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Bain’s Edcon Brings in Brands to Compete in South Africa

Edcon Holdings Ltd. is turning to international brands such as Topshop and Tom Tailor as South Africa’s biggest clothing retailer seeks to restore profit seven years after being acquired in a leveraged buyout.

Edcon, controlled by U.S. private equity firm Bain Capital Partners LLC, plans to bring in more of the labels through its flagship Edgars stores, Chief Executive Officer Jurgen Schreiber said by phone Aug. 21. The strategy is intended to fend off local and foreign competition from Inditex SA’s Zara and Hennes & Mauritz AB, which are both carving out footholds in South Africa.

“We realized we needed something that was long-term, sustainable and different from our competition and brands could do that,” Schreiber said in a separate interview at the company’s Johannesburg headquarters. Other international labels available in Edgars outlets include Dune, Mango and T.M. Lewin.

Edcon has struggled since its 25 billion-rand ($2.3 billion) purchase by Boston-based Bain in May 2007, failing to make a profit in at least three years. The deal saddled the retailer with debt, hampering its ability to invest in stores at the same pace as South African rivals Truworths International Ltd. and Mr Price Group Ltd. The arrival of Zara in 2011 also caused shoppers to defect.

“The debt has been a huge distraction and management took its eye off the ball,” said Roger Tejwani, an independent retail analyst based in Johannesburg. Total debt rose 16 percent to 22.7 billion rand as of the end of June, the company said Aug. 21 as it reported a first-quarter loss of 499 million rand, down from 712 million rand the previous year.

Home-Grown Chains

The yield on Edcon’s 425 million euros ($561 million) of 13.375 percent bonds due June 2019 fell 250 basis points in the two days after the company reported its narrower loss last week to 19.01 percent. The yield was 19.32 percent as of 3:07 p.m. in Johannesburg.

Bain isn’t planning an initial public offering of Edcon until the retailer has reported multiple quarters of profitability, Schreiber said.

Clothing and footwear sales in South Africa, the continent’s second-biggest economy, are dominated by a small number of home-grown chains. Eight South African retailers accounted for almost half of the value of apparel sales in the country in 2012, according to data from Euromonitor. That compares with about a quarter of sales by the top eight retailers in Brazil.

Limited Prestige

“There is an opinion in the market that it takes a long, long, long time for brands to have any type of deep penetration,” Schreiber said. “I think that’s a myth.”

For years, South Africans who wanted clothes from Zara or Topshop could only get them from abroad. Local malls stocked labels such as Edgars’ Kelso or Truworths brand OBR -- fashion that had limited brand recognition or prestige in Europe or the U.S. Edcon has built up about 50 international brands over the past 18 months, with more to be introduced.

“I lived overseas for several years and was pleased to see Edgars had brought in so many new brands when I returned to South Africa,” Charmaine Soupen, 50, said while browsing through ladies’ tops in the Edgars store in Johannesburg’s financial hub of Sandton. She likes to be able to try on clothes made by Mango and Australia’s Forever New in a single store and is a regular customer, she said.

Narrowing Gap

Edcon, which operates chains including Red Square and low-cost Jet as well as Edgars, has been revamping outlets in an effort to claw back market share that fell to 17 percent in 2012 from 22 percent a year after the Bain buyout, narrowing the gap with competitors Truworths and The Foschini Group Ltd. Sales growth was a combined 65 percent in the eight years through 2014, compared with a 163 percent gain at Truworths.

The turnaround plan is taking place as South African retailers struggle with more than 25 percent unemployment and annual inflation that was 6.3 percent last month. Retail sales were unchanged in June, the worst performance since December 2009, while the South African Reserve Bank raised its benchmark interest rate for the second time this year on July 17, cutting disposable income for borrowers.

“Edcon’s international brands strategy is risky in that it could sideline some of its core customers at a time the group desperately needs a turnaround from its revamped Edgars stores,” Alec Abraham, an analyst at Sasfin Securities in Johannesburg, said by phone.

Approvals Halved

The drive to attract customers with overseas fashion labels could also be held back by falling credit sales. Approvals for shoppers wanting to buy on credit at Edcon stores have halved since Barclays Plc’s South African unit took over Edcon’s book in 2012, while a potential second provider of credit, African Bank Investments Ltd., has been put into administration, a form of protection from creditors. Sales made on credit account for almost half of Edcon’s total retail revenue.

The collapse of African Bank sets Edcon’s credit sales back “a couple of months,” Schreiber said Aug. 21. While Edcon will continue discussions with the lender, it’s also in talks with other potential partners, he said.

Edcon has signed exclusive trading agreements with brands such as Topman, U.K. tailor and shirtmaker T.M. Lewin, U.S. denim-dominated Lucky Brand, and British womenswear chain Lipsy as part of the revamp. Some are sold in concessions in Edgars shops and others in stand-alone stores under a local partnership agreement.

Inherent Risks

At Edgars, international brands still account for less than 20 percent of revenue, Schreiber said. Edcon will open another 30 to 40 more stand-alone foreign-brand stores this fiscal year, he said. The rights for Topshop were acquired in July 2012 with the first store opened in November that year. The first stand-alone Tom Tailor and Dune stores opened in August 2013.

Absorbing new brands comes with inherent risks, Schreiber said. Some brands work from the “get go” while others don’t. Even so, there’s a benefit in trying out these “wild cards” in the search for one that takes off, he said.

“One Green Elephant -- hardly anybody actually knows the brand, it’s Japanese,” Schreiber said. “It’s a little out there, the color palettes are a little bit crazy. So with some of them we take a risk.”

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