Pulling Edcon back from the brink is a mammoth undertaking for CEO
Putting it diplomatically, Edcon, SA’s largest clothing retailer, is in a very difficult period in its life cycle. Putting it bluntly, it is in deep trouble, and CEO Grant Pattison will need to muster all his acknowledged retail skills to turn this iconic giant around.
Pattison is not alone in his challenge and Edcon is not an isolated South African case study. Physical retail businesses around the world are bleeding due to the effect of e-commerce.
Iconic retailers are rapidly downsizing and becoming more agile.
Broadly speaking, there are four stages in the typical life cycle of a retail company: introduction, growth, maturity and decline.
Based on this timeline, Edcon’s flagship, Edgars, which has been around for nearly 90 years, should have gone into terminal decline some time ago. By the late 1990s, this segment was already into its maturity phase and was only saved by the 1998 appointment of American Steve Ross.
He came with no baggage or preconceived ideas and experimented with a variety of new concepts, some of which worked and some of which did not. But on balance his was a great tenure.
Unfortunately for Edcon, the 2007 leveraged buyout by Bain Capital failed dismally, due mainly to it coinciding with the global financial crisis.
So much money flowed out of the business to pay back purchase funding interest, the operational side was neglected and market share was lost.
The retailer was rescued from certain oblivion by bondholders agreeing to becoming shareholders.
It is not clear if or when Pattison’s plan will succeed. Indeed, he has even been quoted as saying that the group may not survive in its current form. He has taken on a gargantuan task. Even if his turnaround plan succeeds, it is unlikely that Edcon will quickly rise to being SA’s premier clothing retailer again.
Competition from foreigners such as Cotton On, Zara and H&M makes any turnaround strategy more difficult to implement. The dire situation is exacerbated by the poor state of the South African economy and the likelihood that the country will remain in a medium-term lowgrowth trap.
Pattison is adopting an orthodox strategy to Edcon’s hopedfor turnaround.
He is cutting costs and closing nonperforming assets like the stores-within-stores, such as Red Square and Boardmans, and rejuvenating well-known private-label brands such as Kelso and Stone Harbour.
Hopefully, this strategy will stabilise the business and give it breathing space while funders decide whether to keep it alive.
There is one curious omission in Pattison’s list of asset closures: CNA.
An incongruous inclusion in Edcon’s predominantly clothing retail portfolio, this was a Ross acquisition.
Founded in 1896, CNA is a tired concept that has reached the end of its natural life cycle.
Stationery and books, the mainstay of CNA, have declining appeal in the digital age. And many of CNA’s specialist retailing capabilities were long ago commoditised by the large supermarket chains. It is hardly a destination shopping experience and its impulse buys have limited appeal.
However, in the UK there are some successes in this line. WH Smith has clever placement of outlets in areas with high footfall, such as railway stations, airports and the high street.
And the 125-year old Ryman, owned by retail magnate and BBC Dragon’s Den star Theo Paphitis, is more akin to Waltons as it offers a variety of stationery, furniture and electronic goods. Ryman has kept itself relevant in the rapidly changing UK consumer market, maintaining relevance once maturity is reached.
Edcon’s financial statements show declining revenues for the segment stationery, books, magazines. The trend is R696m for 2017, R978m for 2016 and R1.116bn for 2015.
I suspect that CNA will disappear and its sites will be disposed of or closed. However, in an era of such high and pernicious unemployment, Edcon management will probably put on a brave face and pretend it has a plan.
PHYSICAL RETAIL BUSINESSES AROUND THE WORLD ARE BLEEDING DUE TO THE EFFECT OF E-COMMERCE COMPETITION FROM FOREIGNERS SUCH AS ZARA MAKES ANY TURNAROUND STRATEGY DIFFICULT TO IMPLEMENT