Lewis scores as rivals languish in the comfort zone

FURNITURE retailers JD Group and Ellerines have spent much of the past five years separating financial services from retail products and failing to innovate new products, which has weakened them.

That is according to Stanlib retail analyst Theresa Heath, who said listed furniture retailer Lewis continued to innovate and refresh its product offering when its competitors did not. This had helped it to navigate tough times for the sector more successfully. “They talked more about the financial services opportunity than the retail opportunity and that’s come back to bite them,” said Heath, referring to JD and Ellerines.

Lewis’s top-line growth is negative, but less so than that of its rivals. Its business model differs in that it is more conservative, decentralised and ensures close relationships between store managers and the communities they serve. It keeps a better eye on how consumers are faring with payments and manage these more effectively.

Although some analysts take the view that Lewis should diversify to other financial products and decentralise its offering, the fact that it has stuck to its knitting has paid off.

Heath said the Lewis model had proved resilient. “They are cyclical but tend to move within a narrower band — they manage their business more conservatively and tightly.”

JD is now considering decentralising its supply chain and collections process.

But the outlook for the sector over the next few years is bleak. Consumers are unable to repay loans because of growing pressure on living costs such as higher electricity and food prices. The big operators have poor credit quality after dishing out too much credit. And there are too many stores in the sector amid flagging demand.

JD and Ellerines plan to close stores. Lewis’s new stores are smaller than in the past, but they are more profitable.

Furniture retailers used to enjoy a sweet spot as the first port of call for consumers seeking credit, but now there is more competition for their money not just in terms of furniture, but in terms of lending products.

And the money can be spent anywhere.

“Today, you can access credit anywhere and spend it anywhere. Before, you pretty much had to buy furniture on credit,” said Heath.

Because companies have dished out an abundance of credit, there has been a de- terioration in the collection rates of non-performing loans.

Supermarket retailers have also moved into the lower-income consumer space aggressively, recognising it as a growth area fuelled by a flood of social grants.

Although consumer regulations require that the full cost of the product over the entire life cycle of its payment period be clearly stated upfront, consumers are not put off by the total cost of the item on a credit plan. The key determinant in whether they buy a product is whether they can afford the monthly instalment. It has less to do with the term or the full cost of the product.