Ellerine Rescue Heralds South Africa Furniture Shake-Up

Photographer: Dean Hutton/Bloomberg

Ellerine Holdings Ltd., which has more than 1,000 furniture stores under brands including Beares, Furniture City and Geen & Richards, leads the South African market, followed by JD Group, Lewis and Shoprite Holdings Ltd.’s furniture unit with about 368 stores. Close

Ellerine Holdings Ltd., which has more than 1,000 furniture stores under brands... Read More

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Photographer: Dean Hutton/Bloomberg

Ellerine Holdings Ltd., which has more than 1,000 furniture stores under brands including Beares, Furniture City and Geen & Richards, leads the South African market, followed by JD Group, Lewis and Shoprite Holdings Ltd.’s furniture unit with about 368 stores.

The rescue of South African furniture retailer Ellerine Holdings Ltd. may herald the start of a broader industry shakeout as competitors ponder store shutdowns and reconsider how they grant customers credit.

Retailers such as JD Group Ltd. and Lewis Group Ltd. (LEW) have become over-dependent on credit sales after years of expansion and are now finding it tough to make money as consumers struggle to repay loans, according to Mark Hodgson, an analyst at Avior Capital Markets Ltd. in Cape Town.

“I expect a shakeout, with net store closures and brand rationalization,” Hodgson said by phone.

Ellerine, acquired by African Bank Investments Ltd. (ABL) in 2008, started voluntary rescue proceedings last month after its parent company withdrew funding because of persistent losses. The Johannesburg-based retailer’s difficulties stemmed from declining sales and rising bad debts in a market where most South Africans can’t afford to pay cash upfront for items such as furniture.

Ellerine isn’t the only one struggling. JD Group (JDG), a seller of furniture and provider of unsecured loans, was shored up by parent Steinhoff International Holdings Ltd. in March, while Lewis Group said last month that debtor costs rose 30 percent in the four months through July.

JD Group’s store numbers have risen 31 percent since 2009 to 1,223 stores as of December 2013. Lewis’s estate has increased 19 percent to 636 outlets.

‘Serious Questions’

“Steinhoff has invested a lot of time and money in JD Group,” Jean Pierre Verster, an analyst at Johannesburg-based 36ONE Asset Management, said by phone. “If it wasn’t for Steinhoff’s support, I think there would be serious questions about the continuation of the business.”

In the six months through December, the non-performing loans of JD Group’s secured-lending book totaled 43 percent, with the unsecured book’s bad loans at 53 percent, Chief Executive Officer Peter Griffiths said in a presentation earlier this year.

The weakness of the economy is weighing on retail sales of household furniture and appliances, which totaled 34.9 billion rand ($3.3 billion) in 2013. Accelerating inflation, an unemployment rate exceeding 25 percent and protracted mine-industry strikes that began in 2012 left almost half of South Africa’s 20.6 million credit-active consumers with impaired records at the end of December, according to South Africa’s National Credit Regulator.

1,000 Outlets

Ellerine, which has more than 1,000 furniture stores under brands including Beares, Furniture City and Geen & Richards, leads the South African market, followed by JD Group, Lewis and Shoprite Holdings Ltd. (SHP)’s furniture unit with about 368 stores.

JD Group said this week that it agreed to sell its lending unit to an international consumer-finance provider, providing a boost for the unprofitable company, which raised about 1 billion rand through a rights offering earlier this year. The offering was underwritten by Steinhoff, whose stake in the retailer now stands at about 86 percent. JD forecast a loss per share of as much as 8.70 rand for the fiscal year through June, compared with a 2.76 rand profit a year ago.

Verster said that BNP Paribas SA may be the company that has agreed to buy JD Group’s loan book, after it acquired RCS Investment Holdings Ltd., a joint venture between South African clothing retailer Foschini Group Ltd. and Standard Bank Group Ltd., in April. A spokeswoman at Paris-based BNP Paribas declined to comment when contacted by Bloomberg.

Price Cuts?

With provisions of about 16 percent for unsecured debt, Johannesburg-based JD will need to write off “a significant further amount in the unsecured book in order for that book to be ‘clean enough’ for a purchaser,” Verster said. JD Group didn’t specify in its statement whether the lending-unit disposal includes the unsecured debt.

The retailer may consider cutting prices to boost sales and to ensure “its ability to survive at all,” Verster said.

The subdued consumer climate hasn’t precluded a “high level of interest” in Ellerine’s stores and brands, business rescue practitioner Leslie Matuson said Aug. 20. About 700 people, including credit insurers and suppliers, attended the first creditors meeting. Some Ellerine outlets are expected to close, Verster said.

Shoprite plans to double its number of furniture stores in five years to seven years, and would “certainly look to buy some of the Ellerine stores,” Aubrey Karp, the unit’s managing director, said after an Aug. 19 earnings presentation. While a furniture bad-debt provision of 12 percent “more than adequately covers arrears” of 9 percent, the Cape Town-based company is keeping a close eye on its debtor book, Karp said.

“Ellerine’s demise has made other furniture retailers think about how they make money,” Verster said. “Some furniture retailers might go for a higher turnover, less margin approach by saying, ‘Let’s cut prices a little bit, but let’s sell more.’ But I think the jury is out on that.”

To contact the reporters on this story: Janice Kew in Johannesburg at jkew4@bloomberg.net; Christopher Spillane in Johannesburg at cspillane3@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Paul Jarvis, Tom Lavell, David Risser

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