EDITORIAL: A tough time to revive Edcon
Lenders, be they retailers or banks, should be very cautious about granting credit
SA’s largest nonfood retailer may at last be coming to the end of its long and bumpy turnaround phase. But it can’t expect that much help from the market at a time when consumers are under pressure.
Retail group Edcon’s annual results last week were significant more for the extensive debt and shareholder restructuring that happened during the year, and for the appointment of a new CE, than for the operational details of the year itself. The huge R27bn debt burden that the group had been carrying was cut to R6.2bn in the 2016 deal in which some of its creditors took control of the troubled group, swapping debt for equity. That should free up cash and management time that can be focused on fixing the business. And a new person will take charge of fixing it up: the group has announced that Grant Pattison, the well-regarded Massmart CE who led the group through its sale to Walmart, would take over as Edcon’s CE from February 2018.
There clearly is much to be done to restore the group to anything approaching its former glory as the market leader. And it is tough out there, as the group’s results show.
Retail sales were down 6.7% for the year. Selling on credit continues to be even more of a challenge for the group than selling for cash. Edcon’s cash sales were down 2.4% but credit sales fell by a sharp 13.4%. This was despite stronger growth in credit sales in the second half of the year, thanks to a revision late in 2016 to the agreement it has with Absa, which owns part of the Edcon book and provides in-house credit.
The decline in Edcon’s credit business has been a big part of the group’s slump in recent years. SA is one of the few countries where people buy clothes on credit and historically, retailers such as Edgars led the market in granting it in an era when credit cards were less common than they are now.
In particular, retailers such as Edgars provided "six months to pay" credit to black people at a time when most could not obtain credit cards. But where five years ago about 51% of Edcon’s sales were on credit, in the latest period, this has fallen to 36%, down from 38.8% in the previous year.
Tougher regulation of the consumer credit market by the National Credit Regulator, which in the past two years has tightened up affordability rules to prevent reckless lending, has had an effect on all the credit retailers. So too has the macroeconomic environment. An economy that is barely growing, rising unemployment rates and slowing real wage growth have constrained households, as has higher inflation, particularly higher food inflation, which has eaten into consumers’ spending power. The tax measures of the past couple of years, particularly the lack of relief for fiscal drag in the past two budgets, are also having an effect on middle-and upper-income households. Reserve Bank figures show real household spending grew just 0.8% in 2016.
As it is, SA’s household debt levels are still very high by historical standards, at well more than 70% of income. All of that tends to mean that lenders, be they retailers or banks, should be very cautious about granting credit if they want to be sure that they will be paid back and that they aren’t putting financially stressed customers deeper into debt. Retailers shouldn’t need the credit regulator to tell them that.
Most retailers’ credit-to-cash ratios have come down since the regulator tightened up two years ago. But Edcon’s has fallen more than most, and has kept falling, while rivals such as Truworths have grabbed market share.
Opening up the credit taps now wouldn’t be a good idea for any retailer, but a better managed, more financially healthy Edcon should have space to grow its book and improve its stores, particularly ailing CNA, even if the glory days aren’t here again quite yet.