Edcon not out of the woods yet

Image source: Financial Mail

Right now winning an analysts' popularity contest is the least of the challenges facing Brookes and his new board. With three years to go before any listing (on the more optimistic projections) it is certainly less important than getting approval from the group's remaining 45,000 employees. Brookes says he's hoping to get the staff turnover rate down to below 30% and closer to the industry average.

While most employees are presumably hugely relieved that Edcon dodged the business rescue bullet, these corporate survivors must be feeling a little frazzled after 10 years in a private equity cauldron.

Of course, thousands didn't make it; they were culled in one of Bain Capital's cost-cutting exercises effected in a desperate bid to recoup part of the ill-considered R25bn buyout amount paid in 2007 just months before $the global crisis hit. Management was faced with unrealistic targets that had been used to justify the price tag at a time when economic activity was hollowed out by the financial crisis.

The scene was set for a torrid time for all concerned, made all the worse by the bondholders' determination to seek the solution in international executive talent. Inevitably, during the following years many of the best of Edcon's local managers headed off in search of a less fraught work environment.

Ten years later, while there's relief that the bondholders accepted the restructuring plan, there are rumblings of dissatisfaction that the top executive team is still dominated by non-South Africans, this time Australians.

It's not unreasonable. It would be easy to argue that the severity of Edcon's problems has been aggravated by a poor understanding of local market conditions.

During the six years to end-2015 Edcon employees watched as (largely foreign) executive management lurched from one ill-considered strategic misstep to another and their once great company haemorrhaged from its position of having a dominant 32% market share.

Bain Capital not only constantly interfered with top management, but for a long period allowed McKinsey consultants to take up near permanent residence in Edgardale. "McKinsey actually did some good research, it was just never used," recalls one executive.

While having an international perspective on retail is always useful, during Jürgen Schreiber's reign it went to extremes. So many of the top executives were German that executive committee meetings were held in the German language. Inevitably the locals felt out of place and demotivated.

Before Schreiber even started, Frenchman Hugues Witvoet managed to wreak untold damage as CEO of Edgars, until Bain Capital became suspicious of his CV claims. And it certainly didn't help that these high-paid international executives were pouring in at a time of sustained cost-cutting across the group.

Brookes seems sensitive to concerns about the continued dominance of non-South Africans, but points out that four of his eight top executives are local; three are Australian (not by birth) and another German.

The profile of the board, which was announced last week, is dramatically different from the old one. It was previously dominated by bankers and foreign bondholders, but the new members come from varied backgrounds, some even with a bit of retail experience, and most are South African.

"Five of the seven are South Africans, and the other two bring a useful international perspective," says the new chairman, former De Beers CEO Gareth Penny.

Edcon has been through too much and was too close to the brink for anyone to now assume it is confidently on the road to recovery. There are some who say Brookes hasn't much to show for the 17 months he's been there. Industry analyst Syd Vianello isn't one of them; he says Brookes's contribution was critical to the staving off of business rescue.

"He has had to spend the past 12 months sorting out Edcon's financial mess. He's only just begun the turnaround, so it's going to be at least another two years before we see much," says Vianello, who's a little more excited about the new board than most.

Ironically, Brookes comes from a company that was targeted years ago by a robust Edcon. Flush with huge cash profits and global ambitions, the top Edcon executive team looked at taking over the troubled iconic Australian department store Myer back in 2006.

But the Edcon board was nervous about loading the company up with debt and would back only a paltry offer, so instead, Myer was bought out by private equity firm TPG, which brought in Brookes to sort out the problems.

Australian analyst Chris Wilkinson of First Retail Group describes Brookes as a seasoned retailer who led the Myer chain through testing times for the department store sector.

"At the time Myer and competitor David Jones were both struggling under changes in consumer demand, increased competition from brands and specialist chains, legacy commitments and store portfolios that no longer fitted a contemporary retail model," says Wilkinson.

(And just to prove how small the world of retail is, in 2013, when both Myer and David Jones were again struggling, the Myer board proposed a nil-premium merger of equals. That deal was scuppered by an aggressive bid from Woolworths, which was prepared to pay a 25% premium for David Jones.)

Wilkinson, who sees the similarities between the SA and Australian markets, warns that the changes facing Edcon won't be easy on anyone.

"Changes he put in place (at Myer) upset many people inside and outside the company. But Brookes is a true retailer; there's a lot of skill as well as an old-fashioned gut feel that's helped him."

It's a perspective not everyone agrees with. A second Australia-based analyst says Brookes may have been a good retailer but that he rather inexplicably took his eye off the Myer ball to "hit the speaking circuit big time". When Myer started to flounder Brookes' response was ineffectual, he says.

Brookes sees Edcon as an opportunity to put some of his Australian ghosts to rest and retire on an upbeat note. And 45,000 employees will be hoping he pulls it off; but it's still far from a certainty.

Source: Financial Mail