Podcast features clip of Grant Patterson, CEO of Edcon speaking on Edcon
NOMPU SIZIBA: I’m joined on the line by Chris Gilmour, who is an independent guru on the retail sector. Thanks very much, Chris, for joining us. The picture painted by Edcon CEO Grant Pattison is quite grim, especially given that the group had been given a new lease of life by its various creditors in its restructure process last year. When we read between the lines of what he had to say, do you think Edcon will survive post the lockdown?
CHRIS GILMOUR: Good evening, Nompu. To answer your question immediately, not in its current form, no. I just don’t think it’s possible. A couple of things.
First of all, is the lockdown going to finish on April 16/17 April, whatever? We just don’t know. Current suggestions, if we use geographical precedent in the rest of the world as a proxy, suggests it might be extended. I don’t know. I can’t speak for government. I’ve got no way of knowing. That’s the first point I want make – is it going to be just the three weeks?
In the preamble [see audio hereto] you mentioned property companies. But Grant Pattison talks about the suppliers. There is a whole massive supply chain here. So we are talking about a whole host of people who supply Edcon – for example, cut, make, and trim suppliers, but not necessarily big companies. The small suppliers probably are in the main, and they’ve got a whole host of people who depend, literally, on those jobs and nothing else. So this could be absolutely devastating. And the longer it goes on the worse it gets.
So if people are thinking there is going to be a rapid rebound from this, unless those suppliers can tap into some kind of external funding – and maybe the Rupert and Oppenheimer and Patrice Motsepe initiatives may help to some extent – we just don’t know. If it can’t tap into some sort of external funding, then their prospects look bleak as well.
Everywhere you look, South Africa is a consumer economy. Something like almost 60% of GDP in this country comes from the consumer and, if the consumer is going to be hit, if the consumer can’t go out and spend, then, in Grant Pattison’s words ringing in my ears, R400 million down just in March, and since the lockdown another R800 million. You can’t survive on that type of thing. So again, a longwinded answer to will Edcon survive: perhaps parts of it will.
I really feel for Grant, because he’s done a phenomenal job in trying to rescue this thing. And, as you say, it was was almost there – and this has really just knocked it for six.
NOMPU SIZIBA: So, is Edcon merely the tip of the iceberg, then? Could we see the lockdown adversely impacting a lot of other retail sales outlets?
CHRIS GILMOUR: Oh, absolutely. Today in the UK, for example, BrightHouse and Carluccio’s have both gone into administration. That’s a first-world economy, with people who are relatively wealthy. And in South Africa we are in recession, so money is tight already.
You didn’t mention Mr Price. They put out a statement last Thursday or Friday, saying that they’re going to have to come to an arrangement with their landlords, because it’s just so weak for them as well. And they are really very good value-for-money-type retailers.
So while you have this lockdown, while you could only go to the food retailers, the food retailers will do reasonably well, depending on how much people tend to stock up. But yes, it’s a difficult one to know exactly how well they will do. But the non-food guys are really going to take a beating.
NOMPU SIZIBA: What about the Foschini Group? They came out with a statement over the weekend to say that they’re going to halt paying rent. I mean, can they just do that unilaterally, and do they even give reasons as to why?
CHRIS GILMOUR: Well, essentially if you look at Foschini’s trading statements for the past year or so, they’ve been talking about the fact that the landlords in many instances, both here and in Australia, haven’t really quite grasped the reality that you can’t just keep on escalating rents willy-nilly. I think that may be behind their action. Can they do it legally? I’m not a legal expert, I don’t know. I can’t give you an opinion on that. But they seem to have taken legal counsel on this one. So, yes, they seem to be pretty confident, and that may well set a precedent for other retailers. We’ll have to wait and see.
NOMPU SIZIBA: Chris, you put me straight, very nicely, to say that it’s not just about big companies like real estate investment trusts, but other companies that are heavily connected with the retail sector. But I do want now to focus on the Reits.
What does this situation mean for the likes of Growthpoint, Redefine and other property groups? They must be feeling on shaky ground at the moment. What will they do?
CHRIS GILMOUR: I’m not a property expert, so I can’t give you the real lowdown on that. But, just from a kind of lay investment person’s perspective, I’m trying to think which one of them today actually maintained the dividend. So at this point in time they seem to be holding up.
But, coming back to what TFG, The Foschini Group, have been saying for a while, the property groups have to understand that South African consumers are in a real squeeze; and the ability to pay, both at a consumer level and at a corporate level, is highly constrained. So I think that message has got through.
On a number of occasions over the past, I don’t know, 20, 30 years we’ve heard that the number of new shopping malls is going to decrease. It just keeps on increasing year after year after year. This year will be the year where you really do see a decline in the number of shopping outlets. This may catalyse such a thing.
So, to answer your question, I think if you look at where fund managers have been putting the money, they’ve been closely avoiding the property sector – this type of thing – for a long, long time. And I think this will make them even more cautious.
NOMPU SIZIBA: The fact of the matter is that, whenever the lockdown formally ends, because, like you say, we can’t be sure that it will end on the 16th, the local economy is going to be in an even worse shape than it is right now, with the possibility that quite a number of consumers will have lost their jobs as a result, which leads me to think that consumer confidence will be under major strain, as well as the propensity of consumers to actually go out and buy anything but basic goods.
How do you see the consumer in the foreseeable future?
CHRIS GILMOUR: I couldn’t agree more. However, there will be some degree of pent-up demand. What I mean by that is – let’s take this period – you can’t by law sell clothing or footwear, for example. But within the younger community, particularly, there is that pent-up demand. And if they’ve got the money, if they’ve got the ability to buy – and that is critical, and you’ve alluded to that – then yes, they will go out and spend. But of course that will be highly limited, because of all those other factors that you’ve mentioned.
So, if they haven’t got the money, by definition they can’t spend. And when it comes to getting credit, that has been even more difficult in in the past two or three years. So it’s a horrible Catch-22, even when the lockdown comes off.
That’s why I say I don’t think it’s going to be a big V-shaped balance. It’ll be something much more stifled.
NOMPU SIZIBA: Yes, it’s going to be quite ugly, I’m sure, with a lot of people losing their jobs in the process. We were looking at that unemployment claim in the United States in the week ended March 21st, and 3.28 million Americans had to claim unemployment benefits. It just shows you the kind of impact that these lockdowns have.
CHRIS GILMOUR: I think what it also demonstrates, Nompu, is that in this wonderful economic recovery that started in March 2009 in the States, and then in many other countries, a lot of those jobs that were created were not what I would call sustainable jobs. So we are talking about the likes of coffee baristas and people like that – nothing wrong with that – I’m just saying those kind of jobs only really go with, no pun intended, frothy markets and frothy economies.
So the moment you get a downturn and something as sharply turning down as this one, then those peripheral jobs tend to go with them.
But even I was astounded to see them going for an average of 200 000 a month or thereabouts to 3.2 million. This is unheard of.
When we get the fuller jobs reports from the States, we will get an indication of what the actual unemployment rate is. It’s being hovering around the sort of 3, 3.5% rate for a while. This is going to go up into maybe 8 or 9%. James Bullard and John Leguizamo from Theset was talking a couple of weeks ago about the possibility of unemployment in the States reaching 30%. They didn’t even reach that level in the Great Depression.
I think what we could be looking at in the US is a very sharp downturn, followed by a strong upturn, not nearly as big an upturn as the downturn.
But I think what we’re seeing now is something that is just beyond comprehension, and it is difficult to really make a lot of sense of it till we get a bit more data.
NOMPU SIZIBA: Is it too simplistic to say that, once the coronavirus situation is done and dusted globally, there’s the potential for that upturn that you talk about?
CHRIS GILMOUR: We have to be careful when we say “done and dusted globally”. The coronavirus is going to be with us for quite some time, probably even years, in the sense that it’s in the community in many countries, and it’s going to be doing its dastardly deeds. It’s going to be killing people in the same way as seasonal flu kills people. So it’s going to be around, and it means that healthcare facilities all around the world are going to have to give up the resources to cope with this. It’s not going to go away. It’s going to be reduced, absolutely, and the lockdown measures are going to do that, and social distancing designs to help that.
But I don’t think we can reasonably expect it to weaken. It hasn’t gone away in China, despite their absolute best efforts, which only a totalitarian state can achieve. So, you know, it’s going to be around. But it will impart a dampening effect on the global economy, that otherwise wouldn’t have been there.
NOMPU SIZIBA: Chris, pleasure talking to you this evening, and thank you.