e-spaces

Woolworths needed to adopt a more aggressive approach to its underperforming consumer finance business to improve profitability, Renaissance Specialist Fund Managers executive director Nothando Ndebele said last week.

 August 27, 2007 By Tom Robbins Cape Town – Woolworths needed to adopt a more aggressive approach to its underperforming consumer finance business to improve profitability, Renaissance Specialist Fund Managers executive director Nothando Ndebele said last week. Ndebele said Woolworths’ financial services business had return on equity (ROE) of 11.9 percent, compared with a company target of 20 percent. She noted that African Bank Investments Limited (Abil) had ROE as high as 54 percent. The retailer’s groupwide ROE was 35.1 percent in the year to June. Last week Abil made an indicative offer worth R9.85 billion to buy furniture retailer Ellerine, promising cheaper loans for customers. This has resulted in a new focus on credit retailer business models. Ndebele argued that Woolworths needed a more flexible interest repayment model that charged higher rates for riskier customers and more competitive rates for those with reliable repayment histories. There had been good growth in the lending book, but this had not fed through to earnings growth or returns. “This was due partly to the anomaly that occurred last year, when interest rates went up but the usury rate was held flat until March. Thus Woolworths’ funding costs rose but the interest it received from its customers remained flat. “Secondly, bad debts expense and provisions charges rose faster than the income received.” But “with ROE still below the group’s ROE, the financial services business is not creating value”. The Woolworths book was large enough to warrant interest from potential buyers, she said. But Woolworths chief executive Simon Susman said that while he had noted changes in the consumer finance market, there were no plans to sell the consumer finance business. Analysts have questioned the stock turns of furniture retailers, said to be overly reliant on consumer loans for profits, particularly as banks enter the market promising competitively priced loans. However, clothing retailers such as Woolworths and Truworths earn most profits from retailing and may place greater emphasis on using loans to facilitate retail sales than furniture retailers. Woolworths said it offered credit to middle-income customers to win them over. In the higher market segment, credit was offered to drive customer loyalty but this was coupled with “delivering good returns to the business”, says the 2006 annual report. Woolworths shares lost 0.25 percent to R19.65 on Friday. The general retailers sector fell 0.34 percent.