e-spaces

Woolworths came out with some good news yesterday, announcing the sale of a controlling interest in its financial services business to Absa.

The high flying retailer has, of late, been plagued by costs rising faster than sales, catching the company in the sharp downturn in retail sales.

The retailer simply opened too many stores and lent too much money to customers, who possibly even used its credit to buy bread, milk and luxury food – credit intended for its clothing customers, who are not as well off as its food shoppers.

These problems will likely resolve themselves when the economy starts to grow again. But they will take time to work out of the system.

Yesterday Woolworths showed that it is strategically positioning itself for the death of the in-store card. Consumers will eventually prefer to use credit cards, which offer the choice of where to shop. So expect a credit card push.

Retailers haven’t covered themselves in glory when pricing for risk. They haven’t always had the systems to determine which consumer deserve to borrow R10 000 and which one only R1 000 – and what interest rate they should be charged.

This is the banks’ forté. And they can borrow more to lend to consumers – a more efficient use of their capital. That is the theory, though it didn’t work in the US, resulting in the subprime debacle.

African Bank Investments Limited (Abil) was the first mover, taking out Ellerine last year. But Woolworths may well have stolen a march on Truworths. Watch this space to see who might follow.

This is Absa’s first serious financial services joint venture with a retailer. It will no doubt apply its retail banking expertise to trim costs and collect arrears more efficiently.

Edited by Nontyatyambo Petros. With contributions by Audrey D’Angelo, Thabiso Mochiko and Tom Robbins