The offering of credit to cash-strapped shoppers has become an ever-increasing bane of retailers’ existence.
Ask some of SA’s largest retailers that have had to stomach bruising losses in credit sales running into millions over the past two years due to a raft of amendments to the National Credit Act.
Mr Price, The Foschini Group (the operator of Foschini, Markham, and others) and Truworths International – which generate a big portion of sales from credit in SA – have been the most vocal about the losses incurred.
Credit sales have become a consolation prize for retailers at a time when consumer spending has stubbornly been in the doldrums due to weak economic growth, rising joblessness and household indebtedness.
However, local retailers might claw back some of the losses and credit might be king again.
SA’s credit watchdog the National Credit Regulator (NCR) lost two big court cases in the last three months – the first relating to its amendment of the act and the second, the charging of club fees by retailers.
Let’s deal with the first issue.
The amendments to Regulation 23 of the act in 2015 required retailers to take additional steps for consumers to prove they are worthy of large amounts of credit. Some of these steps include consumers presenting three months’ worth of bank statements and payslips in stores, and additional checks with credit bureaus.
The NCR deemed the amendments necessary to ensure that reckless lending is avoided while Mr Price, TFG, and Truworths deemed them cumbersome.
Michael Mark, the long-serving Truworths CEO, once told Moneyweb that the retailer penciled in credit losses of up to R250 million shortly after complying with the NCR’s regulations. At TFG, new store accounts (credit) have, on average, declined by 30%, said CFO Anthony Thunström.
It has been downhill since then.
So unhappy were Truworths, TFG and Mr Price with the affordability assessments, they hauled the NCR and the Department of Trade and Industry to court and successfully won in setting the regulations aside. Essentially, the onus is now on retailers to determine if consumers qualify for credit. Truworths believes there will be an increase in the number of new store account openings now that there’s clarity on the credit extension rules.
The NCR also waged a war against retailers breaching credit regulations by charging club fees. Many retailers offer membership clubs, where for a monthly fee of between R20 and R80, consumers are offered discounts on things such as movies or airfare tickets.
Edcon (operator of Edgars), TFG, Mr Price and Lewis were referred by the NCR to the Consumer Tribunal for breaching credit regulations in the club fees they charge. The NCR believes that unsuspecting consumers are charged extra fees through club memberships, which pushes up the cost of buying goods on credit.
Last week, the NCR lost its appeal of a Tribunal ruling in June 2017, which cleared Lewis of breaching credit regulations for offering its customers’ club fees. This paves the way for Lewis, the retailer largely selling furniture to lower-income groups on credit, to continue charging club fees.
Retailers – 2 and NCR – 0.
Credit has played a big role in SA’s consumption history. During the dark days of apartheid, black people remained largely unbanked and couldn’t get credit from banks. Edcon was willing to give out credit to these consumers. “Retailers like Edcon were the bankers of the nation and they profited handsomely from that,” Alec Abraham, Sasfin’s senior analyst once told Moneyweb.
As the country transitioned into the democratic dispensation in the early 90s, economic opportunities opened up, fuelling consumerism, an insatiable appetite for credit and the proliferation of unsecured lending.
If dished out responsibly, credit can give retailers access to a wider base of consumers. And for consumers not flush with cash, credit can help them buy goods.