When is a shop not a shop?

Looking at JSE-listed JD Group's results statement for example, we see that while most of its turnover comes from retail, its financial services arm is its biggest profit generator.

Perhaps because of the National Credit Act toughening up lending rules, this is not as extreme as it was a year ago. For the year to end August 2008, JD Group's financial services operating profit of R622-million was nearly six times its traditional retail operating profit of R111-million.

This year, JD Group's financial services operating profit nearly halved, to R351-million, on the back of a nearly flat turnover of R3-billion. It won some of this back by nearly doubling its traditional retail operating profit to R201-million, on a stagnant turnover of R5.2-billion.

Besides tougher lending laws, the past few years have seen the furniture retailers face increased competition from the banks. Capitec specifically pitched itself as a direct competitor, encouraging people to pop into its branches and compare its lending rates against those of the furniture retailers.

Rival micro-lender African Bank merged with furniture retail chain Ellerines in 2008.

But who offers the better deal: micro-lenders or furniture shops?

Carl Fischer, Capitec Bank executive: marketing and corporate affairs, said: "If you need a new television for example, and cannot afford to finance it in cash, you are not obligated to use the retail store's credit facility.

"Instead, you can apply for the best-priced loan at a bank, negotiate the best price from the retail store and manage all your debt from one source."

An added cost to not paying for stuff upfront is that lenders understandably demand that the underlying asset be insured. This makes it tricky to compare financing costs just on the interest rates, since the more competitive rate may come with the higher insurance quote. Philip Kruger, CE of JD Group's Financial Services Division, said there are two angles of approach when comparing the offerings: "One can use the structure of the deal as the starting point, comparing individual charges such as initiation fees, service fees and financing rates charged.

"Alternatively, one can compare the total cost of credit, which includes the total charges for financing the goods purchased over a set period of time.

"The latter approach is the most appropriate manner in comparing the difference between banking and retail finance, as it discounts variances in the individual fees charged and compares the final cost of credit charge regulated by the National Credit Regulator. "At a cost of credit level there is very little difference between the banking and retail credit offering when specifically comparing the fees mentioned above.

"However, furniture retailers offer the consumer additional value-added components, which are firstly product and secondly life insurance, as a further benefit as part of a single agreement. Where the customer has to go outside the banking service channel to obtain specifically the product insurance component, the overall cost of credit becomes less competitive in many instances. It should be noted that product insurance on single items, outside the insurance offered by furniture retailers, is virtually impossible for individuals to obtain and is very expensive."

Kruger points out retailers have a vested interest in financing the deal.

That may be possibly more so this Christmas than usual. JD Group CEO Grattan Kirk said: "Early indications are that retailers will do well to match last year's sales levels but this could change, as the Christmas rush seems to start a bit later every year.

Consumer focus seems to be on plasma and LCD TV, major kitchen appliances as well as lounge, dining room and bedroom furniture.

The cash/credit mix at our traditional retail chains is in line with last year. The cash chains, Hi-Fi Corporation and Incredible Connection, are trading ahead of last year."

Source: Sunday Times

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