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Major cost cutting at furniture retailer Ellerine could be expected if African Bank Investments Limited (Abil) was successful in its R9.85 billion offer for the firm, Nedcor Securities retail analyst Syd Vianello said last week.

August 27, 2007 By Tom Robbins Cape Town – Major cost cutting at furniture retailer Ellerine could be expected if African Bank Investments Limited (Abil) was successful in its R9.85 billion offer for the firm, Nedcor Securities retail analyst Syd Vianello said last week. Vianello said Ellerine and its rivals, the JD Group and Lewis, faced increased risk arising from the inevitable reduction in finance charges associated with increased competition from the banking sector. Ellerine’s “productivity ratios are particularly poor relative to its peers, so we expect major cost cutting post a successful merger with Abil”, Vianello said. “History suggests strategies of this nature involve far more pain than initially envisaged or budgeted [for].” He said bottom-end retailer Lewis was in a better position than either Ellerine or the JD Group, because it had very little exposure to the middle market, where debt pressures were the greatest. He said a second option to counter the banks was for Ellerine and the JD Group to grant more credit to customers. However, this was unlikely given current cash flow constraints in the middle market as a result of rising interest rates, higher food and fuel prices, he said. A third option was to raise selling prices, which customers were unlikely to accept. “Cutting costs thus becomes the most probable strategy.” As Ellerine and the JD Group are multiple-brand retailers, the potential to cut costs in these businesses is higher than at Lewis, which has only one significant brand. The JD Group said it would split its retail and consumer finance businesses into two independent profit centres, in a bid to improve the focus of both businesses. Lewis is sticking to its integrated approach, where the two businesses can cross-subsidise each other. Lewis argued that its customers, which include the informally employed and those without bank accounts, preferred a personalised, in-store credit offering. Moreover, these personal relationships were more effective in following up on defaulters than the more anonymous call centre debt collection. Vianello agreed with Lewis’s integrated approach, adding that the company could lend at higher interest rates as it had a riskier client base. Rand Merchant Bank Asset Management retail analyst Evan Walker said the traditional model at Lewis was “under a bit of risk”, but that it had some protection given its market positioning. Walker added that Lewis’s bottom-end customers had lower debt levels and so were less likely to shop around for better financing deals. The new National Credit Act insists on retailers disclosing real borrowing costs, but Walker said Lewis customers were still less likely to understand these costs than those in higher market segments.