How Grant Pattison saved Edcon

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Edcon, the 90-year-old retail colossus which last year came within an inch of collapsing into the scrapheap like rival Stuttafords, has been saved — for now, at least.

It’s a verdict that has been out till now but last week, the R2.7bn for Edcon’s "restructuring" landed in its bank account. It was touch and go for a while but it’s fair to say that the rescue deal for SA’s largest clothing retailer can be deemed a success.

Some brands haven’t made it. Jetmart, fragrance brand Red Square and high-end homeware store Boardmans are history. In all, 150 of its 1,350 stores have been shut over the past 18 months and, in the rest, floor space has been slashed by 10% — 140,000m² — which is about the size of Sandton City.

In two of SA’s largest malls, the Mall of Africa and Eastgate, Edgars has shrunk to one floor, from two. When the FM visited the Sandton City branch, there was no discernible sign that customers had fled. Some of the assistants told us they didn’t have enough stock, but that’s apparently part of a plan to keep the chain slightly understocked.

That Edcon, which first opened its doors as Edgars in Joburg’s Joubert Street in 1929 thanks to brothers Morris and Eli Ross, is still alive is chiefly due to one man: Grant Pattison.

"I’m an engineer. When things are broken, I like to try to fix them," says Pattison, a tall, seemingly tireless 48-year-old, in an interview with the FM.

It sounds about right: Pattison studied electrical engineering and worked as a management trainee at Anglo American. Nor did he ever have any desire to go into retail until, in 1998, leaving a job interview for Affinity Logic (which he didn’t get), he bumped into Massmart CEO Mark Lamberti in the foyer.

Pattison didn’t know who Lamberti was, but had no problem telling him how badly Game’s shelves were stacked. So Lamberti grabbed his car keys and drove him to a Game store, and told him to repack the shelf as a customer would want it. Pattison hauled everything off the shelf and did just that. Seven years later, he was CEO of Massmart, stage-managing its R16.5bn takeover by US retail giant Walmart.

Bored and keen for a new "strategic challenge", Pattison left Massmart in 2014 and bounced around a few prospects.

What many people don’t know is that Pattison coveted the job of fixing perhaps SA’s most disastrous company: Eskom. As an engineer, it wouldn’t have been a big leap.

In 2016, he was shortlisted as one of the final three for the job of Eskom CEO. But as he was driving to the final interview, he got a call saying it had been cancelled.

Minutes later, he heard on the radio that Brian Molefe had been reappointed CEO, after his short stint in parliament.

Still, Pattison lies awake at night thinking about how to fix the utility. "You actually have to study electricity to understand the problem of electricity, which is that it can’t be stored. You can store other things — water in a dam, steam, but you can’t store electricity," he says.

In some ways, fixing Edcon is the private sector equivalent of the task at Eskom: both are huge, systemically important institutions, crippled by debt and awful decisions.

Pattison’s path to the Edcon CEO position wasn’t straightforward.

In February 2017, he was appointed as a nonexecutive director, where chair Gareth Penny asked him to draw up a job spec from which they could hire a new CEO.

When Penny saw Pattison’s list, he laughed and said: "Grant, you’re describing yourself." The spec was for someone local, who preferably lived in Johannesburg, and had retail experience (preferably apparel). Pattison walked out of the meeting as Edcon’s new CEO.

He describes how he arrived full of bravado, with a typical retailer’s mindset. "I was going to open more stores, put more product on the shelves, drop some costs, pump up advertising," he says.

Then the financial realities hit home. "We created a financial model [which] showed that we destroyed value every time we opened a store … Below a certain trading density and below stock turn, opening more stores destroys value, even though they’re profitable," he says.

Salvaging Edcon, in fact, would be far harder than he expected.

To understand the immensity of this task, you need to understand how it got here. In 2007, in the largest private equity buyout in SA history, the Boston-based Bain Capital arrived in SA and paid R25bn to buy Edcon and delist it from the JSE.

The problem was, Bain heaped huge amounts of debt (taken out in euro, pounds and dollars) onto the company. Every spare cent, which should have gone to invest in the stores and on new merchandise, was diverted into paying the exorbitant interest bill.

Pattison has since described Bain Capital as "morally liable" for what happened at Edcon. "How were they allowed to use foreign debt to do a leveraged buyout in SA? Surely no-one would look at the most volatile currency in the world in 2007/2008 and say — oh, that’s a good idea, let’s put no money in, let’s just borrow it. The thing was inevitably going to collapse," he says.

In fashion-speak, Bain was the proverbial wolf in sheep’s clothing.

Before the Bain deal, Edcon was a powerhouse; in the decade after that, it lost 30% of its market share and its most talented staff, and its reputation was savaged. In 2016, Bain was forced to hand over ownership of Edcon, then unable to pay the debt, to creditors in a debt-to-equity deal. It left Edcon with "just R7bn in debt". In the end, even that was too much.

Pattison inherited the "recapitalisation plan", but he soon figured it was a non-starter from the word go. For one thing, Edcon was making losses, but had forecast earnings before deductions of R2bn, which it hoped to use to repay its R7bn debt.

It was pie-in-the-sky stuff, given that it was actually deep in the red.

So Pattison had uncomfortable meetings with shareholders, explaining that not only were they not going to make R2bn in profit, they were actually going to make zero.

Shareholders didn’t like it, and complained to Penny.

"I think the hypothesis was generated that maybe Grant was talking the thing down so Grant and his backers and partners (of which I had none) were going to come in and get the company on the cheap," says Pattison.

The next option was to try sell Edcon. But no-one would bite.

Brian Joffe’s Long4Life was one of those rumoured to have looked at it, but Joffe’s company told the FM this week that it "looks at numerous opportunities on a regular basis, but we won’t comment on which investments we might have considered".

Pattison says it was "quite a disheartening process to go round the world asking for some money and effectively failing".

So he began to prepare for the worst, explaining to everyone the consequences of Edcon failing. "We started to tell people we were going to run out of money in February 2019, which we did," he says.

It would have been a crippling blow not just to Edcon’s 40,000 staff, but also landlords, the banks to which it owed debt, and the 60,000 people who work in companies that supply the group — from small shoe manufacturers in the Cape, right the way up.

An ambitious deal was drawn up, with the help of top business people including former Investec CEO Stephen Koseff.

Koseff got involved because Investec was one of the banks exposed to Edcon. Investors were looking for someone they could talk to, and he’d played a pivotal role in restructuring African Bank after its collapse in 2013.

As Koseff told the FM this week: "I know my way around it. I know when guys are talking rubbish or not. They needed someone senior to play a role."

He knew the alternative was huge job losses. "It wasn’t only the individuals who work in the company, it’s also the suppliers. What do we do in the interest of saving a whole host of jobs in the country, which is under very stressed economic conditions?"

"Without some very specific interventions," says Pattison, "I think we were very close to the end."

But banks and landlords said they’d only support the deal if it included the Public Investment Corp (PIC), the state-owned company which manages pensions of government employees. Given the PIC’s own internal ructions, that was never certain.

One particular meeting between Pattison and the PIC’s former CEO, Dan Matjila, in November last year, sticks out. "This was one of the most stressful, pressured meetings," says Pattison.

After some wrangling, Matjila said they could find a way to work together. Pattison was immensely relieved. But at lunchtime that day, Matjila resigned — and everything was up in the air again.

"The deal didn’t die but for a good two hours I thought it would," says Pattison. "That was a low point."

In the end, the state-owned Unemployment Insurance Fund (UIF), whose money is managed by the PIC, agreed to put in cash. Pattison’s pitch to them was, if you don’t help us, you’ll have 140,000 extra people claiming from the fund.

But Edcon then found an unexpected ally: the unions, which had fought Pattison bitterly during Walmart’s takeover of Massmart.

"I would never have been able to do the deal had I not already done Walmart. I had relationships with most of the major players, which helped build some trust," he says.

Those at the table who opposed Pattison at Walmart reappeared at Edcon: economic development minister Ebrahim Patel, trade & industry minister Rob Davies, financial advisers Rothschild & Co, Etienne Vlok from the Southern African Clothing & Textile Workers Union (Sactwu), and Mduduzi Mbongwe and Bones Skulu from the SA Commercial, Catering & Allied Workers Union (Saccawu)

This time, they were on the same side.

"The adversarial relationship I had through Walmart was turned into a collegial one … we fought like crazy but I feel very close to the people I fought with. It’s those relationships that have helped me," he says.

Pattison positioned the deal differently to the optimists around the table, and to the pessimists. To the optimists, his pitch was that the retailer could be fixed. To the pessimists, it was: let’s shrink it by a third and if it still fails, you’ve only got two-thirds of the problem you had.

In the end, the final plan was sealed in December: 21 landlords agreed to inject R1bn into the company in exchange for 5% and 10% of Edcon’s shares, the UIF would get 19% of the shares, and the banks, investors and staff hold the rest.

Together, Edcon would get R2.7bn in new investment. Critically, it leaves Edcon entirely debt-free for the first time in 12 years.

Pattison said when the deal was put on the table, it didn’t have a single opponent "other than some Twitter idiots". No-one wanted to be the person who pulled the plug on Edcon.

Estienne de Klerk, Growthpoint SA’s CEO, says landlords didn’t get much of an option. "In the end it was rather binary: you either agreed, or you didn’t."

Growthpoint is the biggest JSE-listed property owner in SA, with 1.4-million square metres of shopping centre space. Edcon occupied nearly 8% of that.

But De Klerk says it was still the best option. "It would have taken time and quite a lot of money to repurpose space, especially space occupied by Edgars stores. I think with the deal that’s done, either everyone is equally happy or equally unhappy."

Koseff played a big role in "herding all the cats", says De Klerk.

"He fulfilled a role to literally go and see everyone who needed to be seen and encourage them to be more understanding, co-operative and appreciate the big picture and potentially how it could either go wrong or go right, depending on how things played out," he says.

It was Growthpoint that proposed the idea of giving landlords equity, in exchange for the rent reduction — an idea since incorporated by Edcon. "The biggest challenge for landlords isn’t the economy or Edcon, but the retailers’ insatiable appetite to commit to more new retail developments. That’s a way bigger issue," says De Klerk.

Rivals weren’t impressed, though. Truworths wrote a letter to at least one property landlord saying the deal was "anticompetitive".

Pattison rejects this view: "Competition requires companies to enter into individual commercial relationships with competitors. A landlord is a supplier to us. The fact they want to help us, even if it doesn’t help Truworths, is tough."

Of course, it’s one thing to save Edcon, but can it ever become the retail icon it was back in the 1960s? Who are its customers? What, in other words, is its raison d’être?

Pattison is clear that Edcon is not trying to be a high-fashion store. It’s a family shop for moms wanting an outfit for going to church or an event and, increasingly, men who’re doing more of their own shopping. It’s fitted clothing for the average person, not a maximum of three sizes. "Wearability" and "washability" are important.

Jet offers similar product to Edgars, but it’s a discount department store. Everything you can get in Jet is available in Edgars, but not the other way round. The Edgars version would cost more and have better quality. (Edgars makes up half the group’s revenue.)

After Bain bought it, Edgars lost its way on the shop floor. Two decades ago, it was built around providing exclusive brands, private brands and selling clothes on credit.

Then the international brands arrived: H&M, Zara and Cotton On. So Edgars switched strategies: it began bringing in more international brands, and opened independent stores. It was the wrong approach.

Says Pattison: "History will show that Mr Price, TFG and Truworths had the right response ... have more local brands. We’ve switched to that strategy."

Edcon’s revival plan has a number of imperatives: it needs better merchandise, a smaller space, and it needs its credit sales to recover. Edcon was famous as the first SA store to offer "six months’ interest-free purchases" in the 1930s.

But under Bain, its credit sales plummeted. This is partly because, to raise cash to pay the debt, Edcon sold its debtors book to Absa. But Absa then started curbing the credit it would allow, which meant Edcon’s credit customers fell from R10bn to R5.5bn.

Now Pattison wants credit sales to rise from less than 35% of its sales to between 40% and 45%.

On the shop floor, the clothes have been placed together in a more "sensible" manner too. In Sandton City, menswear has all been placed together, as has women’s wear. It sounds obvious — but that isn’t how it was in recent years.

Doni Del Sal, who was highly regarded at Woolworths and Superbalist, has joined Edcon as its apparel merchandise director. Talk is that Edcon is also hiring former House of Busby CEO Shane van Niekerk.

Veteran retail analyst Syd Vianello says Edgars’ shop floors are "looking a helluva lot better. They’ve done all the right merchandising things; the things you can do to make it look nice to entice people to shop there, but you don’t have control over the amount of money people have in their pockets."

With consumers under pressure, after a 3.2% fall in GDP in the first quarter, shops are suffering. Says Vianello: "It affects Edcon more than the other retailers. Edcon needs positive sales momentum more so than its competitors, who can withstand flat sales simply because they have the financial wherewithal to do it."

Perhaps most painfully, Edcon is shrinking its physical space.

The fact is, its trading densities are all wrong. It makes about R15,000 a square metre, compared to about R25,000 at its competitors. So Edcon is reducing its shop floor space by a third — including reducing stores in Eastgate and Sandton.

The sceptics argue that even without Bain, Edcon’s days were numbered, as the department store model is dying globally.

Jean Pierre Verster, CEO of Protea Capital Management, says Edcon still has enormous challenges. While Pattison is doing the right things, the department store format is under pressure globally.

Pattison doesn’t agree. The Edgars at Sandton City, he says, is the quintessential department store and it makes R35m profit a year. "It’s huge, beautiful and makes lots of money. So the concept can’t be wrong. Why does it work in Sandton City? We sell more clothes than many other retailers," he says.

Pattison’s view is that department stores work in a big regional mall if they’re smaller than 10,000m²; in a regional mall, it has to be less than 6,000m², and for inner-city malls it must be less than 3,000m².

"If department stores are dead, well then Edgars is dead," he says. "If [we] make it the right size and profitable again … there’s enough proof that its core is still working well."

Every cost line is being scrutinised too.

For example, Edcon spent hundreds of millions on "strategy consultants" over the years — many of whom came from the former owners, Bain Capital. "My guess is over the years at Edcon, I would say those guys took maybe R1bn out of Edcon" he says.

By axing the consultants, Pattison is saving about £1.5m (R27m) a month. "There have been moments where I thought you could do without advisers, but actually you can’t. It’s just too complicated; there are too many companies, too many legal agreements, too many bonds, too many shareholders and banks. I’ve come to accept it as the price of doing these things. But everyone should have paid their own costs," he says.

Perhaps most remarkably, even as it has shut 150 stores which had 1,000 employees, Edcon has managed to repurpose 900 of these people elsewhere. The UIF would probably have demanded no less.

So, is the turnaround working?

The numbers say yes. In the first four months of this financial year, Edcon has made more money than in the same period the previous financial year.

"June was probably our best month so far," says Pattison. Figures for the first quarter will be released this month.

Contrary to what some analysts have argued, he doesn’t believe Edcon was saved because it’s too big to fail. "The turnover would be filled by someone else," he says.

Rather, he argues, Edcon was saved because there is something salvageable there. If it’s a dead business, let it die — but there are green shoots, he says.

It is still doing R24bn in turnover. Rivals with far smaller revenues are turning in R4bn in profit. There’s no reason Edcon, when fixed, can’t do the same. Especially with enough cash in the bank for two years.

"Our very ambitious strategy is to [get to] zero profit in three years’ time. And at that point Edcon again becomes independent and sustainable," says Pattison.

One of Edcon’s big suppliers, who spoke on condition of anonymity, says he is seeing an improvement. "They seem to be a lot more organised. The stock-to-sales ratio is more carefully organised, they’re making sure they’re not overstocked and are ensuring they get a good return," he says.

He says there have been "quite drastic changes" over the past three months, and there’s a new energy at Edgardale. "They’re being tightly managed. The stores look fresher. There’s a revamp in their top nine locations and I think that will remain strong."

Even though space in the Mall of Africa has been cut by half, the revenue from that store has risen by more than 10%.

However, Chris Gilmour, an independent retail analyst, warns that it’s too early to deliver a verdict on Edcon’s turnaround. "On the one hand I don’t want to take anything from Grant, he’s following a textbook approach, and it’s the only approach to take after years of abuse at the company."

But Gilmour says it’s especially tough since it’s the longest retail downturn since 1945, and the economy is in need of a defibrillator. "The biggest challenge is whether Edcon is going to manage to claw back market share. I don’t think that is possible. Things have changed in the past 10 to 15 years with overseas brands like H&M, Zara and Cotton On that have done fabulously well," he says.

CNA, the news agency it owns, is also "bust", he adds. "It’s too early to say if it will succeed or not, but if this economy carries on for another two to three years it will be incredibly difficult for Edcon to survive."

For Pattison, it’s been the sort of learning curve you wouldn’t get in many other companies. Steinhoff, Tongaat Hulett and EOH, all themselves in a rescue orbit, are perhaps the exceptions.

It’s the sort of invaluable case study applicable right the way across SA’s private sector too.

Pattison says he became more of a banker than a retailer in the process. And it’s taught him to question the way deals are typically funded.

"What I’ve learnt is that debt, particularly unlisted secured debt, is very, very dangerous. And when things go wrong, it’s no longer about whether the CEO or management keeps their jobs or shareholders lose some money, it’s about the company’s survival because you have to pay the money back."

Koseff echoes Pattison’s sentiment, especially when it comes to retailers.

"These businesses are not businesses you can leverage. I’ve learnt that as a banker and an investor — don’t leverage retail firms. They don’t have big balance sheets. They have big businesses and cash flows but not big balance sheets," he says.

Koseff says he’s seen it five or six times, where private equity buyers have got involved. "They mess up retail businesses if they overleverage them."

What it means: Fixing Edcon is the private sector equivalent of trying to save Eskom: both are enormous and systemically important institutions, crippled by huge debt and terrible decisions

—  What it means

If Bain hadn’t bought Edcon, any slip-up on the shop floor would also have been handled differently. "All of those deals would be funded by equity holders, and they would have fired the board and management," Pattison says.

But perhaps the main lesson he learnt was that a company needs to ensure it can keep its independence, otherwise the banks take control." You have to pay for advisers who act against you, and you have to pay for them, monthly, in pounds.

"When you breach your covenants, the world almost stops and a credit committee of a bank is now running you, and their every instinct is wrong," he says.

Allowing a foreign shareholder like Bain Capital to swoop in, and burden the company with foreign debt, is a recipe for disaster.

Already, the Competition Commission has cleared the way for Edcon’s new structure. Its shareholders are Absa, Standard Bank, Investec, Growthpoint, Redefine and the PIC.

Says Pattison: "I will always be checking in with myself if this is the best thing for the company, not just for shareholders … It’s quite hard to figure out what part of capitalism you believe in. If you just think about shareholders, the Bain deal was a great deal. If you think about just the company, it wasn’t."

No kidding. Edcon remains a cautionary tale of how a much-fêted private equity deal came to the brink of destroying the lives of 100,000 people.