permanent tissues is derived.
Microclimate: when small areas have different climates to the surrounding region due to
conditions cause by wind breaks for instance.
Midrib: a leaf’s large central vein.
Monocarpic: when plants die after flowering and seeding. This term is usually used for
perennials.
Monotypic: when a genus is represented by one species only.
Mulch: where layers of compost or other organic matter is spread over the soil to retain
moisture, suppress weed growth and supply nutrients.
Nematodes: pests, small and worm-like, that feed on roots.
Node: the joint on a stem where-from a leaf grows.
Oblong: when a leaf’s width is a third to it’s length and the sides run parallel.
Organic: compounds resulted from living organisms.
Ovate: broadest at the base and other wise egg-shaped.
Palmette: similar to espalier training. Where trees are grown and trained flatly against walls,
for instance, with horizontally grown branches.
Panicle: branched, open clusters of flowers.
Parthenocarpy: when fruit form without fertilization.
Pendant: draping from supports.
Perennial: plants that grow from year to year.
Petiole: a leaf stalk.
pH: alkalinity or acidity of soils.
Photosynthesis: when plants use sunlight to convert carbon dioxide and water into its own
food.
Phototropism: a term used for the theory of plants growing towards light.
Pinching out: when speeding up maturity or keeping plants compact by removing the
growing tips off the stem.
Pistil: the female structure in the flower.
Pollination: transferring pollen from male- to female flowers during fertilization.
Pricking out: when seedlings or small-rooted cuttings are first transplanted.
Page 128 of 130
GrassRoots
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
Business Plan Conducted by:
Propagation: increasing plants through vegetative processes or seed.
Propagator: the protective box in which cuttings are planted or seed is sown.
Prostrate: plants that creep or grow along the ground.
Punnet: plastic containers or boxes in which seed is sown.
Raceme: unbranched inflorescence with individual flowers on stalks.
Reflexed: where flower petals curve backwards and downwards.
Rhizome: stems that grow horizontally above or under the ground, also responsible for
propagation.
Rootbound: When plants out-grow their containers and their root-balls don’t have enough
space left for further growth.
Rose: watering can nozzle.
Rosette: rose-like clusters of leaves in circular and overlapping patterns.
Runner: for instance strawberries. When stems root at the tip and grow new plants on
contact with favourable soil.
Scale leaf: non-foliage leaves, often modified, found on rhizomes for instance.
Scion: the piece of stem or bud used for grafting.
Scree: eroded rocky substances from mountain-sides.
Self-fertile: plants who have flowers that can fertilize other flowers of the same plant.
Semi-double: flowers with a couple of petals more than a single flower.
Sepal: usually green, these modified outer leaves protect the flower’s petals and reproductive
parts.
Shadehouse: they provide cool, shady conditions.
Side dressing: extra fertilizing directed at the side of the plant.
Species: groups or individuals of closely connected plants within a genus.
Single flower: flowers with 3 - 5 petals.
Sori: ferns’ spore masses.
Spathe: some plants have modified bracts or leaves that surround its flowers.
Spit: a garden fork or spade’s blade depth.
Sporangium: the part the produces spores.
Spore: reproductive bodies that, single- or several celled, detach from the parent body and
forms new plants. Like fungi, moss, ferns etc.
Sport: the spontaneous arrival of mutant plants or plant parts.
Sprig: short side-shoots on a main stem.
Spur: compact shoots carrying rosettes of leaves, found often on fruit trees.
Staking: when providing support to plants by means of canes or stakes.
Stamen: a flower’s male reproductive (pollen-bearing) part.
Sterile: (a) treating potting composts to kill the seeds of weed. (b) the inability to create
sufficient seeds.
Stigma: a flower’s female part that emits sticky fluids when pollination can occur.
Stolon: runners and/or stems that creeps over the ground surface, forming plants where it
roots.
Stomata: pores in the plant’s epidermis.
Stool: clumps of young stems near the ground.
Strike: when root forming starts on a cutting.
Style: the female reproductive part’s connecting section between the ovary and stigma.
Sub-shrub: plants which have herbaceous top growth, but some woody base growth.
Strain: varieties or species that are only propagated through seed.
Succulent: plants with fleshy, thick leaves and/or stems, able to grow and thrive in arid
conditions.
Sucker: shoots growing from the roots of a plant.
Symbiosis: when different kinds of organisms mutually benefit each other.
Systemic: insecticides or fungicides that enter through plant leaves, poisoning the leaf and
sap.
Tap-root: vertical, long roots with few, if any, side branches.
Tamping down: when firming the soil down after planting.
Tender: those plants sensitive to frost.
Page 129 of 130
GrassRoots
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
Business Plan Conducted by:
Tendril: a means of support for plants through twisting, slender projections.
Terrestrial: growing in the soil.
Thatch: layers of old, non-decomposed grass clippings and roots at the soil surface of lawns.
Thinning: removing extra seedlings to create more space for remaining ones.
Tilth: achieved after raking and cultivation. A fine and crumbly soil surface.
Top dressing: when compost or topsoil is applied to fill holes or improve the soil.
Topsoil: upper, fertile layers of soil.
Transpiration: evaporation of water by plants.
Transplanting: when planting young plants out into the garden from their initial pots or seed
beds.
Trench: deeply dug strips of soil.
Trifoliate: leaves divided into three leaflets.
Truss: fruit- or flower clusters.
Tuber: fleshy, thick roots or underground stems that store and provide nutrients.
Tunic: the papery covering around some bulbs and corms.
Umbel: when individual flower stalks rise from the same point.
Undulate: wavy or twisted petal, sepal or leaf margins.
Unisexual: flowers of one sex.
Variegated: leaves and sometimes flowers of two or more colours.
Vegetative propagation: propagation methods excluding seed.
Vermiculite: a soil-improving mineral, also used for root cuttings.
Water shoot: strong shoots on mature branches.
Weeping: drooping growing habits.
Whorl: when leaves or flowers are circularly arranged, arising from the same single point.
Windbreak: any structure that lessens the force of wind, for instance hedges, walls etc.
With-holding period: the time between applying the chemical and its breakdown of residues.
Page 130 of 130