THE announcement that African Bank Investments Limited (Abil) plans to sell furniture business Ellerines raises several questions about the outlook for low-end retailers, the most pertinent of these being: if Abil couldn’t find a way to improve the ailing retailer’s book and turn the company around, who can?
In the statement released by the bank on Monday, the Abil board is of the view that the group has implemented most of the strategic initiatives with regard to the Ellerines acquisition, and as such is more than happy to dispose of an asset that has as yet failed to provide any meaningful contribution to the group. While at face value this may seem to make sense, one can only wonder which "strategic initiatives" were planned for the company when Abil acquired it in 2009 for the princely sum of R9.1bn.
Four years seem like a remarkably short time in which to reap the full benefits of the extensive restructuring process embarked on when Abil took over. This involved firing about 2,000 staff, closing and rationalising branches, as well as upgrades and capital investments to the tune of R1bn, including the hi-tech white elephant of a warehouse in Boksburg.
Aside from achieving their "strategic initiatives", the bank also said that a stand-alone, product-based retail business such as Ellerines failed to meet the strategic requirements of Abil’s risk-based financial services business model.
Given the short time since Ellerines was purchased, this indicates a marked shift in strategy over the past four years. More to the point, if retail has fallen out of favour, one has to ask what will become of the other stand-alone retailers in the stable, such as Furniture City, Dial-a-Bed, and Wetherleys?
Of even more interest was the way the sale was presented as an almost routine decision.
In its statement, the bank said the sale was part of a plan to "accelerate" the disposal of the furniture retail business.
This is particularly curious considering that Abil had never before indicated that it wished to sell Ellerines or any of the others.
Abil CEO Leon Kirkinis has always said that he is good with the things he knows — such as unsecured lending — and has in the past resisted ventures away from his core strength, such as transforming Abil into a fully fledged bank.
For this reason, one can only assume that the decision to move into furniture retail was underpinned by a very confident outlook that conditions in the retail sector were going to improve, or at least stay the same.
For someone like Kirkinis to spread his wings into unfamiliar territory only to sell up shop four years later suggests that something went horribly wrong.
By the looks of it, the horribly wrong thing mostly has to do with the increasingly precarious position of the consumer.
At the time of the acquisition, the group said it had "the necessary skills and experience … to reposition the business for substantial future profitability and growth as a pure retailer".
Since then it seems things have spiralled out of control.
The slowdown in retail over the past three months is nowhere more apparent than in the furniture business. Sales at the retail unit of Abil, dominated by the Ellerines franchise, fell by 13% in months. And last month Moody’s warned that the original Ellerines lending portfolio was deteriorating further.
Although the bank has said it plans to strengthen its balance sheet and raise as much as R4bn in equity, the sale of Ellerines will hardly be a significant contributor. For starters, everyone knows that Abil is on the back foot, and as a result is unlikely to get the price it wants for the sale.
Second, it seems as though Abil intends on keeping the Ellerines book.
So what does the sale say about the outlook for other cash and credit retailers targeting the lower end of the market?
If Cashbuild’s fourth quarter operational update is anything to go by, the outlook is bleak.
Although the cash retailer’s revenue had increased 8%‚ its gross profit margins declined further and were expected to remain under pressure. Cashbuild attributed its lacklustre performance to a "competitive trading environment" which I assume means: there’s less and less money in the system.
Marrying unsecured lending with retail hasn’t worked on the scale Kirkinis hoped, and the last of the bad debt has yet to been seen. But the bigger picture is that the position of the consumer at the lower end is bad and getting worse.
• I owe a great debt to my colleague Maarten Mittner, our banking specialist, who contributed his expertise freely while I was writing this column.
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