Edcon, Southern Africa’s biggest non-food retailing group which sells textiles and footwear and owns Jet Stores, Jetmart, CNA, Edgars and Ackerman is suffering from something akin to a metaphorical financial influenza-it is literally begging lenders, landlords and creditors to go easy on it as it currently debt trapped.
Information reaching BusinessPost is that the metaphorical flu may infect the Botswana stores as the South African economy has an inextricable link to that this country, therefore if South Africa catches flu Botswana sneezes. Last year data revealed that South African economy entered recession in the second quarter of 2018 for the first time since the global recession of 2009 and this could be one of the major factors of Edcon’s financial woes.
Pundits and observers on the other hand believe Edcon business of selling goods on credit appears not sustainable as people tend not to pay in the midst of economic recession which has rendered many to be unable to afford the cost of living. Edcon has 30 stores in Botswana employing approximately 300 people and these jobs and shops are expected to shrink according to experts. Edcon has been in business for nearly 90 years and operate in stores across South Africa, Namibia, Botswana, Lesotho, Swaziland, Mozambique, Ghana, Zimbabwe and Zambia.
Four principal brands: Edgars, Jet, CNA and thank U. According to Edcon latest financial results, the group has 187 stores outside of South Africa. The financial results states that, sales from stores outside South Africa contributed 12.2 percent (9.1 percent excluding Zimbabwe) of retail sales for fiscal 2018, down from 11.9 percent (9.4 percent excluding Zimbabwe) during the prior period. Following media reports that Edcon is failing to pay rent on many South African malls, this week the group has devised a plan to fight its impending financial woes.
Edcon financial woes is expected to lead into loss of 140 000 jobs at South Africa. Last year the group closed many stores in Botswana avoiding what was termed retail cannibalization-one of the contributors to the company’s financial blow. Retail cannibalisation occurs when a company’s new stores steal customers from existing stores in a development that has got the eventual reduction of overall sales even though sales in the new stores generally do well.
South Africa’s biggest non-food retailer recent financial woes are due to weak consumer spending and economic growth in South Africa. Edcon was taken over by banks and bondholders in 2016 to avoid nose-diving. Edcon shops of Jet sells quality value fashion, home and beauty merchandise targeted at lower to middle-income customers- these are the hardest hit by South African recession.
Edgars on the other hand is expected to salvage a lot of business because it targets middle to upper-income customers who control the economy, but this type of consumers takes a lower share of the South African population. Now Edcon plans on “recapitalisation programme”to reduce their financial woes. Edcon Spokesperson Michael Rubenstein would not comment on how the recent developments are exactly going to affect Edcon business in Botswana.
This week Rubenstein passed a recent statement from Edcon CEO Grant Pattison to BusinessPost and the spokesperson said the announcement applies to all Edcon businesses, even those in Botswana. This suggests that the financial woes at South Africa also affects Edcon local businesses. "The restructuring and recapitalisation of Edcon has passed its next hurdle with the Edcon Board having recently approved the structure of the proposed recapitalisation plan, and in response lenders have extended waivers to allow time for implementation.
This will allow sufficient time for the number of necessary due diligence and governance processes to be completed. At this stage, we can’t release any additional detail as we remain subject to Confidentiality Agreements. The Board fully appreciates the support that is being received from all Group stakeholders and the commitment that has been shown for the viability of the business. We will make further announcements in due course,” said Pattison’s recent statement.
Pattison’s recent statement comes after last year December Edcon press statement where the company confirmed that it is in discussions with numerous stakeholders with regard to the Group’s continued recapitalisation programme. Pattison commented, “Edcon’s balance sheet recovery programme has been underway for some time as we continue to focus on completing a recapitalisation of Edcon.
Part of the process is the continuing discussions with various stakeholders: which include lenders, landlords, potential new investors, and others, as we explore and discuss various options.” Edcon want malls to reduce rent and lenders to go easy on it. South Africa’s Sunday Times reported that on 7 December Edcon had sent out a letter to its 31 biggest landlords asking for a two-year 41 percent "rent holiday" in exchange for a five percent stake in the business in a bid to stave off liquidation and the loss of up to 140 000 jobs.
A report by the Sunday Times newspaper stated that Edcon had sent out a letter to its 31 biggest landlords asking for a two-year 41 percent "rent holiday" in exchange for a five percent stake in the business in a bid to stave off liquidation and the loss of up to 140 000 jobs Edcon is facing collapse or possible liquidation according to South African experts. According to Sunday Times who had seen a letter from Edcon to landlords, the group is desperate to an extend that it is planning to offera 5 percent stake in the business in exchange for a two-year agreement on rentals.
According to the South African Sunday publication, Edcon is doing all these to secure P1.6 billion in emergency funding from banks and the Public Investment Corp. According to latest financials, Edcon’s total net third party debt as at 30 June 2018 was P6 billion. According to Edcon, another element of the programme to ensure successful recapitalisation of the balance sheet has been to lower store costs, which were well-controlled for the three-month period ended 30 June 2018 increasing by only 0.6 percent to P1.4 billion. Financial results for the thirteen weeks ended 30 June 2018 the Edcon Group reported retail sales of P4 billion for the quarter, at a gross profit margin of 38.9 percent.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”