Edcon is another hard lesson for those pouring money into loss-making companies
FOR THE PUBLIC Investment Corporation (PIC), the R1.2 billion of Unemployment Insurance Fund (UIF) pool that the PIC invested in Edcon may be a drop in the ocean, but the lost investment should be considered another hard lesson to the government about the futility of pouring money into loss-making enterprises.
Edcon said on Monday that it was selling parts of its business to fashion retail competitor Retailability, which has some 460 stores with brands such as Legit, Beaver Canoe and Style.
Formerly South Africa’s biggest non-food retailer, with iconic local brands such as Edgars, Jet Stores and CNA, Edcon went into business rescue proceedings towards the end of last month.
It was Cosatu and Edcon’s management who in 2018 pushed hardest for the R2.7bn bailout from the PIC on the grounds that some 140 000 jobs would be affected if Edcon was not saved.
The support included concessions from creditors and landlords, and some R1.2bn from the UIF.
It should have been obvious to all involved that the economy was barely growing; middle income consumers, Edcon’s main target market, were and remain financially hamstrung; the group had substantial debt; and retail shopping trends were changing very rapidly the world over, with online sales eating into the market.
The chances of Edcon surviving over the long term appeared slim indeed.
Edcon’s financial troubles started long before, before it was bought out by US private equity firm Bain Capital Private Equity in 2007, in a R25bn transaction that loaded Edcon up with debt, and forced it to service its interest burden rather than invest in the brands and in the changing retail environment.
Covid-19 was the death-knell, as it has been for very many retailers. Here in South Africa, for instance, Massmart said only a day ago that it was cutting another 1 800 jobs, and that it was closing the loss-making Dion Wired stores.
In May, Edcon said it could no longer pay its suppliers and would focus on paying salaries through the Covid-19 pandemic, with chief executive Grant Pattison opting not to draw a salary until the group stabilised.
Recently, Edcon announced it would send retrenchment notices to some 22 000 employees, meaning nearly all its employees’ jobs were on the line.
Now, with Retailability taking over some of Edcon’s stores, some jobs will at least be saved.
Jet Stores, which focuses on fashion for lower income consumers, is another of Edcon’s brands that is likely to find a buyer soon. CNA was sold to Astoria Investments in February, so some Edcon jobs will be saved there too.
But there will, nevertheless, be many thousands of jobs lost at Edcon once the business rescue process is over.
And as for a break-up dividend for the investors, including the PIC, well history doesn’t favour positive outcome in this regard.
South Africa has a whole host of state-owned businesses, in much the same position as Edcon, such as Denel, Eskom and SAA.
The lessons from Edcon seem obvious.
Stop pouring money into operations that are not profitable, and there is some hope for job retention at least, in selling off parts of the loss-making operations to more agile competitors.