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The country’s biggest three credit furniture retailers faced a long-term threat to their business model as banks continued to issue credit cards to mass-market consumers, analyst have said.

Bank credit cards are competing for share of market that stores rely on for significant profit

Plastic could break furniture retail credit arms
May 21, 2007

By Tom Robbins

Cape Town – The country’s biggest three credit furniture retailers faced a long-term threat to their business model as banks continued to issue credit cards to mass-market consumers, analyst have said.

Local retailers make a significant portion of their profits from loans to customers. In the case of the JD Group, it was as high as two-thirds, according to executive chairman David Sussman.

In developed markets such as the US, customers generally use credit cards to purchase furniture and appliances, enjoying the freedom to shop at the store of their choice at a price they find most attractive.

Nedcor Securities retail analyst Syd Vianello said a time would come when many customers would bypass the consumer finance offered by the JD Group, Ellerine and Lewis in favour of credit cards to buy lounge suites and stoves.

An Absa spokesperson said last week that local banks had issued 40 percent more credit cards last year compared with 2005. Standard Bank said it now had in excess of 2 million credit card holders.

Ellerine chief financial officer Reg Rawlings agreed that the proliferation of credit cards posed a threat. He expected the number of credit cards issued to treble by 2010.

The JD Group estimated that groupwide, as many as 50 percent of its customers had credit cards, but corporate services director Jan Bezuidenhout said most of those cards had limits of less than R1 500.

This is hardly enough to buy a lounge suite at any of the retailers. The entry level lounge suite at JD Group’s Russells chain sells for R7 999.

Lewis said only 11 percent of its customers had cards. Ellerine said less than 30 percent of its bottom market customers had credit cards. For the middle market it estimated that more than 50 percent had cards.

Doug Walker, the director of the card division at Standard Bank, said the bank wanted to grow its market share and would examine customers’ repayment behaviour every year, to increase credit limits where appropriate.

Godwill Chahwahwa, an investment analyst at Coronation Fund Managers, expected the proliferation of credit cards to pose a threat to retailers in about five years.

But he said retailers “will be the first to acknowledge this” and he expected them to respond to the challenge.

While most of the furniture retailers had expressed interest in expanding their financial service offerings, Chahwahwa said it remained to be seen who would be the winners.

Rawlings said furniture retailers understood the bottom end of the market better than banks and were more accommodating towards customers who defaulted on payments.

In my opinion if this was true. That plastic is going to affect furniture retailers’ business models negatively. What affect then will the national credit act coming into effect on the 1 June 2007 and the increase in defaulting of payments have on their business models? Surely then both of these should be good for business!

Comment by david May 22, 2007 @ 7:08 am

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