Cash is king for Lewis as it repositions
The shift from credit sales to cash is continuing in furniture retail, Lewis's latest results show.
A decade ago, Lewis was a minnow in a big pond in which JD Group and Ellerines Holdings were the big fish. The fundamentals for furniture and appliance sales were looking good. Economic growth and access to credit were fuelling strong demand for anything from beds and lounge suites to flat-screen television sets, the latter being still a relatively recent phenomenon.
But credit-fuelled consumption spending could not be sustained, mostly due to lower growth and weaker sentiment - a trend that continued long after 2008's global financial crisis was over. In the boom years of the early 2000s, furniture retailers had become so accustomed to healthy growth that they tried to sustain it in the lean years through unhealthy methods. Soon they had become too dependent on the revenue from the financial services they had sold along with the credit.Lewis has used the past five years to become more of a retailer again."In 2014, when we embarked on this diversification strategy, merchandise sales contributed 46% of revenue. If you look at the latest set of results, merchandise's contribution to revenue is now at 57%," CEO Johan Enslin told Business Times.Now Lewis, owner of the eponymous stores as well as the Russells, Best Home & Electric and Beares chains, is the only furniture retailer left listed on the JSE.Ellerines failed in 2014, dragging its parent, African Bank, into curatorship. JD Group was swallowed by Steinhoff International and now sits in the troubled global company's African retail unit, Pepkor.The collapse of Ellerines gave Lewis another opportunity to diversify away from its traditional low-income market. By adding the Beares chain, it increased sales among more well-to-do customers. It has since also added UFO with its mostly cash sales.Where Lewis had historically counted on credit sales of about 70%, the new strategy helped Enslin to shift the mix to less than 58% in the year to end-December."UFO contributed a third of all cash sales. Quite a bit of cash sales also came through the rest of the business. In the case of traditional retail, which is Lewis, Best [Home & Electric] and Beares, cash sales for the year increased by 9.5%," Enslin said.Lewis was not alone. JD Group also restructured to significantly reduce its dependence on consumer credit to drive revenue. Credit sales dropped from 70% of the total to 30%, Pepkor said in its annual report.
With competitors going under or decreasing their footprint, it would seem logical that Lewis would benefit. But the past few years were tough, according to Enslin. Not only did cash-strapped consumers postpone furniture and appliance upgrades, they tended to pounce on cheaper options. And the failure of Ellerines and the closure of hundreds of JD Group stores led to heavy discounting to get rid of stock. This gnawed at Lewis's sales and influenced its profit margins for several years.But the company stuck it out and repositioned the business. It had several scares from the credit regulator challenging some of its lending practices, but Lewis won out in the end.Enslin said: "We basically built on the core competence that already existed just by expanding the markets we sell into and giving ourselves an opportunity to service customers across all income segments in SA."And, perhaps with an eye on looser spending habits in an economy that will hopefully return to stronger growth, Lewis is sprucing up. The group said it had refurbished 121 stores in the reporting period and planned to revamp 150 more in the email@example.com firstname.lastname@example.org