EDITORIAL: Edcon has its work cut out after bailout
Thousands of jobs will be saved, but major structural challenges remain
It’s the season of bailouts, with retailer Edcon becoming the latest to get a handout, to the tune of R2.7bn, from existing lenders, the Public Investment Corporation (PIC), the Unemployment Insurance Fund (UIF) and landlords.
CEO Grant Pattison, who joined in June 2017, believes it is a “significant step forward” to get the company back on “the path to success”, and that it will provide the management with enough time to implement its store restructuring plans.
In the process, thousands of jobs will be saved — not only of the employees and casual workers at its Edgars, Jet and CNA shops —but also in the clothing manufacturing sector. With 44% of its products made locally, Edcon is the biggest supporter of local manufacturers, according to the SA Clothing and Textile Workers’ Union.
The management is happy, the unions are happy, and the landlords are pretending to be happy.
Given Edcon’s financial troubles, CEO Grant Pattison has been much more aggressive than Bernie Brookes in downscaling its footprint.
But we’ve seen this movie before. In late 2016, then CEO Bernie Brookes announced an enormous debt-to-equity swop that reduced Edcon’s debt from R29.2bn to R5.3bn, with additional cash and loan funding made available to help implement a restructuring plan.
Brookes’s strategy included selling off non-core assets such as Legit, closing unsuccessful stores and getting rid of the high-end brands that were brought in by his predecessor Jürgen Schreiber. Eye-wateringly expensive jeans were just never going to be Edgars’s bread and butter, something Brookes at least realised.
Under Schreiber, Edgars also took the eye off the ball of its staples — its value-for-money in-house brands such as Kelso, Charter Club and Stone Harbour. Three years ago, Brookes promised more love and attention to these, something Pattison is also pushing.
Given Edcon’s financial troubles, Pattison has been much more aggressive than Brookes in terms of downscaling its footprint. He has closed Red Square cosmetic and La Senza lingerie shops, and has been renegotiating leases in malls to give up floor space in its bigger stores. A number of Boardmans stores have also been closed, with cosmetics and homeware now largely sold under the Edgars Beauty and Edgars Home brands in the Edgars department stores.
The bailout announced on Friday may give Edcon some room to breathe, but major structural challenges remain.
Part of the reason for its demise over the past decade-and-a-bit is that its balance sheet, overly indebted since its leverage buy-out by Bain Capital in 2007, has left it with little room to manoeuvre. No-one foresaw the global financial crisis, which brought the economy to a standstill — followed by nearly a decade of economic mismanagement under former president Jacob Zuma. There hasn’t been much of a recovery since, and Edcon is one on a long list of retailers that are feeling the economic pinch.
But the management has also failed to keep up with the entrance of international competitors such as H&M and Cotton On, which offer the fashionable value-for-money clothes with which Edgars used to dominate the market. Due to expensive internet and delivery costs, local players have been somewhat protected from the onslaught of online retailers, but this is a fast-growing section of the market. Edcon has done much to improve its own online offerings, but it will need to up its merchandising game.
Another challenge is that globally, department stores are increasingly falling out of fashion — it is really only the most innovative and cutting-edge that manages to thrive. For that, however, you need cash to play around with, not counting every cent, as Pattison will have to for the foreseeable future.
His track record at Massmart, where his successors have failed to replicate his magic, should give him the benefit of the doubt. But he’ll also know by now that trying to serve the fashion needs of everyone from sporty teens to young moms, 30-something career women and middle-aged men is somewhat trickier than offering electronics, building material and camping equipment at bargain prices.