Janice Kew and Christopher Spillane
THE BUSINESS rescue of furniture retailer Ellerine Holdings may herald the start of a broader industry shake-up as competitors ponder store shutdowns and reconsider how they grant customers credit.
Retailers such as JD Group and Lewis Group had become too dependent on credit sales after years of expansion, and were finding it tough to make money as consumers struggled to repay loans, Mark Hodgson at Avior Capital Markets said.
“I expect a shake-out with net store closures and brand rationalisation,” he said.
Ellerine Holdings, acquired by African Bank Investments in 2008, started voluntary rescue proceedings last month, after its parent company withdrew funding because of persistent losses. The retailer’s difficulties stemmed from declining sales and rising bad debts.
Ellerine is not the only one struggling. JD Group, a seller of furniture and provider of unsecured loans, was shored up by parent Steinhoff International in March, while Lewis said last month that debtor costs rose 30 percent in the four months to July.
JD Group’s store numbers have risen 31 percent since 2009 to 1 223 stores as of December last year. Lewis’s store estate has increased 19 percent to 636 outlets in the same period.
“Steinhoff has invested a lot of time and money in JD Group,” Jean Pierre Verster at 36One Asset Management said. “If it wasn’t for Steinhoff’s support, I think there would be serious questions about the continuation of the business.”
In the six months to December last year, non-performing loans made up 43 percent of JD Group’s secured-lending book, with the unsecured book’s bad loans at 53 percent, acting chief executive Peter Griffiths said.
The weakness of the economy is weighing on retail sales of household furniture and appliances, which totalled R34.9 billion last year. Accelerating inflation, an unemployment rate exceeding 25 percent and protracted mining strikes that began in 2012 left almost half of South Africa’s 20.6 million credit-active consumers with impaired records at the end of last year, according to the National Credit Regulator.
Ellerine, which has more than 1 000 furniture stores under brands including Beares, Furniture City, Ellerines and Geen & Richards, leads the local market, followed by JD Group, Lewis and Shoprite’s furniture unit with about 368 stores under the OK Furniture and House & Home chains.
JD Group had agreed to sell its loan unit to an international consumer finance provider, it said this week.The group raised about R1bn earlier this year through a rights offering underwritten by Steinhoff, which has a stake of about 86 percent in the retailer.
JD Group forecast a loss of up to R8.70 a share for the year to June, compared with earnings a share of R2.76 a year earlier.
With provisions of about 16 percent for unsecured debt, JD Group would need to write off “a significant further amount in the unsecured book in order for [it] to be ‘clean enough’ for a purchaser to buy”, Verster said yesterday.
JD Group did not specify whether the loan unit disposal included the unsecured debt.
The retailer might consider cutting prices to boost sales and to ensure “its ability to survive at all”, Verster said.
The subdued consumer climate did not preclude a “high level of interest” in Ellerine’s stores and brands, business rescue practitioner Leslie Matuson said last month. About 700 people, including credit insurers and suppliers, attended Ellerine’s first creditors’ meeting. – Bloomberg