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Edcon, on its last legs, goes into business rescue

Apr 29 2020 16:43
Carin Smith

For more than 90 years, fashion retailer Edgars has been the mainstay in South Africa's high streets and the anchor tenant of choice in malls that began populating the country's landscape in later years.

But after numerous attempts over the years to resuscitate the store and its other brands such as Jet, its owner Edcon has applied for voluntary business rescue.

During the almost five weeks of nationwide lockdown in response to the Covid-19 pandemic, Edcon chief executive officer Grant Pattison, in a letter dated April 29, said the ailing retailer had suffered about R2 billion in lost sales. According to Pattison, who was appointed CEO two years ago, the lost sales, "… which included the necessary social distancing measures, lockdown and extended lockdown, [...] consumed the Group’s remaining cash."

On Friday, with government reducing restrictions on the lockdown to Level 4, all 932 of Edcon's stores will open and trade under the guidance of business rescue practitioners, Piers Marsden and Lance Schapiro. Piers Marsden is a director of Matuson and Associates - Les Matuson being one of the joint BRPs dealing with South African Airways. 

Edcon already under strain

Before SA moved into lockdown at the end of March, the Johannesburg-based company was already under significant strain from a series of structural changes in the retail market as well as an economy that has failed to break through the 2% growth mark for the past five years.

Structurally, departmental chain stores across the globe have been struggling as shoppers increasingly prefer smaller store formats and, in more recent years, shifted spending habits online.

Three years ago, one of South Africa's oldest fashion outlets, Stuttafords, finally closed its doors for the last time after going through a restructure of its own. The chain was founded in 1858.

What further distressed Edcon was the slow repayments and reports of fraud on their in-store credit card, and then this market being overtaken by banks such as Capitec, who have been aggressive in offering unsecured lending.

Moreover, as a fashion retailer, they were accused of shifting away from their core offering, fashion. They had bought a series of international brands, deciding to forego their local offering, and out-priced themselves for their traditional consumer. Shifts in the sector had already affected an Edcon business that had not aligned itself with changes in the sector and demands of "fast fashion".

Edgars lost its relevance in the South African retail space "over a number of years, leading up from 2007 when it went private in the leveraged buy-out with Bain," veteran retail analyst, Chris Gilmour, said.

"Over a number of years they consistently lost market share across the board, including to Mr Price at the low end of the market, for example. Edcon just became increasingly less relevant in the market place."

Since being bought by US private equity firm Bain Capital and delisting from the JSE in 2007, Edcon has been subjected to various turnaround strategies. Just over a year ago, it received R2.7 billion when the Public Investment Corporation, landlords and creditors funded a R2.7 billion recapitalisation deal that enabled the company to keep operating.

In his letter to suppliers, Pattison told them that the R2.7 billion cash injection had been "substantially utilised" in funding the losses for the financial year's ended March 2019 and 2020. The retailer has 14 000 permanent and 25 000 temporary employees.

'Knocked for six'

The last restructuring plan drafted by Pattison, who was tasked with turning around Edcon and potentially preparing it for a return to the JSE, looked like it may work, according to Gilmour.

"There was buy-in from creditors and landlords and it looked like it would work. But then came the unexpected Covid-19 pandemic and lockdown and knocked them for a six," he said.

"It is tough out there … I don't think they will come back."

Edcon now makes up about 1% of all listed property companies' income combined, compared to about 2% before the group embarked on its store rationalisation and store closure exercise last year.

The group now occupies 500 000 fewer square metres in malls than it did before.

Evan Robins, portfolio manager at MacroSolutions, Old Mutual Investment Group, said the retailer under-invested and followed some bad strategies like having big stores and brands with their own stand-alone "shops", which made no sense."Edcon is out of cash. I am not sure if it can be turned around. On the other hand, it does have the footprint needed in the retail industry. But unless they get the cash, I don't know. It is sad, as they might have been able to survive if it was not for Covid-19."

In a business update a day before lockdown began, Pattison said Edcon would be engaging with government and other stakeholders about possible assistance available to help it reopen its doors after the lockdown.

At the time, he had predicted that the group would lose R800 million over the 21-day lockdown period. This was before the lockdown period was extended by another two weeks until the end of this month.

* Additional reporting by Ron Derby.

edcon  |  mr price  |  chris gilmour  |  retail  |  business rescue
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