Edcon aims to change its fortunes by driving credit sales

RCS buys its debtors’ book from Absa, which had a ‘conservative’ approach to lending.
Boosting sales by providing more credit to its Edgars, Jet and CNA customers is a ‘crucial part’ of Edcon’s turnaround strategy, says its CEO. Image: Moneyweb

Retail giant Edcon hopes to significantly bolster credit sales, following Absa’s announcement on Monday of the sale of its Edcon store card debtors’ book to RCS – the home-grown consumer finance group now owned by French banking conglomerate BNP Paribas.

BNP Paribas’s personal finance division bought RCS in 2014 from Edcon rival The Foschini Group and Standard Bank, which originally launched RCS as a joint venture some 20 years ago. The RCS deal with Absa is subject to regulatory approvals.

Speaking during a joint RCS/Edcon media briefing on the deal in Johannesburg on Tuesday, Edcon CEO Grant Pattison said the sale is part of a bigger agreement between RCS and Edcon that will see the retailer boosting its credit sales – a crucial part of its turnaround strategy.

Grant Pattison, CEO of Edcon. Image: Moneyweb

Edcon sold its debtors’ book to Absa back in 2012 for R10 billion. Today it is reportedly valued at around R4.5 billion, as the number of active card accounts on the book have fallen by more than two-thirds to around 1.2 million.

According to Edcon, credit sales on its store account cards accounted for some 60% of its sales in 2010, with around 4 million active cardholders. Today, around 30% of group sales come via its store cards.

The group has in the past complained about Absa’s conservative lending on the Edcon debtors’ book and in 2016 launched a second credit book internally to revive its credit sales. Pattison says Edcon’s own secondary credit book has around 1.2 million account card holders, so together with the Absa book the retailer effectively has around 2.4 million store card holders between its Edgars, Jet and CNA retail chains.

“We are really excited by the partnership with RCS and will be working together to grow both our credit businesses in SA,” says Pattison.

Cash injection

“While RCS will acquire the Absa Edcon debtors’ book, we are also in talks with them to acquire parts of our own internal credit book, which is valued at about R1.6 billion. As part of the first tranche, we are looking at selling about half a billion rand of our own credit book to RCS, which will serve as a cash injection for Edcon,” he explains.

Pattison adds that the deal with RCS is part of Edcon’s overall restructuring plan and was negotiated before the retailer secured R2.7 billion to recapitalise the business in March. The funding lifeline – from the Public Investment Corporation, existing lenders and several of Edcon’s landlords – has kept Edcon in business.

Read: Edcon gets lifeline from the public, landlords and lenders

and: Edcon limits job cuts despite 150 store closures

“This deal with RCS is part of the process,” says Pattison. “We had to secure the R2.7 billion funding before this deal could be finalised. It will allow us to grow our credit sales, which is a key part of turning around our business. Edcon has 10 million Thank U rewards customers, so there is huge potential to grow credit sales together with RCS.”

Loyal customer base

Commenting on the deal, RCS CEO Regan Adams says it has always been part of the group’s ambition to become the preferred provider of financial solutions to Edcon. “They are one of the largest non-food retailers in South Africa, boasting a loyal customer base of around 10 million. As part of this deal, we have also secured the right to provide consumer finance products to Edcon customers, including credit cards, store cards and personal loans.”

Adams notes that the deal with Absa and Edcon will also boost the RCS group’s client base and business in South Africa.

He says RCS has some 1.3 million customers in the country and works with many of the major retailers, including The Foschini Group, Massmart, Pick n Pay and even international retailers like Cotton On.

“RCS is the largest provider of outsourced store card services in South Africa and we have assets of around R11 billion,” he says. “We have a very good understanding of the different consumer credit segments in the country….”

In an emailed statement Absa confirmed the sale of the Edcon store card debtors’ book to RCS. It said the transaction includes the sale of Edcon’s store card debtors’ books in both South Africa and Namibia.

“The sale is positive for Absa as it will free up capital and management time to focus on executing against the strategy that Absa announced last year,” says Arrie Rautenbach, CEO of retail and business banking at the banking group. “In terms of the strategy, our priority is to regain our leadership in core areas.”

Read: Footgear buys Edgars Active as Edcon downscaling continues 

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Really in these times where the whole population is deeply in debt and arrears. How long before you run into cash flow problems? a Crucial part of a turn around strategy? Nothing makes sense to me anymore.

Maybe one of the MW readers who is in Retail or Banking can explain with certainty.

I am not in either of these sectors but I think Edcon sells the book (probably at a discount to the original sale value) and RCS takes the risk and Edcon gets cash now which it desperately needs.

The question may be asked what is in it for RCS, again I think they know pretty well statistically the percentage it will get back from the debtors and they score the discount mentioned above as well as future interest profits.

RCS also takes the risk of the future credit worthiness of the South African consumer on their books. Again they must know something that we dont.

Edgars already went bankrupt before which is why they needed the banks and PIC to bail them out. This was because of too much credit being advanced to credit impaired customers (Debt slaves already) – now they want to do it again.
Insanity – doing the same thing over and expecting a different result.

Perhaps the problems that Edgars is experiencing is a result of them selling lower quality products than their competitors at over inflated prices.

Perhaps it’s time to re-position themselves in the market as an affordable option in the clothing market. What’s the point of doing the same thing that hasn’t been working?

Not an inspired strategy.

Perhaps Edcon and other retailers should go back to lay bys – that way the consumer benefits as well as the retailer.

Not just the Loan sharks.

End of comments.

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