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Last month Edcon CEO Grant Pattison stood up at a conference organised by Absa and boldly told his audience: "This is the most difficult job I’ve ever had."
It’s saying something that Pattison bills this as his trickiest assignment yet. He cut his teeth as an engineer at Anglo American and in 2011, as CEO of Massmart, clinched the sale of the consumer goods firm to US chain Walmart.
The Edcon story is an intriguing case study, raising questions over how the iconic firm, which owns one-time blue-chip brands including Edgars, Jet and CNA, lost its formidable advantage and failed to adjust to the new world order of global retail.
It should never have let this happen. Almost since brothers Morris and Eli Ross opened their first store on September 6 1929 in Joubert Street, Johannesburg under the name "M&E Ross, trading as Edgars", the company has been a pillar around which SA clothing retail has revolved.
Until recently, one in five South Africans shopped at one of its 1,350 stores. Even today, after a lost decade, it remains SA’s largest nonfood retailer, accounting for nearly a third of the clothing and footwear market. More than 27,000 staff members work at its stores, indirectly affecting 100,000 other people.
The downward slide started in May 2007, after US private equity company Bain Capital paid R25bn to buy Edcon and delist it from the JSE, swamping the retailer’s balance sheet in R17.3bn of debt.
The debt, and a credit crunch soon after, nearly sank the company. Over the past decade, its peers — Mr Price Group, Truworths and TFG — capitalised on Edcon’s internal focus on repaying the debt, and Edcon failed to see how badly it was doing on the sales floor.
Since 2012, Edcon has lost an estimated 22% of its clothing and footwear market share: it once held more than 50% of the sector.
In September 2016 Edcon finally got a big reprieve. Lenders who were owed more than R20bn agreed to swap this debt for shares in the company. At the time this was hailed as a deal that saved Edcon from the chopping block.
But did it? Edcon has settled the bulk of its debt, but still owes an estimated R7bn to its lenders. Widely circulated analysts’ reports warn that at its current cash-burning rate, Edcon may effectively run out of funds towards the end of 2019. In other words, a new cash injection is needed to keep the 89-year-old Edgars brand alive and kicking.
In an interview with the FM, Pattison concedes that there is a need for new funding in the next few months. "The current process we’re under is looking for shareholders, new and old, to inject new capital into the business," he says.
Quite how much money depends on how well Edcon does over the Christmas trading period. And that could go either way.
It’s a turnaround that has taxed Pattison in ways he could never have expected when he took the job in January. But those who know him say he’s not one to balk at a challenge or to sugarcoat the reality of Edcon’s position. Someone who has worked closely with Pattison notes: "He says exactly what he is thinking regardless of where he is or the appropriateness of the comments."
This seems clear when Pattison speaks about just how tricky Edcon’s turnaround really is. "Running a company is normally a challenge [but] turning a company around is another level of challenge. And without a supportive shareholder that makes it even harder," he says.
That last point is critical. At the moment, there is no single large shareholder in Edcon that can propel the strategy and fund it. Rather, there’s a disparate group of debt holders who’ve lost a lot of money and now hold the shares.
"What people internally have told me is that for the first time in a long while, all the stakeholders buy into a strategy and believe in it. What I’m lacking now is a shareholder who’s prepared to back the company," says Pattison.
But despite missing a single large shareholder, things are finally beginning to pull in the right direction.
"For the first time in a long while Edcon has a plan — focus on core retail brands, consolidate store portfolio, focus on private brands, grow credit accounts and sales, and decentralise," Pattison says.
That may be true, but it’s clear the company is running out of time. Asked if Edcon can survive, Syd Vianello, an independent retail analyst, says it’s a tough call.
"We are racing against time. We have to get the turnover up and the gross profit in rands up, and we have to cut costs — but quickly. If we don’t get this formula right soon we’re doomed, because we’ll run out of money. And our competitors know that."
One option to raise cash, of course, is a listing on the JSE.
But Pattison says this won’t happen in the foreseeable future. "The listing requirements are quite onerous, so Edcon would have to demonstrate a period of stability, which would take a few years."
Anyway, he says, listing isn’t a solution to Edcon’s financing challenges. Rather, it’s something the owners would only consider "once Edcon is fixed and has established a track record".
How long that will take is anyone’s guess.
Last month Stats SA reported that retail sales grew 2.5% for the year to August — almost twice the 1.4% annualised growth reported in July.
But Edgars’ particular trajectory raises questions about whether it can capitalise on any recovery. Walk into some of Edgars’ largest stores — like the flagship at Joburg’s swish Melrose Arch — and you’re struck by the absence of shoppers. At Melrose Arch, most of the initial space Edgars occupied is boarded up, reinforcing the impression of a gradually disintegrating department store.
The question is: even if it finds a new investor with deep pockets, are Edcon’s best days behind it? In other words, can Pattison succeed in turning Edcon around and restoring it to the peak of SA’s retail ladder?
"It’s not the debt that’s a problem at the moment, but profitability," says Pattison. The problem is, Edcon is making a loss, and someone has to fund the loss, he says. This falls to the shareholders and the problem under discussion is: how long will they fund these losses?
This was evident in Edcon’s most recent set of accounts, for the year to March 2018. Sales were down 4.8% to R24.1bn and a trading loss ballooned to R1.36bn from R373m the year before. Even though R20bn in debt was written off in 2016, Edcon incurred R1.53bn in "financing costs" to repay remaining debt.
The three months to June were no better: sales down 8.8%; trading losses of R225m.
Repaying debt has been Edcon’s biggest headache daily since Bain’s equity deal more than a decade ago. In 2008, for example, it made a trading profit of R2.2bn, but that year’s financing costs were R2.5bn.
Today, there’s another round of "recapitalisation" talks taking place over the remaining debt. "We’ll have to wait for the outcome. But it is encouraging that there are discussions," says Pattison.
The restructuring is financial, not operational, and the terms of the debt are being negotiated. In this case, it involves 30 to 40 lenders (the banks are a mix of local and overseas ones) and it’s an unwieldy, complex process. It means there are about 40 to 50 companies trying to find common ground — from professional advisers to lenders and potential lenders.
But if this is Pattison’s financial challenge, there is no less challenging a turnaround needed in the shops, after a decade of missteps in merchandising and dealing with customers led to a dramatic loss of market share.
Vianello says that though Edcon’s main challenges are costs and capital, it also has too much floor space, which has become inefficient because of its store locations.
There’s also the uncomfortable truth that while Edcon hasn’t moved much in a decade, the SA retail market has undergone a tectonic shift over the past five years, as global retailers Cotton On, Zara and H&M have set up shop. "Customers know who Edcon is, but it has to convince those same customers to come back into the stores," Vianello says.
Edgars clothing simply hasn’t been as attractive as that of its rivals. "Edcon’s customers are probably still fiercely loyal to the brand, but not to the product," he says. "The brand is part of SA’s clothing history, everyone knows it — it doesn’t have to market itself. But its customers relinquished their loyalty to the product offer as the brand lost direction. The challenge is to regain the loyalty by offering consumers good, fashionable product at value prices."
About five years ago, under then CEO Jürgen Schreiber, Edcon decided to bring in international brands, which cost the retailer plenty in royalties. And it didn’t work.
Vianello says Edgars must go back to its roots as a family outfitter. "Take a brand like Mr Price, Cotton On or even H&M, they call their product ‘fashionable value’. Edcon needs to become a fashionable value retailer, selling fashion at value prices."
Other blunders included the sale of its credit book to Absa in 2012, which led to the bank turning off the loan taps. Edcon’s credit sales dived from 50% of goods sold in 2013 to 36% in 2018. For Edgars, the retailer that popularised paying on credit, this was a huge blow.
But Pattison believes the organisational structure has now been fixed.
"Edgars, Jet and CNA and Thank-U are great brands," he says.
He believes the brand positioning is now clear and should translate into higher sales over the festive season. Store layouts are being fixed and trading density and stock turnover figures have improved.
Since he arrived, Pattison has accelerated the plan to close Edcon’s international-branded stores, like Tom Tailor and Topshop, and to focus instead on stocking its own private-label clothes under brands such as Kelso and Stone Harbour.
Also, he plans to close about 30% of Edcon’s retail space over the next five years, depending on when leases come up for renewal. This has implications for competitors. Analysts worry that Edcon may discount heavily into December, which could disrupt rivals.
Pattison says this isn’t the case.
"We want to demonstrate to our investors we’re running at healthy gross margins. We have to show we can be competitive without extraordinary discounting. These next four months to the end of January are critical to put our best foot forward."
He has also rebranded Boardmans and Red Square as Edgars Home and Edgars Beauty, respectively, and closed a number of duplicated stores. All Jetmark stores have been shut or converted to Jet. Existing Edgars, Jet, CNA and Thank-U outlets will also be overhauled.
It’s clear Pattison is juggling many moving parts — resetting the brands, negotiating closures and working with the funders to determine Edcon’s future.
There are a few ways Edcon could go from here. The easiest would be for existing funders to put in the extra cash, which they may be reluctant to do. A second might be a white knight riding to the rescue — the sort of large shareholder Pattison would like.
Third might be a sale of strategic assets like CNA or its international brands. And fourth is the nuclear scenario: wholesale failure culminating in Edcon’s business rescue.
Fortunately, this seems a remote possibility right now, even if analysts still consider it a retailer "in financial distress".
The problem is profitability. Edcon is making a loss, and someone has to fund the loss
— What it means
If Edcon were to fail entirely, the fallout would be profound: SA’s banks, property companies including Hyprop and Growthpoint, and lenders would take a bath.
None of the banks, for example, has fully provided for an Edcon collapse, so they would have to record an extraordinary loss.
It would also be a disaster for the wider economy, considering that Edcon employs 27,000 people directly, and that 100,000 people in all are exposed indirectly to its fortunes. In a country with a 37% unemployment rate, at the widest definition of unemployment, this would be devastating.
Mercifully, at this point, the white-knight scenario seems the most likely.
It’s a poorly kept secret that many of SA’s big retailers (and even overseas companies) have at some point considered buying Edcon. Even the now-flailing Steinhoff put out feelers a few years back.
Most of the would-be predators walked away. But it seems some are still interested. Insiders close to Edcon say the material part of those discussions needs to take place before Christmas.
If that goes well, a due diligence is likely to take place in the months after Christmas.
Such a white knight might have to pay between R6bn and R9bn, says one analyst, citing an SBG Securities report which puts the enterprise’s value at this amount.
Of course, if such a new investor comes on board, it may want to then make tricky demands of the current lenders — including, potentially, asking that they agree to write off part of the debt, or change the debt from short term to long term.
Pattison only stepped into the role in January, following Bernie Brookes, who was brought in by Bain Capital to list the group on the JSE. One insider says Brookes found Edcon to be "unlistable", however.
Many people would have said no to the challenge. But some say Pattison was bored, champing at the bit for a new challenge. He might not be from fashion retail, but he did at least have experience in multiformat retail.
If he knew then what he knows now, would he still have taken the job? "Absolutely. I went in with my eyes open." For him it wasn’t as much about the paycheck (though he is well paid), it was about stepping up to deal with a business that needed fixing.
He’s no stranger to tricky scenarios. As CEO of Massmart during the negotiations with Walmart, Pattison walked a delicate line between the government, unions and business to ensure the deal took place.
But for Edcon’s immediate future, all eyes are on cash flow. Clearly, some answer needs to be found in the next few months.
You get a sense that Pattison is hoping one of the potential buyers apparently sniffing around takes the bait, so he can finally get down to running the actual business. And then, hopefully, reviving an icon.
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