Don’t call us, we’ll call you -- at a price

IF you happened to visit the website of retailer Lewis Stores last week and clicked on the section “ethical code of conduct”, you probably wouldn’t have been surprised at the result.

The page said simply: “Error 404 — not found.”

“The resource you are looking for has been removed, had its name changed or is temporarily unavailable,” the website flashed.

Come now, Lewis — isn’t that being a shade too coy?

Shouldn’t “temporarily unavailable” really read “permanently unavailable”? Or even “long gone”?

Billing itself as the “leading retailer” of furniture and appliances sold largely to the middle market on credit in its 602 stores across the region, Lewis is a stalwart of most investors’ retail portfolios.

Now, it is true that most investors don’t decide where to invest based on a company’s ethics.

But when the way in which a company makes its money seems so unscrupulous, investment managers start paying attention. Because, sooner or later, either your customer base revolts or the dozy regulators wake up to the wider harm you’ve caused.

One asset manager who wrote to me said: “We despise this furniture industry. Their practices are disgraceful, pouncing on the uneducated, and a major cause for the poor state of consumers out there.” This seems no exaggeration. Take the “instalment agreement” that a customer was asked to sign a few years ago in the branch in Woodstock, Cape Town, a few hundred metres from the company’s down-market head office.

This contract, seemingly scripted by particularly malevolent lawyers, appeared almost intentionally pockmarked with reams of confusing and meaningless jargon. And it contained some rather egregious fine print: “Should the purchaser be in arrears with the monthly instalments . . . the following charges will be applicable:

Telephone call to follow up on arrear instalment: R12;

Personal call . . . to follow up on arrear instalment: R30.”

There are other fees too, such as the R30 you pay for a “registered notice of default” should Lewis decide to drag you to court.

This is some handy extra profit for the industry. But how much?

Using the national credit regulator’s numbers of 4.2 million accounts in arrears, it is possible to work out what the retailers and personal lenders make from these “phone calls”, assuming that each of these customers gets, on average, one phone call a week.

This simple act of dialling a customer’s phone number, it turns out, earns those lenders an extra R2.4billion a year. This adds to the crush already inflicted on people who couldn’t pay in the first place.

Let’s look at Lewis. According to its figures, about 215 000 of its 678 109 clients are in arrears or considered “slow payers”.

So, if each of those customers gets a phone call once a week, Lewis will earn an extra R135-million a year. Now that’s some handy cream when you’re battling to produce returns.

But question marks also remain over the people who are paying regularly. About 68% of Lewis’s customers are considered “satisfactory” payers — in other words, they’re up to date with 70% of their instalments.

The thing is, Lewis has set aside a meagre R22.9-million as a “provision for bad debt” for those 463 048 customers who have borrowed about R4-billion, which they are repaying.

Is this paltry sum — less than 0.5% of the amount borrowed — really enough to cover bad debts over a 36month Lewis contract?

This is especially pertinent because, as African Bank CEO Leon Kirkinis will tell you, the bottom has pretty much fallen out of unsecured lending.

Perhaps this is one reason for a majority of analysts rating Lewis as a “sell” — even though on paper the share looks ridiculously cheap.

So which investors are most exposed to Lewis? Its largest shareholders are the Public Investment Corporation (15%), Sanlam Investment Management (10.4%), Old Mutual Asset Managers (7.7%) and Absa Asset Management (3.9%).

The PIC’s involvement is particularly odd, especially if its mandate extends to using government pensioners’ money in the interests of “development” and “what’s good for South Africa Inc”.

Predatory practices aside, is this really a sustainable business model? Is this the sort of company that the PIC, which invests people’s pension savings, should be propping up?

You can sort of see why Lewis had trouble updating its ethics page.