It was blindingly obvious walking through CNA Sandton City this weekend that it was shutting down. In recent years what was its sprawling flagship has become a near-permanent construction site. Shelves lay bare. What little stock there was, was heavily discounted. The extended range once made possible by the acres of space was missing. And there were barely any shoppers. At one stage I counted more security guards.
See the thing is, this CNA store (especially) was a special place, at least for me. The magazine section at the back was a destination you could go to discover the world, long before smartphones and Twitter and apps and pervasive Internet. On Saturday mornings there was hardly any standing room as people ‘browsed’. This was the real Sandton library.
Barely 50 metres away in Sandton City is Musica’s flagship Megastore, part of the Clicks Group. This too is a business operating in a sector in decline. But step inside and the two worlds couldn’t be more different. You can see Clicks has invested in the space. There’s selection, there’s stock, there’s a destination. And you can’t miss the high-margin, still-growing product categories like headphones, technology and vinyl (yes, vinyl) as you walk in.
Two years ago, Clicks boss David Kneale told me that the group is “focusing the business on [being a] destination location because we believe that for a long while to come there’ll be a market for the physical format of the product, and our strategy in Musica is to be the last man standing”. In 2013, with 27% profit growth, it was in Kneale’s words “the star performer of the group”.
Now, with major competitors like Reliable Music bust and Look & Listen in business rescue, it has achieved that. And rather unbelievably, it has managed to consistently grow profit.
Yet, Clicks freely admits the business is “non-core to the group’s strategy” in its annual report.
It would appear that this has finally dawned on Edcon. CNA has become an awkward appendage, made more clear when one reads the Edcon financial statements. The group’s retail division is split into two segments: ‘Edgars’ and ‘Discount’. The latter is Jet and Legit, while the former is everything else, including the foreign brands it has launched in the country, like Topshop, River Island, and T.M. Lewin.
And then there’s CNA. Edcon CEO Jürgen Schreiber told Business Day in February that it’s considering the sale of “non-core stores”. There’s a lot of “non-core” in Edcon, including Boardmans and possibly Red Square, but surely CNA is first on that list?
Truth is CNA was never enough of a book shop to be a book shop. Or a toy store to be a toy store. Or a stationery outlet to be a stationery outlet. The only thing it was ever really good at was being a news agent. The huge variety of magazines available on its shelves was unmatched. But it’s 2015. Traditional news agents are either extinct or on the endangered list.
A foray into mobile phones and laptops seemed to be one bright light a few years back. But CNA never carried the breadth and depth of product to make it an obvious must-stop.
While CNA is being left to run into the ground, Musica is bustling. One can’t help make comparisons.
Musica should cross R1 billion in turnover this financial year (R506 million for H1 at end February 2015). Clicks no longer provides a segmental profit breakdown for Musica and The Body Shop, preferring instead to publish overall retail numbers. However, the last time it broke out Musica separately (in August 2012), the business posted a profit before tax of R42.8 million on annual turnover of R871.5 million. That’s not a bad margin at all. Presumably, Clicks has managed to maintain this margin.
By contrast, CNA should hit somewhere between R1.8 billion and R1.9 billion this financial year. Not surprisingly, its Christmas quarter dwarfs all the others. As at December 27 2014, its operating profit on R1.488 billion in revenue was R5 million for the 39 weeks (nine months). In other words: there is no margin to speak of. (I’d be willing to bet that most CNA stores are loss-making at this point.)
Five years ago (FY 2009, to March 2010), CNA posted operating profit of R138 million on turnover of R1.851 billion. Year-ends differ markedly, but Musica reported FY 2010 (to August 2010) operating profit of R53 million on turnover of R952 million. Five years ago, CNA was more profitable than Musica (relatively) and almost exactly twice the size.
Momentum provides two totally different stories too.
Looking at the most recently published numbers, Musica’s first-half turnover is up 2.4% year-on-year to February 28 2015. CNA’s turnover for the nine-months to December 27 2014 is down 3.8% year-on-year. In Q3, however, it fell 7.3% (5.3% like-for-like). And that’s the big Christmas quarter.
Gross margins at CNA are at (or near) all-time lows too. In Q3 2015, Edcon says this was 29.5%, versus 32.9% five years ago. Compare this to 40.1% gross margin in the Edgars division and it’s no surprise why CNA is considered “non-core”.
Carefully cutting the store portfolio is one obvious way of managing a business (in a sector) in decline.
Five years ago, in April 2010, CNA had 203 stores. As at December 27 2014, it had 197. That’s a 3% drop! Sure, it’s been decreasing the size of the stores (the Sandton City store was halved and Edcon used the space to open one of its mono-branded stores last year), but surely Edcon should’ve been decreasing the number of stores too? It’s no use having small, crammed stores with even less range than before, scattered across multiple categories.
Musica, by comparison, had 154 stores five years ago (as at February 28 2010). By February 28 this year, it had 118 (in the past six months it closed four and opened four). Effectively, it’s cut its footprint by a quarter (24%) over the last five years! Add the fact that it’s been cutting space and it’s obvious why it’s profitable and CNA is not.
In the most recent annual report, Clicks says it “will continue to open new outlets in destination shopping centres where it will be the only specialist entertainment retailer”.
CNA, meanwhile, trades in shopping malls where there are dedicated gift shops (Cardies), dedicated stationery shops, dedicated toy shops, dedicated music shops (Musica!), dedicated book shops (mostly Exclusive Books). It has no niche, its as simple as that.
While non-core, Musica is lucky that it has a strong parent in Clicks. CNA doesn’t have that. Edcon’s been lumbering under private-equity debt since the buyout at the top of the market in 2007. Its engine, Edgars, has been struggling for years and it’s only now that it seems to be turning the corner. Edcon admits in the second paragraph of its Q3 numbers that “standalone stores such as River Island, Topshop and T.M. Lewin, among others, are exceeding expectations”. Why, then, would it even bother focusing on CNA?
You can bet that Edcon’s been trying to find a buyer for CNA for some time. But who on earth would buy it? And why would anyone want it? What could it even become?
Given how relatively over-traded the South African retail market is, even its store footprint is not as valuable as it was five or ten years ago. And Edcon, with its replace-CNA-square-meterage-with-clothing strategy, is ensuring that whatever value is left is being eroded daily.
My bet? It’s going to be run into the ground once and for all. Don’t be surprised if it ends up in business rescue or liquidation (again) in a few years’ time.
This is why it’s so remarkable that Exclusive Books found new owners who actually love books and who have a vision.
* Hilton Tarrant works at immedia. He’s going to miss CNA, well, what it once was.
1 In its most recent annual report, Edcon says the “estimated useful life” of the “CNA brand” (as one of its intangible assets) is “indefinite”. Dig deeper, and the CNA brand (and other intangibles in the division) is now valued at R127m by Edcon. Edcon impaired this by R33m last year (and by R386m the year before).