Edcon still stumbling

With Edcon on the ropes, SA’s largest clothing retailer has been ill-placed to counteract a new scramble for customers by the world’s heavyweight brands.

The arrival of global retail titans, including Zara and Cotton On, has also focused attention on the strategies of the SA incumbents.

Last month, H&M announced its first store opening in SA, a 4 700 m store sprawling across two floors — one of H&M’s largest globally. And US fashion brand Forever 21 will be the new anchor tenant at the upmarket Nelson Mandela Square towards the end of the year.

Under the cosh in recent years, Edcon has pushed the big brands into its stores. Other local retailers have responded differently. Mr Price has become faster in its supply chain, allowing it to quickly put the latest catwalk-inspired trends on its shelves and racks. Woolworths and Foschini have made big acquisitions which they believe will boost their speed-tomarket, given their extra buying power and quicker stock turnaround time.

“Edcon’s foreign brands have certainly brought newness and excitement into their stores but these don’t necessarily appeal to the core Edgars credit customer, who may not be able to afford them without credit,” says Stanlib analyst Theresa Heath.

It hasn’t helped that Edcon sold its debtors’ book to Absa in 2012 for R10bn — and the bank promptly shut off the taps. Credit sales plunged. Edcon then began talks with a “secondary credit provider” — only it picked African Bank, which soon stumbled into curatorship under a mountain of bad debts.

To fix itself, Edcon needs to have a clear credit strategy. But Heath says that with little marketing behind these new brands, the strategy hasn’t been as successful as Edcon would have hoped.

“It has also diverted focus from Edgars’ core in-house brands, which arguably should hold the key to better margins and provide differentiation in the market, as well as being brands SA customers love and can afford,” she adds.

But it has been Edcon’s local rivals, not its newer international rivals, who have stolen its lunch. Heath says the major beneficiaries of Edcon’s weak trading in recent years have been Pepkor’s brands Pep and Ackermans, Mr Price and The Foschini Group.

Estimates suggest that international brands have taken only between one and two share points from the large retailers, including Edcon. debt compared to its equity — was taken out in a world where paying interest of between 7% and 10% on loans wasn’t unusual. But when the crisis hit, it battled to repay.

“Management’s attention became more focused on the structure of the balance sheet, rather than the operations. That was critical in where they started to go wrong,” the portfolio manager says.

From there, the mistakes began to cascade. Though the debt load was stifling, Edcon might have managed to pay it off had profitability not plummeted at the same time.

Edcon’s retail sales trading margin fell from 12,9% of sales in 2006 to 3,4% by March 2015. Sales growth also slowed to a snail’s pace, to a marginal 4,7% per year in the past five years.

Rather than investing in the upkeep of its stores, Edcon began using every spare cent to pay its debt — at a time when consumers came under pressure and the National Credit Act (NCA) began squeezing lenders further.

Edcon, like many retailers, relied heavily on credit — another strategic misstep that it has come to regret.

In the four years before the act was implemented in 2007, Edcon had signed up a whopping 2m credit customers.

“They dished out credit like there was no tomorrow,” says Vianello, “But at the point when they did the Bain deal, the credit story was already starting to level off. The world was then thrown into turmoil and, along with the NCA, the crisis prevented Edcon from rolling out credit.”

Banks became wary of giving Edcon much credit leeway, given its precarious balance sheet. And with 70% of its sales on credit, Edcon began to choke.

“Retailers who didn’t have debt burdens survived even with inflation and bad-debt write-offs. Edcon with near R25bn [debt] just couldn’t,” says Vianello.

Sales faltered, while interest repayments soared — and Edcon began posting losses. A string of ratings downgrades followed.

Realising its mistakes, Edcon took action — refurbishments, IT enhancements, cost cutting — but its performance remained patchy.

and was replaced by Jürgen Schreiber, a German-born MBA graduate who cut his teeth in Canada’s pharmaceutical retail trade.

When Schreiber came on board, the talk of re-listing Edcon was still doing the rounds. This is the traditional exit route for private equity, but the debt meant the prospect of returning to the market dimmed.

“They missed the boat,” says Momentum Wealth portfolio manager Wayne McCurrie.

“I don’t think they will ever list. If they