Anyone who is a fan of The Money Show with Bruce Whitfield, which is presented daily on Radio 702 during the week, would have been heartbroken after the telephonic interview he had with Edcon CEO Grant Pattison at the end of March.
Edcon seems set to become another high-profile victim of economic impact of the Corona Virus (COVID-19) with Pattison pointing that the company may not survive the Government imposed 21 day lockdown.
Suppliers will have to wait
According to an article by Moneyweb, Pattison pointed out that like-for-like sales have dropped 45% since Government released statements outlining drastic measures to combat the spread of the disease.
Even before the lockdown, Pattison warned that March revenue will not meet expectations. It is now believed that March revenue will be R400 million below the retailer’s forecasts.
“The failure to meet the March sales targets, and the expected drop in collections of the debtor’s book, will mean that the business only has sufficient liquidity to pay salaries,” Pattison told Moneyweb, “Edcon is unable to honour any other accounts payable during this period.”
It is believed that the bulk of Edcon’s 1 100 clothing stores will close which will cost the company about R800 million in sales.
Pattison pointed out to Moneyweb that Edcon is considering all its options including filing for bankruptcy and will hold talks with government about any possible state assistance.
Rental agents face major blow
One of the biggest expenses that these stores face is rental. This was a major question when Ramaphosa announced the lock down, if a business is not able to operate during the three-week lockdown, will they be expected to pay rent during this period?
On 30 March 2020, Moneyweb reported that The Foschini Group (TFG) has sent a letter to its landlords about the stop in rental payments.
The Moneyweb article pointed out that Edcon has 750 Edgars and Jet stores countrywide, covering around a million square metres in retail space. TFG has around 29 retail brands including Foschini, American Swiss and Sportscene and has more than 2 500 stores in South Africa occupying around 750 000 square metres of retail space.
While this is a major issue, and understandable in the sense that if retail stores cannot generate revenue, how can they pay rent, it is making the South African Property Owners Association (Sapoa) the de facto ‘beast of burden’ in this situation.
Sapoa CEO, Neil Gopal told Moneyweb that the association has seen this communication and feels that this will be illegal as Sapoa also has financial obligations that it has to meet during this time.
Sapoa’s argument supporting this is that the retail stores assets will still be on the property during this time and therefore, the retail store will effectively be using the property. Further, Sapoa also points out that retail stores normally have insurance agreement in place of which business interruption insurance plays an important part.
Gopal points out that landlords are encumbered with debt, still have to pay rates and taxes, and have operational expenses regardless of whether a shopping mall is operating or not.
The Department of Trade, Industry and Competition (DTIC) is offering some relief to retail stores that are impacted by the Government lockdown.
The relief will effectively loosen rules around certain aspects of the Competition Act to allow retail landlords to work together in responding to Covid-19 issues faced by the sector.
According to the DTIC, which will be the main driver of the block exemption scheme, the new rules will apply only to agreements or “concerted practices” in respect of:
- Payment holidays and/or rental discounts for tenants;
- Limitations on the eviction of tenants; and
- The suspension or adjustment to lease agreement clauses that restrict the designated retail tenants from undertaking reasonable measures required to protect viability during the national disaster.
“To qualify for exemption, such agreements must extend to all South African retail tenants in the designated retail lines, including small and independent retailers. The designated retail tenants covered by this block exemption are identifiable by the designated trading lines, namely: clothing, footwear and home textile retailers; personal care services such as hairdressers, health and beauty salons; and restaurants,” the DTI notes.
A busy time ahead
Once the lock down period is over, and some measure of normality is introduced when it comes to business activities (whatever that may look like), business rescue practitioners may find that there is no shortage of business.
If companies like Edcon and TFG are battling to pay rent, how many smaller businesses are struggling to do the same. Yes, there is relief from the DTIC, but will it be enough to meet these obligations?
There is also no immediate relief in sight for Sapoa when it comes to business rescue. In 2016, Sapoa brought an application before the North Gauteng High Court where they argued this case. One of their arguments was that post commencement financing could be used to cover any default on rent. The court disagreed and eventually dismissed the case.
Companies will have to go through a significant period of adjustment once normal trading can resume. But, will it be business as usual? COVID-19 will introduce a new normal into the market and many businesses will find that it will be a case of business un-usual.
Business turnaround practitioners will be key role players during this time. There will be a lot of fires that will need to be put out and creditors who will be looking for their recompense. We need to be the voice of reason, and a helping hand, during this time. Our skills are needed now more than ever.