Bitter turnaround medicine for Ellerines

MORE than 2800 Ellerines staff may lose their jobs by the end of the year if a dramatic plan to save the embattled furniture business by shutting almost half of its stores goes ahead.

MORE than 2800 Ellerines staff may lose their jobs by the end of the year if a dramatic plan to save the embattled furniture business by shutting almost half of its stores goes ahead.

Business Times has a copy of a notice issued last week to Ellerines employees, in which business-rescue practitioners Les Matuson and Jay Pema said management had identified 343 "nonviable" stores for proposed closure.

This would be a big blow to the group - which includes brands such as Beares, Geen & Richards and Dial-a-Bed - as it would amount to nearly 40% of its 896 stores.

Ellerines dodged questions on how many staff and stores would be affected after releasing a curt announcement of the plan on Tuesday.

The potential closure of these stores, identified as "unprofitable" or located in areas in which there is "insufficient market demand", is in addition to a proposed restructuring of the group's head office and supply chain and logistics structures.

Now jobs are on the line.

"There appear to be 2810 (40%) positions out of a total of 7060 positions that are potentially going to be affected as a result of the proposed restructuring and may result in retrenchments," the notice said.

The plan comes a month after Ellerines was placed in business rescue, hours after its parent company, African Bank, released a shock trading update which precipitated its own dramatic collapse.

The notice said that after incurring losses of nearly R4-billion since 2008, "it is imperative, if liquidation is to be avoided together with the losses of all jobs, for steps to be taken urgently to achieve a turnaround in the financial position of the company and achieve a level of profitability".

Matuson emphasised on Friday that the scale of retrenchments was not definite and depended critically on the success of two processes - first, to raise capital to fund the restructuring plan and, second, to sell all or part of the business.

"The success of the plan is hugely dependent on the ability to raise capital," to fund the turnaround, he said.

Matuson would not say if funders had been found, although the notice said "funding remains uncertain".

But Matuson did say Ellerines had "initiated a process" to sell at least part of its business, which could mitigate job losses.

"There are credible parties who have expressed an interest in acquiring various divisions, or the business in its entirety," he said.

After that, the business would have a better sense of what its future would look like.

Matuson would not say who had expressed interest.

"The fact of the matter is that there is a process we are going through, and all efforts are being made such that job losses are minimised," he said.

The notice was issued because, under the Labour Relations Act, the "proposed restructuring would amount to a large-scale retrenchment".

The "consultation period" ends on November 9, after which Ellerines will serve termination notices on staff affected.

But the deeper concern is that the Ellerines restructuring does not appear to address flaws in the fundamental business model, which brought it and African Bank to their knees.

Analysts have argued that furniture retailers that sell on credit, such as Ellerines, are primarily financial-services businesses because an overwhelming portion of their revenue comes from interest on loans and other products such as credit insurance.

According to Matuson, about 60% to 70% of Ellerines sales are credit sales, and this is unlikely to change with credit still expected to form a major part of the business.

"I would say that credit is inextricably linked to the success of the business," he said.

But Matuson admitted: "We have just been through a period of what has been an easy access to credit, and now SA consumers appear to be debt-swamped."

Jean Pierre Verster of 36ONE Asset Management said this posed significant risks to Ellerines should it manage to navigate its immediate cash-flow crisis.

Verster was one of the analysts who predicted the demise of Abil.

"The business model is flawed if you look at the way it has traditionally been implemented. You can't be charging these high interest rates, in excess of 30%, while making very little merchandise sales margin. It's unsustainable," he said.

"The point is that if your business model is not sustainable it doesn't matter what surgery you do to cut out the bad stores," said Verster.