Read the following case study and answer the questions that follow. EDCON Edcon is a 90-year-old retailer

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Read the following case study and answer the questions that follow.

EDCON

Edcon is a 90-year-old retailer in South Africa that came within an inch of collapse in 2018 like its rival Stuttafords. It was touch and go but it is fair to say that the rescue can be deemed a success. As part of this restructuring, Jetsmart, Red Square and Boardmans are history. 150 of the 1350 stores have been shut down and floor space has been slashed by 10% (14000 square meters) – which is about the size of Sandton City. In two of SA’s largest malls (Mall of Africa and Eastgate), Edgars has shrunk to one floor from two. The first Edgars store was opened in Johannesburg’s Joubert Street in 1929 by brothers Morris and Eli Ross and Edgars is alive today thanks to one man: Grant Pattison. Grant Pattison, an engineer with experience in retail having been CEO of Massmart (Walmart), took on the position of CEO of Edcon because he was keen for a new strategic challenge and being an engineer: he wanted fix Edcon. When Grant Pattison arrived at Edcon as the new CEO he was full of bravado with intentions of opening more stores, putting more product on the shelves, dropping costs and pumping up advertising. However, when the financial realities of Edcon hit home, he has to create a new financial model and salvage Edcon. Grant Pattison says salvaging Edcon was far harder than he expected. In 2007, Bain Capital, a Boston firm, bought Edcon in a private equity deal and delisted it from the JSE. The problem was Bain heaped huge amounts of debt (in Euros, Pounds and Dollars) onto the company. Instead of using money to invest in new stores and new merchandise, it was diverted to having the exorbitant interest bill. Pattison described Bain Capital as being ‘morally liable’ for what happened to Edcon. “How were they [Bain] allowed to use foreign debt to do a leveraged buyout in SA? Surely no-one would look at the most volatile currency in the world in 2007/2008 and believe it is a good idea to borrow money instead of investing it. Edcon’s collapse was inevitable after this deal. Before the Bain Capital deal, Edcon was a powerhouse but in the decade that followed, Edcon lost 30% of its market share and its most talented staff, and its reputation was savaged. In 2016, Bain was forced to hand over ownership of Edcon, unable to pay debt to creditors in the debt-equity deal. It left Edcon with R7 billion in debt which was too much for Edcon. When Pattison joined Edcon as CEO he inherited a ‘recapitalisation plan’ but he soon figured it was a non-starter ‘Pie in sky stuff’ because Edcon was deep in the red. Pattison began having uncomfortable meetings with shareholders, explaining that they were not 2 going to make R2 billion in profit but they were actually going to make zero. Shareholders did not like hearing this news. Pattison considered selling Edcon but no-one would bite. Pattison recalled it being “quite a disheartening process going around the world asking for some money and effectively failing.” Pattison began preparing for the worst bit, explaining to everyone the consequences of Edcon failing. “We started to tell people we were going to run out money in February 2019, which we did.” If Edcon failed, it would be a crippling blow to the 40 000 staff employed, the landlords and the banks to which it owed debt. Not to mention the 60 000 people who work in companies who supply to Edgars such as the shoe manufacturers in the Cape. Pattison drew up an ambitious deal and got the help of former Investec CEO Stephen Koseff. Koseff got involved because Investec was one the banks exposed to Edcon. Investors were looking for someone they could talk to and Koseff had played a vital role in the restructuring of African Bank after its collapse in 2013. Koseff supported the goal of saving huge job losses despite very stressed economic conditions in SA. There were some very specific interventions that made the rescue possible. Banks and landlords agreed to Pattison’s new deal on condition that the Public Investment Corp (PIC), the state-owned company which manages pensions of government employees were included. Given the PIC’s internal ructions, that was never certain. There were a couple of stressful, pressured meetings between Pattison and the PIC’s Dan Matjila, but after some wrangling, Matjila said they could find a way to work together. Even though the deal was up in the air a few times during this time, the state-owned Unemployment Insurance Fund (UIF), whose money is managed by the PIC, agreed to put in cash. Pattison’s pitch to them was “if you don’t help us, you’ll have 140 000 extra people claiming from the fund.” Edcon found an unexpected ally who helped fight to keep Edcon afloat: the unions. The same unions who had fought against Pattison during the Walmart Takeover were now supporting Pattison. Pattison notes that “I would never have been able to do the deal had I not already done Walmart. I had relationships with most the major players and stakeholders which helped build some trust.” Pattison was pleaded to be on the same side as the unions and it was his relationships with them that helped make this deal possible. Pattison positioned the deal differently to the optimists around the table. And to the pessimists. To the optimists, his pitch was that the retailer could be fixed. To the pessimists, it was: let’s shrink Edcon by a third and if it still fails, you only have two-thirds of the problem you had. In the end, the final plan was that the landlords agreed to inject R1 billion into the company in exchange for 5% and 10% of Edcon shares. The UIF would get 19% of the shares and the banks, investors and staff would hold the rest. Together Edcon got R2.7 billion in new investment, leaving it debt free for the first time in 12 years. Estienne de Klerk, Growth point SA’s CEO, says landlords didn’t get much of an option. “In the end it was rather binary: you either agreed or you didn’t. Edcon occupies 8% of the 1.4 million square meters of shopping center space owned by Growth point. Seeing the big picture of saving Edcon, Growth point agreed to the deal but proposed the idea of giving landlords equity in exchange for rent reduction. Edcon accepted even though its competitors such as Truworths were not impressed. It is one thing to save Edcon but who are its customers? Pattison says that Edgars is not trying to be a high-end fashion store. After Bain bought Edcon, Edgars lost its way on the shop floor. Edgars is a family shop for moms wanting an outfit for going to church or an event and, increasingly, men who are doing more of their own shopping. Edgars sells fitted clothing for the average person, not a maximum of three sizes. Pattison emphasizes that “wear ability and wash ability are important”. Edgars is fashionable value retailer, selling fashion at value prices. Jet is Edgar’s discount department store selling similar products. Everything you can get in Jet is available in Edgars but not the other way around. The Edgars version will cost you a little more and you will get both better quality and variety. Two decades ago, before Bain, Edgars was a family outfitter that sold local and Edgars exclusive brands and private labels and they sold clothes on credit. Then Bain brought in the international “high fashion” brands and switched strategy to opening independent stores. The High Fashion was the wrong approach and under Bain, credit sales plummeted because the debt book was sold and “6 months’ interest free purchases” were scrapped. Edcon was also paying plenty in royalties for these high fashion brands which eroded profit. Despite the pressure faced by consumers after 3.2% fall in GDP, Pattison wants credit sales to rise from less than 35% of its sales to between 40 and 45% in his revival plan. On the shop floor, clothes have been placed in a more sensible manner, with menswear placed together, as it has been done with women’s wear. This sounds logical but it was not done this way in the last decade. Customers still know who Edcon is, but now Edcon has to convince those same customers to come back into the stores. The Edcon brand is part of SA’s clothing history, everyone knows it — it doesn’t have to market itself. But its customers relinquished their loyalty to the product after the brand lost direction. The challenge for Edcon now is to regain the loyalty by offering consumers good quality, fashionable products at value prices.

Painfully, Edcon is shrinking its physical space so it can make more money per square meter. Pattison needed to make Edgars the right size and profitable again by scrutinizing every cost line. Remarkably, even though Edcon has shut 150 stores, Edcon has managed to repurpose 900 of those 1 000 employees elsewhere. The UIF would probably have demanded no less. The question is: Is the turnaround working? The numbers say Yes, Edgars is making for more than in the same period the previous financial year. Edgars was not saved because it was too big to fail but because there were green roots and because there was something salvageable. “Our very ambitious strategy is to become independent and sustainable” says Pattison. Suppliers agree that changes are taking place. Everything seems more organized and tightly managed. The stores look fresher and despite cutting the Mall for Africa store in half, the revenue has risen more than 10%. Even though Edcon plans to claw back market share, the reality is that it’s in the longest retail downturn since 1945 and the economy will make it difficult for Edcon to survive. Pattison says that salvaging Edcon has been a learning curve and he became more of a banker than a retailer in the process. He has learnt about the dangers of unlisted secured debt and that retailers are not the type of business that should be leveraged. Retailers have big businesses and cash flows but they do not have big balance sheets. Allowing a foreign shareholder like Bain to swoop in is a recipe for disaster and their retailing instincts are wrong. Pattison says, going forward he will “always be checking in with myself if decisions are the best thing for the company and not for the shareholders.” As part of his learning curve, Grant Pattison, Edcon’s fixer, devised a template for fixing a business which is highly valuable as we are seeing the likes of Steinhoff, Tongaat Hulett and EOH, all circling the rescue orbit: Grant Pattison says the basic formula to turn a business around has always been the same.

First thing is you shout for help from "the biggest and baddest person" around. So, how do you know who this is?” "Insiders know who this person is. Someone in the company already knows how to fix it. You’re new. Find those people and listen to them.” "That’s easier to say than do, because at the same time there’s a whole bunch of people who’re going to be talking to you, who are wrong," he says. Pattison says you need to search for the older, bald and grey-haired people and listen to their stories, which are inevitably the same. "They’ll tell you about the different CEOs who’ve run the company, and within those stories there are always stories about things that worked and things that didn’t.” "If you listen carefully enough, you’ll hear what worked." Second, says Pattison, you need to listen to the noise and your instincts. Take out the "bad people" — those who play politics, the poor performers and "the mean, nasty" types — whatever the cost. That allows for a reset. "Mostly all I ever see everywhere is denial," he says. So you must move people through the denial curve, to a place where they’re able to get to grips with the kind of profits the company makes, what customers really think about them, and their relationship with suppliers. Stop being defensive and stop arguing, he says. Then you can build a plan to fix it.

Sources:

• https://www.businesslive.co.za/fm/features/cover-story/2019-07-04-how-grant-pattison-saved-edcon/

• https://www.businesslive.co.za/fm/features/cover-story/2018-11-15-the-battle-to-make-edgarsrelevant- again/

• https://www.businesslive.co.za/bd/companies/retail-and-consumer/2019-07-15-edcons-turnaroundgains- traction-amid-asset-sales/

Questions:

Edgars, under the leadership of Grant Pattison reverted to its original business level (competitive) strategy. Identify this competitive strategy and evaluate the competitive strategy in terms of its contribution to the organization’s objectives.