Edcon footprint likely to shrink further

● Buoyant Christmas sales are unlikely to be enough to stave off store closures at Edcon, and the impact of poor sales and low trading densities is likely to see the group further trim its retail footprint.

This week Keillen Ndlovu, the head of listed property at Stanlib, told Business Times: “We believe that Edcon is likely to close more stores, more so the underperforming ones and the ones that do not fit into their strategy.”

Stanlib estimates indicate that Edcon, which owns Edgars, Jet and CNA, occupies about 6% to 7% of the total South African retail space — owned by both listed and unlisted companies — and about 10% of the space in mainstream malls.

Ndlovu said Edcon stores would be closed when leases expire, but in other cases the size of stores would be reduced. The group will also be looking at renegotiating rental terms based on turnover, whereby the landlord would share the upside and the downside. Ndlovu said the primary reason for the closure of stores would be underperformance.

“Edcon remains influential in malls but its influence may not be as strong as before.”

In July, Edcon announced a rationalisation strategy in terms of which it consolidated its Boardmans, La Senza lingerie and Red Square cosmetics brands into Edgars stores. This was regarded then as a last chance for the group’s survival.

The rationalisation was driven by the need to service hefty debt, which has been an issue for the group since US consultancy Bain bought Edcon in 2007 for R25bn.

Nine years later Bain walked away from Edcon in a debt-to-equity deal to a consortium of investors including Franklin Templeton, FirstRand Bank, Investec and Standard Chartered, for nothing.

Edcon said in May the rationalisation plan would enable the group to focus on boosting profitability, primarily in Edgars.

According to Edcon’s unaudited trading update for the 13 weeks to December, the group closed 253 stores in the third quarter of 2018. Edcon will this week release a further trading update.

Edcon has 1,292 stores.

Despite this, Edcon CEO Grant Pattison said this week: “Edcon will not be making any announcements on specific store closures or openings. And further, we will not speculate nor comment on the effect of our performance on other companies.”

Pattison said Edcon would continue with the relaunch of several of its brands, namely CNA, Edgars Home and Edgars Beauty.

“Whilst we acknowledge we are not yet perfect, we do believe our retail offerings have shown vast improvement, and this should attract customers back into our stores,” Pattison said.

Most malls in SA were built around Edcon as an anchor tenant when it was regarded as a retail behemoth.

Ndlovu said: “Landlords have been co-operating with Edcon so far [by giving up space and being willing to negotiate lower rents] and would like to see Edcon continue to operate as it plays a major role in the retail space and in the South African economy, including in job creation.”

Some retailers have benefited from Edcon’s struggle, taking market share from the group’s brands.

Atiyyah Vawda, an equity analyst at Avior Capital Markets, said: “They have lost a lot of market share and I think TFG has been the largest benefactor from Edcon’s market share loss.”

But overall, the retail industry has been struggling as consumers’ propensity to spend remains limited. In the past year TFG’s share price has declined 7.4% while Truworths, Woolworths and Mr Price were down 8.58%, 19.72% and 4.6% respectively.

“The environment itself is very challenging,” said Vawda.

“The consumer is not in a great space and there’s a lot of pressure on disposable income.

“We’ve had fuel hikes, and that has filtered into cost of transport, and on the other hand, wage growth is slowing.”

Vawda said recovery within the retail sector would depend on a number of factors, including structural issues such as job losses.

“That has to be controlled before we can see an improvement in consumer spending and the pressure on the consumer,” she said.

“It’s difficult to see the catalyst at the moment. It’s a gloomy picture … But at the end of the day, the retailer that is positioned the best will likely be resilient,” she added.