FROM BEHIND THE PAYWALL
STUTTAFORDS: The unnecessary death of SA’s last department store
First published in June 2017.
Grand old Stuttafords, once the Harrods of SA, will be shutting up shop on August 1, representing perhaps SA’s largest corporate failure in recent years. The tragedy is that its demise could have been avoided had it not been for the apparent bad blood between the two main shareholders, the Ellerines and the Rubensteins.
Stuttafords, the 159-year-old department store synonymous with SA’s retail glory years, will shut its doors permanently on August 1. This makes it the largest casualty of the slow demise of the country’s consumer spending. Founded by English immigrant Samson Rickard Stuttaford, who modelled it on London’s swish department stores, it became the grande dame of early 20th century SA retail. The first store opened at 5 Harrington Street, just behind the Castle in Cape Town in 1858 and it became an institution – the template for imitators like Greatermans, Garlicks and John Orr’s.
"Stuttafords was the epitome of Johannesburg fashion and culture," says Gerald Garner, who runs tour company Joburg Places. "It was like Harrods is to London — something of an iconic store. People would come by bus or train to Park Station, walk down Eloff Street, which was the glitziest retail street in the country, if not the continent. (They) would typically go to Stuttafords to shop and have tea, many of the ladies in white gloves."
Stuttafords might have had a future had the main parties sacrificed a little. Now jobs will be lost and creditors may sue
The department store’s collapse is the largest corporate failure in SA’s fragile, post-Nenegate business world. But perhaps the most tragic element of this saga is that the demise was entirely avoidable.
Stuttafords found itself the casualty of a bitter fallout between its largest shareholders, who happened to be among SA’s wealthier families — the Ellerines and the Rubensteins.
The closure is a blow for its 280 creditors — who include large brands like Estee Lauder, L’Oréal, Tommy Hilfiger, Polo and Levi Strauss. But it’s a far more crippling blow for the 950 staff who, barring a miracle, will find themselves on the streets in a few weeks.
In the past few weeks Stuttafords closed a number of stores, including those in Rosebank and Clearwater in Gauteng and four in Cape Town. Within weeks, its Namibian and Botswana stores will close, followed by the one in Menlyn Park, Pretoria, and Gateway and Pavilion in Durban. Finally, its Eastgate and Sandton stores will shut their doors.
"Within weeks we’ll all be searching for jobs," Stuttafords CEO Robert Amoils told the Financial Mail in an interview on Monday.
But it didn’t have to be this way, Amoils added. "Not at all. I believe Stuttafords could have been saved very eloquently, very easily. Business rescue itself could have been avoided had agendas (of the shareholders) been aligned. I’d love to say I did everything right, but certain mistakes were made and hindsight is a perfect science."
Amoils says that had he known how bad the economy would get for consumers, he’d have done things differently — specifically, invested less in some stores and closed underperforming ones
earlier. "After Nenegate in December 2015, we saw a dramatic decline in consumer spending. We experienced a noticeable loss in consumer confidence; we had the rand devaluing at an astronomical rate and we saw 2016 start with a material and noticeable lack of demand from our customers. We lost, relative to our budget, in the first six months, R100m in projected turnover," he says.
It was a tough environment for the Stuttafords business model, which was to stock well-known brands, creating a department store-style "theatre of shopping". But when the rand tanked, the prices of these imported brands spiked, just as people’s discretionary income was falling.
All retailers, including Edcon and Mr Price, felt the heat. So in February 2016, Stuttafords shareholders Ellerine Bros (with an effective 35% stake) and the Rubensteins’ Vestacor (an effective 32%), ploughed R50m into the company to give it firepower to upgrade stores.
But there were already tensions between the two families, and Stuttafords at Canal Walk was the final straw.
The Rubensteins wanted to keep the store, believing it should be Stuttafords’ main entry point to the Cape even though it was losing money, partly due to deeply discounted promotions aimed at hitting a turnover target.
The Ellerines, on the other hand, believed Stuttafords should shut the store. It was complicated by the fact that the Ellerines also had a direct stake in Canal Walk of 20% and another indirect stake in the shopping centre through its shareholding in property company Hyprop. And Swedish chain H&M was eager to take over Stuttafords space.
"Unfortunately for the business, the agendas of the shareholders were not aligned to the agendas of the business," Amoils says. The Ellerines, he says, had a conflict of interest: to do what was best for Stuttafords or best for Hyprop?
"As the CEO of Stuttafords, my job was not to protect the shareholders; my job was to protect my company, and my company needed that particular location," says Amoils.
It was a standoff, he says, that felled the company. "That disagreement certainly didn’t get better; it got worse and as a result of that it was difficult for the management team to rely on either one of the shareholders."
Things came to a head in September 2016 when, the Financial Mail can reveal, a family-owned private equity fund tabled a binding letter of intent, seeking to invest R130m in exchange for 75.1% of Stuttafords.
Amoils says that because of the tension between shareholders, the Ellerines were simply "not willing to entertain the offer without any form of explanation".
It was a turning point. Had a white knight rescued Stuttafords at that stage, it might have escaped its eventual collapse. "It would have not only saved the business, it would have given us the necessary capital to expand," says Amoils.
Things got worse. A month later, on October 28, Stuttafords was put into "business rescue" after the credit insurers withdrew their cover. This left suppliers exposed, unsure they wanted to keep supplying clothing to the retailer.
At the time, Stuttafords owed a huge R836m in debts: R400m to shareholders, R147m to Nedbank and the rest to various suppliers like Adidas (owed R1.34m), Estee Lauder (R29m) and Tommy Hilfiger (R14.6m).
Even then, it wasn’t necessarily a death knell. Business rescue would give Stuttafords a breather from having to pay suppliers and time to figure out a new plan.
It could still have been saved.
John Evans, the business rescue practitioner, slogged for four months to put together a plan to save the company, believing that Stuttafords was "profitable and rescuable".
On February 20, Evans unveiled his first "business rescue plan": the Rubensteins’ Vestacor and Stuttaford’s management team would put in R10.3m, in exchange for 76% of the business.
It was a hard sell for suppliers, who would be paid 5c for every rand they were owed, then another 18c over the next year-and-a-half — only if they agreed to keep supplying Stuttafords. In other words, they had to forgo 77% of what they were owed.
Some suppliers grumbled, irked that they were taking all the pain while Amoils’ management team weren’t being fired and the bank wouldn’t lose a cent.
The Ellerine brothers didn’t like the plan one bit — perhaps objecting to handing over control to the Rubensteins. So they and Nedbank abstained from the vote, ensuring that it didn’t get the 75% approval from creditors needed to pass. Instead, on March 8 the Ellerines pitched their own rescue plan — to inject R12m into the business in exchange for 76% of Stuttafords.
As the Ellerines’ lawyer Peter Levenberg put it: "We don’t want to see creditors left high and dry ... this proposal actually offers employees and, really, most of existing management, their best chance of living to fight another day."
The proposal included replacing Amoils’ management team, running a bidding process to find a buyer, and assembling a "dream team" of top retail talent to save the company. Names bandied about included Steve Ross, Edcon’s former CEO.
With the clock ticking, creditors (including Nedbank, this time) gave it the green light. A bidding process started and the Ellerines put in their own proposal to buy and revive Stuttafords.
But in a final devastating twist, the Ellerine brothers then pulled out. From left field on April 18, Ellerine Brothers sent a legal letter to Evans’ business rescue team to say they weren’t going ahead.
They said certain conditions hadn’t been met, and didn’t believe Stuttafords was "able to obtain the new facilities with Nedbank or any other financial institution".
This shocked Evans, whose lawyers wrote back the next day saying they were "astounded" at Ellerines’ effort to "escape or repudiate" its role as the would-be champion of Stuttafords’ rescue.
"It has profound consequences for (Stuttafords), and all affected parties to whom (Ellerines) has promised a successful outcome and rescue. Employees and creditors will then be left high and dry," he said.
In the letter, Evans described some of Ellerines’ justification for pulling out as "utter nonsense and rubbish", saying the way it had acted would "most likely lead to the liquidation" of the company.
An urgent meeting of all those owed money by Stuttafords was called for May 12 at the Killarney Country Club. There, depressingly, Evans told them the bad news — Stuttafords would have to be wound up, its doors closed for good.
In this scenario, creditors will probably get 3c for every rand they’re owed. If they’re lucky, this could rise to 10c to the rand. It sounds awful, but it’s better than an actual liquidation, which would have given them zero.
Evans told the Financial Mail this week that he was deeply disappointed by the Ellerines’ actions. "I feel they led me, Stuttafords and its employees and creditors down a dark alley and abandoned us at the end, with no route out. The business rescue plan created a binding obligation on the Ellerines brothers to implement the plan they proposed. But they didn’t," he said.
In the end, Evans says, it seemed like they were "looking for excuses" why they shouldn’t fulfil their obligations and honour their commitments to creditors and employees.
Evans says that but for the Ellerines’ intervention, Stuttafords could definitely have been saved. "Had we got going in February we might have been okay. We could have filled stores with winter stock, and had a reasonable winter trading period. Stuttafords would then have had time to get its ducks in a row. But the delays in waiting for the Ellerines offer meant that when they pulled out, it was too late," he says.
Amoils agrees, saying that for Ellerines to renege was "just flabbergasting".
"They did not abide by the obligations or commitments of their plan. They refused to even meet Nedbank to get the bank to agree to a bail-out," he says.
Worse: once Ellerines bailed out, it was too late to find an alternative. Every day that passed meant more money was needed to save Stuttafords, as the shelves became emptier and emptier.
"By the time the Ellerines plan was adopted, the amount of money that was needed was well in excess of R100m. Today what is needed is well in excess of R250m," says Amoils.
In an e-mail to the Financial Mail, Ellerines’ lawyer Jane Andropoulos said her clients always wanted to rescue Stuttafords but the business rescue practitioners didn’t come to the party by implementing the plan.
She said Ellerines only had an obligation to act once the rescue plan had been "substantially implemented" by Evans.
"[They] did not provide the confirmation necessary that the company had fulfilled the conditions," she wrote.
Andropoulos said Stuttafords hadn’t provided enough information for them to properly assess whether a "sustainable business model was viable". She said Evans’ claim that Ellerines "had some ulterior motive is ill-founded and misconstrued".
"At the end of the day the only parties that have made money out of this process are the business rescue practitioners and the lawyers. Ellerines remains liable for its guarantee to Nedbank in an amount of R40m. There are no winners, only losers," she said.
Though it looks for all the world as if the game is up, Evans says there is still a scramble for some "interested parties" to save one or two of the most profitable stores — Sandton or Eastgate, or both. But with trust at a record low and an economy in recession it’s a hard sell. Says Amoils: "Unfortunately for us as a business, the negativity shrouding the business became so great that the ultimate finale became inevitable."
As is common in a grand corporate collapse, the race to blame someone is hotting up. Some suppliers grumble that Stuttafords must have known it was on the verge of collapse back in October, but kept ordering new stock anyway — sailing close to the wind of the reckless trading laws.
"Every creditor had their own version, but you have this massive amount of stock coming in just before business rescue, and you file for rescue on October 28," says Gareth Cremen, a lawyer at Hogan Lovells who represented certain creditors. Cremen says orders went up by 300% against the same time the previous year.
Alex Eliott, who is also a Hogan Lovells lawyer, says Stuttafords’ financials show it made a R35m loss for June and July last year, a few months before it was put into business rescue.
"The lawyers representing the creditors are saying at the very least they should have been placed in business rescue in June or July and they were trading recklessly," says Eliott.
This is why some creditors preferred a liquidation to a winding-up under the business rescue rules, as it would have allowed for a section 417 inquiry into what went wrong. Says Cremen: "Your creditors may not get money out, but at least they could find out what happened".
On this point, Amoils argues that the business rescue plan did allow for an investigation anyway — and no evidence of shady behaviour has yet been brought forward.
For staff, however, a winding down is a better route, as it means they’ll get a retrenchment package, which they wouldn’t have got in a liquidation. It’s a collapse that will be felt all the way down the retail supply chain, with some of the smaller suppliers of shoes and clothes, who relied on Stuttafords, set to struggle the most.
"There are small family-owned businesses and for some this is their only distribution point. They don’t supply their products to anyone else. They effectively haven’t been paid for eight or nine months," says Cremen.
As it stands, they’ll now get only 3c of every R1 they’re owed. If all goes particularly well, they could get up to 10c/R1. Equally, landlords will struggle to replace Stuttafords, given that it typically rented stores of up to 6,299m².
But with an unemployment rate at 27.7% (the highest in 14 years) and a recession worsening the chances of finding new jobs, the biggest losers will be the staff.
Stuttafords in Sandton has a funereal air about it and "50% off" signs are everywhere. Shelves seem empty and sales staff jittery.
"We’re not sure," says Ganono Bvuma, a sales assistant who has worked at Stuttafords for a year while completing a BCom degree. "We had the business practitioners dealing with the business rescue here. They promised to come back and tell us what was happening with the feedback but they never did."
Another assistant says: "All I know is that I have a job until the end of the month."
In the men’s fragrances section, there is no stock: no Paco Rabanne, Dolce & Gabbana, Bulgari or Gucci. As the shelves slowly empty, Bvuma says people are still coming in every day "hoping for a clearance sale".
But if the 950 staff are clearly the losers, the banks won’t fall into this category. Nedbank, owed R147m, won’t lose a cent because it had security for its loans.
In a rather prissy response, Nedbank said it "does not, as a matter of policy, provide details of its banking relationships with any of its clients".
The lawyers have been even bigger winners. Many law firms had some horse in the race. Colin Strime of Fluxmans represented the business rescue practitioners; Phillip Vallet of Fluxmans represented Vestacor; Bowmans represented Ellerine Bros; Werksmans represented Nedbank; and Hogan Lovells represented some of the creditors.
With some big egos to massage, there was never any shortage of work. Suspicion all around didn’t help.
Amoils says: "This wasn’t a guise to try to steal money — it was simply the result of many factors that were beyond management’s control ... we wanted to save the business."
Had everyone agreed to take a haircut, Stuttafords might have had a future, he says. "We could have had a better conclusion. But if you have shareholders that are fighting, whether it’s between themselves or [with] management, nobody wins," he says.
Evans is still holding out hope that "something" can be done to save the Sandton or Eastgate stores.
"There are a few interested parties, but I’ve told them they need to get cracking in securing funding and making an offer. But it’s tough: the economy is in recession, there’s an uncertain political environment too. But we’re holding thumbs," he says.