Edcon has something in common with troubled state-owned airline South African Airways: it has been on life support for a long time, says Evan Robins, portfolio manager at MacroSolutions, Old Mutual Investment Group.
Edcon is the parent company of, among others, Edgars.
In an emotional conference all to suppliers on Thursday, Edcon CEO Grant Pattison broke down, telling suppliers the company only had sufficient liquidity to pay salaries but was "unable to honour any other accounts payable during this period", Fin24 reported.
Following the president’s first announcement on Sunday, 15 March, Edcon’s turnover has declined 45% in comparison to the same period last year. The company said by the time lockdown began, it expected to be around R400 million below forecasted sales and cash for the month, and expected to lose a further R800 million in turnover during the 21-day lockdown.
Robins told Fin24 that unlike the embattled airline, however, Edcon had no remaining safety net.
"If SAA were a private enterprise, it would have gone bankrupt a long time ago. It lost touch with the market and some bad decisions were made," he said on Friday.
"That has been no secret.
"Edcon has been the weakest of the retailers and has been on life support for a long time. It had no safety net because it was in financial difficulty for a long time - a bit like SAA in a way. When it was 'saved', everyone wondered how long it would last."
In 2019, Edcon received a lifeline received a lifeline of R2.7 billion from the Public Investment Corporation and lenders, and rent reduction from landlords in return for equity to aid in restructuring its business model to restore competitiveness.
This was after facing a heavy debt burden amid an weak consumer spending and slow economic growth. In 2016, Bain Capital Private Equity handed Edcon over to creditors after a 2007 buyout turned sour, Bloomberg reported.
Fin24 reported on Thursday that Edcon CEO Grant Pattison broke down in tears during a conference call to suppliers when he had to inform them that the company only had sufficient liquidity to pay salaries but cannot pay any other debts during the lockdown period.
After President Cyril Ramaphosa announced the first coronavirus curbing interventions on Sunday March 15, Edcon's turnover declined by 45% compared to the same time last year. By Thursday the company was at about R400 million below forecasted sales and cash for the month.
Furthermore, the lockdown means Edcon will lose a further R800m in turnover during the 21 days, thus expecting a significant shortage of cash by end of April.
In 2019, Edcon received a lifeline of R2.7bn from the Public Investment Corporation and lenders, and rent reduction from landlords in return for equity to aid in restructuring its business model to restore competitiveness.
The group has faced a heavy debt burden amid an environment of weak consumer spending and slow economic growth. In 2016, Bain Capital Private Equity handed Edcon over to creditors after a 2007 buyout, in which Edcon was delisted from the JSE, turned sour.
Cash flow problems
"Edcon now has no cash flow and therefore decided to pay their staff and not their suppliers, but now the suppliers will likely have cash flow problem," said Robins.
"This is a big thing, but it did not come out of the blue. Everybody knew Edcon was in trouble. In circumstances like we are in at present, what happens is the weakest go under first."
Although it is not yet clear what route Edcon will take now, Robins said options they are likely looking at could be liquidation, or a buy-out or business rescue.
Others could follow
"What is happening to Edcon symbolises how difficult it is in the retail industry at the moment. Other retailers likely just have stronger balance sheets and can hang on longer than Edcon," he continued.
Robins believes if this situation had occurred about five years ago, the impact would have been even greater because over the last few years ,Edcon had already been reducing the space it was renting.
Fin24 reported in January this year that Edcon shut the doors of its large Edgars store in Rosebank Mall as a cost-cutting measure. The store was almost as big as a rugby field. Last year Edcon closed 150 other under-performing stores under the group, including various Jet, Edgars and CNA stores.
At the time, the group indicated that the closure of these stores was largely in line with a cost reduction strategy to ensure profitability. A lot of the retail space Edgars occupies will not easily be let again if it closes down, Robins believes.
On the other hand, Robins says, if Edcon does not survive this period, other retailers could take up sales Edcon would have had.
"Times are tough and this is just the first retailer we see getting into dire straits, and we will see more business failures. Cash flow becomes survival in these times. The lesson to be learnt from Edcon is to be prudent," says Robins.
Pattison told suppliers on Thursday that the group would next week turn its attention to building a re-opening plan, but that he was not sure what that would look like or if it would even be possible.
He said business rescue was one possible option. Furthermore, he foresees that, even if the business could survive, it would be heavily dependent on business support packages offered by government and other agencies and funders.