In a quavering voice, Edcon CEO Grant Pattison told suppliers last week the 21-day lockdown, which started at midnight on Thursday, is casting a long shadow of doubt over the fate of one of the biggest names in SA’s retail.
He is right, and only decisive action, which will be painful, will prevent the 90-year-old company from dragging everyone down with it.
Even before the lockdown, which has restricted business activity to just a few industries deemed essential for millions of South Africans to survive, Edcon was already feeling the strain on its revenue as more and more people stayed away from shopping malls to avoid being infected with coronavirus.
In the two weeks before President Cyril Ramaphosa imposed the lockdown, Edcon had lost 45% of income and about R400m in sales from its flagship Edgars and Jet chains. In the next three weeks the company may suffer another R800m in sales, a steep downturn that gives us a glimpse of what companies with weak balance sheets are facing.
Suppliers were told there was no money to pay them, and there was only enough to pay salaries.
It would not be unreasonable to imagine suppliers have hard feelings about that, and they will remember that decision the next time Pattison and his supply-chain team place an order to replenish Edcon’s inventory.
They would most likely demand upfront payment, potentially forcing Edcon to dip into the salaries of its 18,000 workers, who will then be the disillusioned face of the company that desperately needs customers to visit and buy at its stores.
It’s a vicious cycle.
It’s easy to sympathise with Pattison, but without drastic and painful decisions, it will get worse. Not just for Edcon and its employees, but its suppliers and their employees.
Just as SAA, which year after year tried to implement turnaround strategies funded by billions of rand in taxpayers’ money, finally reckoned with the reality that it would not be able to survive in its current form, it is time for Edcon to consider the same.
Edcon has been a touch-and-go since at least 2009, shortly after Bain Capital took the company private in a R25bn leveraged buyout.
The projected mechanics of the 2007 deal ran into trouble within two years when SA’s economy slipped into recession during the 2008 global financial crisis, hitting consumer spending and leaving Edcon with less and less money to pay its dollar-denominated interest bill.
The next episode was when Bain gave up equity control of the group to a group of creditors that included emerging market-focused fund manager Franklin Templeton and local lenders such as Standard Bank and Absa, helping the company to slash its heavy debt load by nearly 80%.
Yet, that was still not enough for Edcon to run its businesses profitably, forcing Pattison to enlist the Public Investment Corporation, which has more than R2-trillion of government employee pensions in its custody, to lead a R2.7bn cash-injection effort that allowed the company to cut rental payments in exchange for shopping-mall owners taking equity stakes.
Despite commendable operational revival efforts by Pattison, who slimmed the company to just two core brands, Edgars and Jet, serving middle-class and lower-income consumers respectively, it is difficult to make a case for yet another bailout.
Predictably, labour federation Cosatu — which was instrumental in the company’s PIC-led bailout — believes saving a big employer such as Edcon is worth another shot.
The PIC should lead the effort again by using its big shareholdings in property companies — which are already reeling from weak rental growth and vacancies in shopping malls — to give Edcon another break in rental payments, Cosatu says.
That will be throwing good money after bad.
Assume Cosatu gets its way, Edcon is likely to struggle to grow sales, let alone profits, in the coming months because the economic toll of the pandemic is likely to be felt mostly in the company’s consumer heartlands: the middle class and the low-income households. Sure, it would be in the same boat as TFG, Mr Price and Truworths, but it would be navigating that market with the weakest balance sheet.
Failure to make tough calls, which may include putting the company in a form of bankruptcy protection such as business rescue, could divert funds that could be used for companies with brighter prospects of escaping the downturn. That is indefensible.