There is a temptation, especially in a time of crisis when not much makes obvious sense, to lump together events that seem similar.
Shallow or simplistic ‘analysis’ is then used to ‘prove’ that these were all caused by some exogenous shock or event. These patterns are recursive in every crisis (or indeed boom); the global financial crisis in 2008 – the most recent of these – was blamed for all manner of things.
This time is no different, even as countries grapple with a global pandemic on a scale never seen before. In recent days, the commentariat has decided that a number of high-profile businesses closing or filing for business rescue can all be blamed on the lockdown. Of course, a hard shutting down of the economy for over a month will have substantial consequences; this column does not deride that impact.
But for many of the recent companies making headlines – such as Comair, SA Express, South African Airways (SAA), Associated Media Publishing, Caxton Magazines and Edcon – the seeds of their demise have long been in place, in some cases for years.
Some are operating in industries in long-term structural decline. Others have been technically insolvent for longer than we care to remember. Businesses, large and small, with weak balance sheets operating in a stagnant economy will fail easily. Economic growth last year was just 0.2%! This is certainly not a fertile environment for easy money to be made.
Comair is not SA Express is not SAA
Comair is the rare example of a company using business rescue for the purpose it was intended. Too often, an application is made for business rescue far too late. Sometimes, as in the case of suspect failed property syndication schemes, the process is abused outright.
It’s also astonishing how many people misunderstand business rescue entirely. Once a business enters the process, it has not ‘failed’ or gone ‘bankrupt. But precisely because it is abused, many never emerge and do fail.
For Comair, business rescue gives the airline room over the coming months to make the necessary decisions to ensure its long-term survival.
Given that the business is not operating currently (all flights are grounded), it is therefore impossible to do this without protection from creditors. The headlines screaming about a R564 million headline loss in the last six months of 2019 don’t tell you that this was largely an accounting loss as it had to reverse a R450 million portion of the SAA damages settlement.
On an operating basis, the airline was profitable.
It did not enter this crisis in a weak position. There was R416 million cash on hand at the end of the year, and a strong minority shareholder in Bidvest (with 26.91%).
SA Express is a sub-scale feeder airline that was mismanaged and looted for years until it was grounded by the Civil Aviation Authority last year. It made stuttered attempts at restarting operations but ended up grounding itself a few times as it juggled a mountain of outstanding payments. The airline was placed under provisional liquidation last month. Contrast this with private operator Airlink, which flies many of the same routes profitably and sustainably.
SAA’s business rescue process has been a farce due to the fact that the airline was already too broken and too insolvent to fix. The amounts needed to sustain operations became eye-wateringly large – emergency funding of R3.5 billion raised from the Development Bank of Southern Africa in January lasted just months. In April, business rescue practitioners requested an additional R10 billion in funding. This was clearly completely unsustainable.
Despite government’s dreams of starting a new flag carrier from “the ashes” of SAA, there is simply no money to do so. Neither SAA nor SA Express failed because of the Covid-19 pandemic. All the lockdown did was to allow political cover (or a convenient excuse) for them to finally hit the wall.
For Associated Media Publishing and Caxton Magazines at least, the causes of their failure are similar. Both are operating in print media, a market that has been in decline for over a decade already. There is an oversupply of similar content (think recipes, gardening tips, gift ideas and so on) available online for free.
In general, magazine circulations have been decimated since 2009.
It is uncommon to find a niche magazine that ‘sells’ more than 20 000 copies in this country, and even those with more mass appeal are struggling to sell more than 40 000. Sure, there are outliers, but the production, printing and distribution of magazines has gone up over time.
|Circulation||2009 Q4||2019 Q4||Change|
|Cosmopolitan||97 892||34 915||-64%|
|House and Leisure||35 682||21 034||-41%|
|Good Housekeeping||–||33 933||–|
|Bona||82 710||50 148||-39%|
|Country Life||34 901||25 582||-27%|
|Essentials||38 687||18 620||-52%|
|Food & Home||36 820||17 828||-52%|
|Garden & Home||54 587||37 126||-32%|
|People||85 450||32 303||-62%|
|Rooi Rose||105 298||58 532||-44%|
|Vrouekeur||77 481||38 623||-50%|
|Woman & Home||97 524||64 934||-33%|
|Your Family||63 799||23 771||-63%|
Source: Audit Bureau of Circulation (ABC)
The circulation figures only tell half the story. Management accounts for each title will be revealing. All manner of tricks have been tried by publishers to keep these titles viable. Frequency is the easy one, where many magazines have been cut to 10 issues a year from monthly. Others published in alternate months. Some rely on free issues or sales at just above 50% of cover price (where titles are bundled together) to boost numbers.
Many publishers have shifted to building digital audiences, but the revenue streams that have come with those cannot replace declining print advertising revenue. Some have pursued a well-established strategy of monetising audiences through events, but Covid-19 put paid to that. This was surely the straw that broke the camel’s back for Associated.
For Caxton, the decision to “withdraw” from magazine publishing is a lot more complicated. The magazine arm provides print volumes (at good margins) for its commercial printing operations. It won some Media24 printing work from Novus, but management will be asking difficult questions about the long-term viability of some of its printing assets.
A nonsensical ‘ban’ on the sale of magazines during the first weeks of the lockdown by most retailers obviously did not help matters. But the lockdown didn’t kill these titles, just as previous magazine closures couldn’t really be blamed on some or other event. Failure to innovate quickly enough did.
The pain in retail is just beginning
The situation where clothing retailers were not allowed to trade for the entire month of April is entirely unprecedented.
Edcon CEO Grant Pattison – who draws no salary – told suppliers last month that sales for March (prior to lockdown) were R400 million below forecasts, and that it expected to lose R800 million in sales in April because stores were shut. In the announcement that it was to file for business rescue, the retailer said “lost sales” totalled R2 billion.
That Edcon was in a weak position before Covid-19 is undeniable. This was a business that had finally been pulled from the brink following one flawed strategy after the next. The debt load was cleared and then cleared again, it was slimmed down and was on an unambiguous path to sustainability.
As with Comair, filing for business rescue now gives Edcon the best (or only) possible chance of survival. Everything now depends on how it trades over the coming months.
For the most part, the larger retailers will be fine. Some are in better shape than others, but you can expect banks and shareholders to be ‘accommodative’ of those in weaker positions.
We are likely to see high-profile outright failures in certain sectors like entertainment and hospitality. Already, thousands of smaller enterprises in these sectors are in dire straits. Some have closed permanently. How landlords navigate the coming months, mainly in the form of rental relief, will determine the fate of many, many businesses.
As the impact of the Covid-19 pandemic and the lockdown rattle and reverberate through the economy in the weeks, months and years ahead, appreciate that things are seldom as simple as they first seem. Why did one business succeed when another in the same sector failed? That’s a far more useful question to be asking.