The Bain of Edcon’s existence

It is tempting to write off the disintegration of the Edcon of the past as a singular corporate disaster tale, a car crash of interest to only its bondholders and its 40 000 staff, who must surely have to steel themselves to pick up the business press every morning. But any splintering of the 86-year-old company will be felt far beyond just Edgardale, which squats on Johannesburg’s Main Reef Road like a corporate relic of the 1980s. As the Cover Story in last week’s Financial Mail suggested, the experts believe it’s only a matter of time before its individual components are split off and sold.

This raises the once-unthinkable notion that the likes of Jet, Legit and Boardmans may yet exist under a different banner — be it Truworths, The Foschini Group, or even a foreign buyer.

The consequences of this would have a domino effect right the way down the supply chain, extending into corners of the economy people wouldn’t have expected. It’s the sort of systemic risk we worry about so often when it comes to banks; how is it that policy makers seem blithely unconcerned about this when it comes to the country’s largest fashion retailer?

Take the rag trade, which relies on Edcon as a big buyer for its products. Though the textile factories in far-flung parts of SA, such as Newcastle in KwaZulu Natal, have regained some of their vim after China’s cheap imports have slowed to a dribble, Edcon’s cash-flow hassles will have cascaded down to the bottom of the clothing chain.

It’s the same story with the property owners. At last count, Edcon leased about 1,5m m²of retail space — about 6% of the total shopfloor space available, behind only Shoprite and Pepkor.

Last year, Avior Research said that Resilient, Fountainhead Property Trust and Hyprop had the largest exposure to Edcon. These three would, in a worst-case scenario, be hit by a complete collapse.

Luckily for them and their investors, this now seems unlikely. But this reprieve is only because 95% of its bondholders have now struck a deal which will result in them taking a haircut on what they’re owed by the company. They, of course, had little choice, which is why some ratings agencies see that as tantamount to a default in any event.

The implication for the shopfloor, however, is that Edcon will now be trimming its space requirements, looking to lease a smaller combined space for its brands. This vacant space will represent a dilemma for the landlords, as well as an opportunity for the retailer’s rivals.

Said Avior: “In our opinion, one of Edcon’s most valuable assets is its leases. With international retailers struggling to gain a meaningful presence in SA due to limited availability of space, Edcon’s existing footprint may be seen as an ideal platform from which expansion into SA can be achieved.”

This brings the philosophical issues around this subject into sharp relief. Private equity is often painted as the inevitable, ugly end-game of free-market capitalism — a place where the cut and thrust of the boardroom is stripped of any sentiment.

This isn’t necessarily a bad thing. Capitalism is, after all, meant to be about creative destruction. Years ago, OK Bazaars reached the end of its natural life and folded into Shoprite, which has taken its crown at the apex of the food retail pyramid.

In the case of Edcon, however, its 40 000 staff across numerous countries will feel that it needn’t have been this way, had Bain not loaded way too much debt onto the group, R25bn in all, back in 2007. This stacked the decks far more in favour of destruction and lowered the odds of anything creative and positive coming out of this.

Bain can’t have known that the financial world would have hit a wall months after doing the deal. But the consequence is that Edcon has shed market share and suffered a big smack to its once-formidable reputation.

For Bain, which swaggered into SA with all the pomp of an all-conquering private equity giant who’d seen it all and done it all, this has been chastening.

But its foray has weakened the entire fashion retail sector, and left everyone poorer. Bain may be feeling the sting of poor decisions, but the pain will be felt too by consumers, property companies and already struggling smaller clothing makers.