Johannesburg - The business rescue of South African furniture retailer Ellerine Holdings may herald the start of a broader industry shakeout as competitors ponder store closures and reconsider how they grant customers credit.
Retailers such as JD Group and Lewis Group have become over-dependent on credit sales after years of expansion and are now finding it tough to make money as consumers struggle to repay loans, according to Mark Hodgson, an analyst at Avior Capital Markets in Cape Town.
“I expect a shake-out with net store closures and brand rationalisation,” Hodgson said by phone.
Ellerine, acquired by African Bank Investments Ltd 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 in a market where most South Africans can’t afford to pay cash upfront for items such as furniture.
Ellerine isn’t 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 Group said last month that debtor costs rose 30 percent in the four months through July.
JD Group’s store numbers have risen 31 percent since 2009 to 1,223 stores as of December 2013.
Lewis’s store estate has increased 19 percent to 636 outlets in the same period.
‘Serious Questions’
“Steinhoff has invested a lot of time and money in JD Group,” Jean Pierre Verster, an analyst at Johannesburg-based 36ONE Asset Management, said by phone.
“If it wasn’t for Steinhoff’s support I think there would be serious questions about the continuation of the business.”
The weakness of the economy is weighing on retail sales of household furniture and appliances, which totalled 34.9 billion rand in 2013.
Rising 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 December, according to South Africa’s National Credit Regulator.
Ellerine, which has more than 1,000 furniture stores under brands including Beares, Furniture City and Geen & Richards, leads the South African market, followed by JD Group, Lewis and Shoprite’s furniture unit with about 368 stores.
JD Group this week said it agreed to sell its lending unit to an international consumer-finance provider, providing a boost for the unprofitable company, which raised about 1 billion rand through a rights offering earlier this year.
The offering was underwritten by Steinhoff, whose stake in the retailer now stands at about 86 percent.
JD Group also forecast a loss per share of as much as 8.70 rand for the fiscal year through June, compared with a 2.76 rand profit a year ago.
Price Cuts?
The retailer may consider cutting prices to boost sales and to ensure “its ability to survive at all,” Verster said.
The subdued consumer climate hasn’t precluded a “high level of interest” in Ellerine’s stores and brands, business rescue practitioner Leslie Matuson said August 20.
About 700 people, including credit insurers and suppliers, attended the first creditors meeting.
Some Ellerine outlets are expected to close, Verster said.
Shoprite plans to double its number of furniture stores over the next five-to-seven years and would “certainly look to buy some of the Ellerine stores,” Aubrey Karp, the unit’s managing director, said after an August 19 earnings presentation.
While a furniture bad-debt provision of 12 percent “more than adequately covers arrears” of 9 percent, the Cape Town-based company is keeping a close eye on its debtor book, Karp said.
“Ellerine’s demise has made other furniture retailers think about how they make money,” Verster said.
“Some furniture retailers might go for a higher turnover, less margin approach. By saying ‘let’s cut prices a little bit, but let’s sell more.’ But I think the jury is out on that.” - Bloomberg News