Ed­con has tough is­sues to iron out

Finweek English Edition - - IN THE NEWS - BY SHOKS MZOLO

Just 10 years ago, the Ed­con group was mak­ing R1.3bn in net prof­its. But for the year to March, net loss came in at R2bn on the back of R29.4bn in rev­enues. The only piece of good news, strictly for eter­nal op­ti­mists, is that net loss has nar­rowed from last year’s R2.4bn. So where did the group go wrong?

With brands like Edgars, Board­mans and Jet span­ning 1 500 stores in SA, and over 200 other stores in seven neigh­bour­ing coun­tries, Ed­con’s chains rank f irst or sec­ond in most of its prod­uct lines. This, as well as en­vi­able brands and foothold, used to trans­late into mas­sive prof­its. But for the past few years Ed­con’s in­come state­ments have been splashed in red ink. How did this hap­pen?

Ed­con sim­ply “lost fo­cus”. That is ac­cord­ing to Ar­gon an­a­lyst Ju­naid Bray.

“Over­bur­den­ing the bal­ance sheet by gear­ing the busi­ness up at the peak of the pre­vi­ous cy­cle, just prior to the global f inan­cial cri­sis, con­strained Ed­con’s abil­ity to rein­vest in its busi­ness and main­tain its core credit of­fer­ing,” says Bray.

Hence, he says, Ed­con, which is owned by US com­pany Bain Cap­i­tal, could not in­vest to grow and de­fend its mar­ket share in the face of in­ten­si­fy­ing com­pe­ti­tion from both lo­cal peers and “from the in­creas­ing pres­ence of for­eign re­tail­ers like Zara and Cot­ton On”.

When Bernard Brookes takes over as Ed­con CEO at the end of Septem­ber, his legacy will be de­fined by how he tack­les such mat­ters.

With pre­de­ces­sor Jürgen Schreiber gone to pur­sue an op­por­tu­nity i n Canada, l ong- ser v i ng COO Urin Fern­dale and Roanne Daniels, a Bain rep­re­sen­ta­tive, are joint in­terim CEOs un­til the end of Septem­ber.

Brookes joins Ed­con af­ter nine years in charge of Myer, Aus­tralia’s premier depart­ment store chain. Ed­con noted that, un­der Brookes, Myer’s mar­ket cap grew from AU$1.3bn (when it f loated on the Aus­tralian Stock Ex­change in 2009) to over AU$2.3bn now. How­ever, Myer’s prof its, and stock, suf­fered dur­ing the sec­ond half of his ten­ure.

Ed­con chair­man Dwight Poler r ega r ds Brookes high l y. Ed­con, ac­cord­ing to Poler, is “very pleased” to have Brookes on board.

In con­trast, in an in­ter­view with Busi­ness Day, Syd­ney-based Im­pact Re­tail­ing con­sul­tant Stu­art Ben­nie of­fered any­thing but a pleas­ing preview. “Some­how he seemed to lose fo­cus,” said Ben­nie of Brookes’s other ac­tiv­i­ties. “It beg­gars belief that a CEO who was fired – put it how you will – in Aus­tralia can be hired to join an ail­ing Ed­con.”

TOUGH TIMES Ed­con, which has laid off an un­spec­i­fied num­ber of em­ploy­ees in re­cent years, dis­cussed “selling as­sets or ceas­ing oper­a­tions to im­prove [its] short-term liq­uid­ity and ser­vice [its] cash pay­ments” and thus “de­press” and “im­pair” its abil­i­ties, it said in July, when it also dis­closed that its over­draft had quin­tu­pled to R25m.

June quar­ter­lies show a drop in store sales at the Edgars di­vi­sion, the main source of in­come, whose base now ex­tends to 549 out­lets. At the lower end, in­clud­ing Jet, sales soft­ened. Sales and mar­gins weak­ened at sta­tioner CNA as it “right-sized” trad­ing space and added five branches dur­ing the quar­ter. Mod­est growth from neigh­bour­ing coun­tries had a mi­nor ef­fect on Ed­con’s los­ing streak.

Spokesper­son Deb­bie Mil­lar dis­misses as­ser­tions that things are look­ing bleak. In­stead, she sin­gles out EBITDA, which has risen over the last four quar­ters (but is far off its best).

RE­GAIN­ING MAR­KET SHARE For Bray, re­gain­ing lost mar­ket share is long over­due. But it won’t be easy as ri­vals – mainly Mr Price and Pep­kor, who have made gains from its losses – f ight on. Crit­i­cally, it may be dif­fi­cult to win back lost clien­tele, he adds. Re­defin­ing the mar­ket and prod­uct mix is another top pri­or­ity. “The high-end branded goods strat­egy has low­ered the af­ford­abil­ity of Ed­con’s of­fer­ing, which has be­come more re­liant on credit, while Ed­con doesn’t have the abil­ity to sig­nif­i­cantly of­fer credit,” as­serts Bray.

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