EDITORIAL: Retailers have yet to find their feet in a global economy
Without doubt, running a business in SA requires enormous skill, energy and perseverance. Sadly, it seems that running a large one profitably is out of the reach of growing numbers of JSE-listed companies. 2020 is just a few weeks old and already three major retail chains have reminded us of how tough things are.
But as it happens, even benign economic conditions with a trouble-free Eskom would not have saved Edcon, Massmart and Woolworths from the headline-grabbing announcements made in the past 10 days. Each of these major retailers is suffering from self-inflicted wounds, which, in the case of Woolworths, have been festering for five years, and much longer at Edcon and Massmart.
At Edcon successive management teams have failed to recapture the glory days that came to a gruesome halt in 2007. That was the year Bain Capital led a R25bn private equity deal that left the clothing retailer struggling in a sea of debt. Despite being paid staggeringly well, none of these management teams came close to addressing the debt burden or dealing with the rapidly changing trading environment they faced.
In its latest restructuring, Edcon used its muscle as an employer and tenant to inveigle the Public Investment Corporation (PIC) and landlords to assist in re-arranging the debt. The group no longer releases its results, but reports of continued stress are borne out by ongoing store closures, which seem inevitable given the absence of any indication it is able to retain old customers or attract new ones.
Since it was cobbled together in the 1990s thanks to near-unlimited funding from Wooltru — the previous holding company for Woolworths and Truworths — Massmart has rarely managed to achieve many consecutive years of organic profit growth. Though demonstrating limited skills running a retail sales group, Massmart executives did manage to pull off the sale of the decade in 2010 when they persuaded a very willing Walmart to pay R148 a share for a controlling 51% stake in the group.
At the time Massmart CEO Grant Pattison, who now leads Edcon, assured investors the SA management and the group’s local identity would be retained. “What isn’t going to happen is a bunch of Walmart people around here start running the company,” Pattison said at the time.
In hindsight Walmart’s strange reluctance, perhaps required by restrictions imposed by the competition authorities, to get too involved in its newly acquired SA business might have been a mistake. Though, while the US giant enjoys a reputation for extreme efficiency on home ground, its record elsewhere is patchy. But it’s difficult to imagine that Massmart would have continued to drift along as haplessly as it has over the past 10 years had there been hands-on involvement by the US parent.
As far as own goals go, they don’t get much bigger than Woolworths’ R21.4bn purchase of David Jones in 2014. The acquisition — much of which has been written off — not only left the group with crippling levels of debt, it absorbed management time and energy and left the group’s profitable home base exposed to competitive challenges.
There has been a tendency to blame the government — squabbling, inept politicians and crippled state-owned entities — for all our economy’s woes. The assumption is that if only the government would come to the party, the economy and all its parts would thrive. Underlying that assumption is the belief that the government could create the ideal conditions for investors. That is not going to happen. Not only because there is no such thing — outside economics textbooks — as ideal conditions, but because the government does not have the capacity.
But even if it could create those mythical ideal conditions, we would still be faced with the problem of corporate executives incapable of avoiding own goals.
It may be that a full quarter of a century later, and despite the welcome infusion of new blood, our executives have not learnt to operate profitably in an open economy; that they still hanker after the times of certainty. Truworths’ just-released trading update is another reminder of how much value has been destroyed by SA executives struggling to secure a spot in the wide open international marketplace.
SA’s grim economic performance is not just the government’s doing.