Consumer Business Exco Finance Risk

The relationship between the SA retail industry and business rescue

Rescue buoy

Introduction and state of the industry

At the start of 2009, several of the historically successful and extremely profitable United Kingdom retailers were forced to enter into Business Administration in order to rescue their businesses and brands. These big brands included names such as Woolworths, Clintons, Game, HMV and Blockbuster. The closure of these big brand names brought about a major shock to the United Kingdom’s retail industry. The predominant reasons behind these closures had been identified as: the current economic climate during that time, increased competition as well as the advent of the internet which resulted in changes in consumer behaviour. It can be concluded that without action, the same fate may befall certain South African retailers (Deloitte E, 2014).

The retail industry is predominately a high volume, low margin business which has recently experienced a deterioration in margins. For example, Pick ‘n Pay’s relatively low gross margin decreased from 18.0% to 17.7% from the year ended February 2012 to February 2013 (Pick ‘n Pay Annual Financial Statements 2013); Shoprite’s gross margin has decreased slightly from 20.9% to 20.8% from the year ended June 2013 to the year ended June 2014 (Shoprite Holdings Annual Financial Statements 2014); whilst JD Group’s gross margin has decreased from 28.1% to 25.9% in the same period (JD Group Annual Financial Statements 2014). The decline in these percentages shows that the retail industry’s margins are under pressure. This is especially relevant for JD Group due to the nature of their products which are deemed as discretionary goods compared to the necessities sold by Pick ‘n Pay and Shoprite.

The pressures that these South African retailers have historically experienced were mainly as a result of the amplified fuel costs, increasing shop rentals, electricity hikes and unreliability of energy supply; as well as inflation which had increased the cost of doing business. In this industry, it is becoming increasingly difficult to pass these costs onto the customers due to the increased competition and the current challenges regarding stretched consumer credit that retailers are faced with.

In the Deloitte South African Restructuring Outlook Survey conducted in January to February 2014, the retail industry was listed as one of the top 3 industries predicted to be in distress in 2014. It seems that even at the time the survey was conducted, the writing had been on the wall (Deloitte B, 2014).

Several market conditions currently exist in retail which are causing both domestic and international retail companies to enter financial distress and are subsequently obliged to commence or at least consider business rescue. Some of these elements include:

  • Consumer spending levels remaining weak, especially with respect to non-essential goods;
  • Operational costs are rising as variable costs (in terms of supplier prices) and fixed costs (such as rentals, electricity and head office costs) are increasing;
  • Technology has shifted consumer behaviour, giving more importance to the digital presence of a brand and the ability to purchase items online over having to physically purchase from a store; and
  • Increased competition, both locally and from international multinationals, as globalisation continues its trend of making the world smaller (Deloitte C, 2014).

One rising concern, especially in the South African retail market, is the increasing debt levels of consumer. Retailers are facing increasing strains on their credit sales, which have become a vital function used to increase sales to customers who would not otherwise be able to afford to pay the cash price. The rising debt levels of consumers, coupled with increasing interest rates, means that the credit sales may no longer be the significant driver of increases in sales that they once were.

The National Credit Regulator (NCR) statistics indicate that as many as 9.7 million consumers are struggling to pay their debt obligations, meaning they are unable to make their minimum payments. This represents nearly half of all credit active consumers, which is a concerning statistic given the reliance on credit by certain retailers. With retailers often extending credit to these same customers in an attempt to drive sales, the retail industry is likely to see the level of bad debts increasing in the future (National Credit Regulator, June 2014). Credit results in the deferral of cash within the business, and may increase liquidity risks if left unmatched with creditor obligations.

Recent Retail business rescue cases

Meltz was a well established chain in the retail sector. However, Meltz commenced business rescue proceedings in March 2013. Meltz opened its first store in 1997, which increased to 42 stores employing 260 staff members in South Africa and generated net profits of R6m in the 2010 financial year. The main reason for Meltz’s success was its ability to source branded clothing items at a 60% discount by buying overruns and cancelled orders. Meltz then targeted the “upscale bargain hunter” by retailing these brand names at significant discounts when compared to other retailers (Planting, 2013).

Due to increased competition from other fashion discount stores such as United Fashion Outlet and the new Pick ‘n Pay clothing line amongst others, Meltz’s sales began to rapidly decline. In the 2011 annual financial statements, the decreased sales manifested in a loss of R5m and a loss of R27m in the 2012 draft annual financial statements. These losses could not be sustained and led to Meltz being unable to meet their creditor obligations. Meltz then began to seek alternative options to remedy their financial woes. A successful business rescue plan was implemented which resulted in the sale of the business for R37 million post recovery compared to the losses previously incurred. This represented 100 cents in the Rand for secured creditors, post-commencement finance creditors, preferent creditors received three to five cents in the Rand for concurrent creditors. (Matuson Associates A, 2013)

Within another sub-sector of the retail division, music and consumer electronics, Look & Listen was another well-known brand who applied for business rescue. Look & Listen had historically been a profitable business with retained earnings of R110.7m in February 2012 generating a profit of R1.1 million for the 2012 financial year. However, these profits quickly turned into losses of R9.2m and R18.9m in the 2013 and 2014 financial years respectively. At this stage, despite major product portfolio alterations, only 5 of 19 Look & Listen stores were trading profitably.

The major causes of the decline in profitability in Look & Listen were as a result of a decline in turnover and the margins earned on the turnover due to the following pressures:

  • There were many challenges relating to the lease agreements for the stores, most significantly the inability to exit unprofitable store leases or extend profitable store leases;
  • Decreasing prices in the industry itself, leading to decreased margins generated;
  • A depressed economic climate, hitting discretionary retail the hardest;
  • Migration of users away from physical products to digital downloads in the music, gaming and move platforms; and
  • Illegal downloading and piracy of products (Matuson Associates B, 2014).

Taking the lessons from the recent local examples, as well as taking into consideration the ever adapting consumer demand, increasing competition and changes in consumer purchasing technology, many retailers are obliged to start considering the following strategic options available to them:

  • Embracing a multichannel approach, including both a physical and online retail experience, in order to retain customers who are embracing the online shopping experience;
  • Changing physical location to a more lucrative area or consider closing stores which are no longer profitable as an online presence is becoming more important;
  • Altering the product portfolio within the store by focusing on enhancing the customer proposition;
  • Systematic cost and benefit analysis of products within each product channel; and
  • Planning for survival as restructuring and changes in strategy are expensive and that therefore should be started as soon as identified.

The Deloitte South Africa CFO 2014 Survey reported that South African CFO’s are predicting 2.8% and 3.2% GDP growth in 2014 and 2015 respectively. This relatively flat GDP growth represents a bleak macro-economic outlook for businesses and retailers will have to ensure that they act as quickly as possible to address and respond to any signs of financial distress before they require business rescue (Deloitte A, 2014).

Indicators of financial distress in the retail sector

Indicators of financial distress include (but are not limited to) a deterioration in the liquidity and efficiency metrics of a business, as represented by the current ratio and acid test ratio. In the retail industry, it could be argued that the acid test ratio is more relevant than the current ratio as it excludes inventory, which is not always readily convertible into cash to settle liabilities.

Using Look & Listen as an example, their current ratio at February 2013 was 2.1 and if you exclude inventory, their acid-test ratio declines to 0.63, indicating a lot of their cash was tied up in the inventory and Look & Listen will thus be unable to meet its current obligations utilising its current assets readily convertible into cash (Matuson Associates B, 2014). In both the case of Meltz and Look & Listen, cash flows became strained leading to the companies being unable to purchase newer stock to replace stock which was not moving off the shelves. This is evidenced by the fact that over 52% of Meltz’s stock was over 1 year old (Matuson Associates A, 2013).

With regards to Meltz and Look & Listen, these two retailers were in a situation of financial distress due to being highly invested in working capital. However various opportunities and strategies are available to retailers who have large quantities of stock on hand which can be utilised to turn the business around. These strategies may include the following:

  • Upfront discussions with creditors, in order to negotiate a moratorium or a “haircut” on outstanding debt;
  • Sale of the older inventory at discount to generate liquidity, usually incurring an initial loss on the old products in order to purchase a smaller number of newer, more popular products;
  • Reduction of store presence and leasing of low profitability stores in order to increase online presence;
  • Sale of the business to a third party as a going concern;
  • Using inventory as security over debt in order to increase cash flows and balances; and
  • Reduce staffing levels to decrease the level of fixed costs.

The International Playing Field

Although the market for retailers appears strained in South Africa, all hope is not lost for the future of the retail industry. Many South African companies have begun expanding operations internationally. Woolworths has become the largest retailer in the Southern hemisphere following the completion of the deal with David Jones in Australia. Shoprite has seen a 9.7% increase in turnover owing to their presence in 163 stores throughout 15 African countries. Steinhoff has realigned its entire business model from manufacturing with no pricing power to being a vertically integrated furniture business offering manufacturing, sourcing, logistics and retail across Europe, the UK, South Africa and Asia Pacific, with pricing power leading to significant growth. Lastly, Walmart’s (International retail giant), recent acquisition of Massmart indicates the growing interest globally in the potential of our local retailers.

Three of the above-mentioned South African retailers are included in the 50 fastest growing retail brands internationally. The traction in these brands and their international presence has led to success with compound annual growth rates over the 5 years ending 2012 of:

  1. Steinhoff International Holdings                         36.3% (3rd internationally)
  2. Shoprite Holdings                                             14.2% (33rd internationally)
  3. Woolworths Holdings                                        11.9% (46th internationally)

Woolworths and Shoprite are the only South African companies in the top 30 global Tobin’s Q ratio list (a ratio of a company’s market capitalisation compared to its tangible assets), with ratios of 3.80 and 2.62. On average, the Tobin’s Q ratio of South African retailers is 1.00, indicating the market participants believe that part of the company’s value comes from its intangible assets (e.g. its brand). However, this is 5th internationally, above many developed markets such as Canada, UK, France and Germany (Deloitte D, 2014).


The market conditions and pressures discussed demonstrate that there are several issues facing the retail industry, which have already forced historically profitable retailers to apply for business rescue. The most significant of these are the increased competition in the industry, the increasing digital consumer shopping activities and the increased debt levels experienced by the average consumer.

South African retailers are inevitably going to have to adapt their strategies to take advantage of the change in consumer spending habits, whilst minimising the risk of consumer credit defaults, in order to avoid business rescue proceedings. This will position themselves well to protect their brands, something which HMV and other retailers in London could not achieve.

If South African retailers cannot adapt their strategies at the pace of changing consumer preferences and the declining share of wallet, there is a significant risk that they will experience financial distress and will be required to enter business rescue proceedings, as Meltz and Look & Listen already have. Early identification of warning signs and radical innovation are crucial to ensuring the sustainability of the local retail industry.


Deloitte A. (2014). South Africa CFO Survey. Deloitte South Africa.

Deloitte B. (2014). South African Restructuring Outlook Survey Results. Deloitte.

Deloitte C. (2014). The Changing Face of Retail. Deloitte.

Deloitte D. (2014). Global Powers of Retailing: Retail Beyond begins.

Deloitte E. (2014). The changing face of retail: Where did all the shops go.

JD Group Annual Financial Statements 2014. (n.d.).

Matuson Associates A. (2013). Business Rescue Plan in Relation to B and J Meltz Proprietary Limited. Matuson Associates.

Matuson Associates B. (2014). Business Rescue Plan: Look & Listen Group (Pty) Ltd. Matuson Associates.

National Credit Regulator. (June 2014). Consumer Credit Market Report. NCR.

Pick ‘n Pay Annual Financial Statements 2013. (n.d.).

Planting, S. (2013, March 6). Fashion Chain Meltz in business rescue. Retrieved October 31, 2014, from Moneyweb:

Shoprite Holdings Annual Financial Statements 2014. (n.d.).

About the author



Leave a Comment