Various industries ceased to operate under a “business as usual” approach as they responded to changes in the operating environments. It is therefore not surprising that the introduction of the multiple currency system was a welcome development across sectors. To many, the move meant restoration of stability and realisation of income in real terms.
For the clothing retail industry, business has significantly improved since the change of the monetary system. Traditionally, outlets like Truworths and Edgars realised most of their revenue through credit sales. However, this facility had been rendered inoperative due to the then prevailing economic conditions. It did not make any economic sense to offer credit considering the pace at which the local currency was losing value.
The re-introduction of credit to customers has had a positive impact on the various clothing outlets. Evidently, the most recent financial results released by the two listed clothing retailers, Truworths and Edgars, show the positive impact that credit sales have had on the two businesses. For the full year to July 4 2010, Truworths posted US$13,4 million in revenue, which compares favourably with US$1,4 million recorded over the same period in 2009. Approximately 70% of turnover came through credit sales.
Likewise, Edgars posted USD10,3 million in turnover for its half year to July 3 2010 against US$1,5million over the same period last year. According to the company management, there was a 607% increase in unit sales, a fact that the company attributes to credit initiatives.
Growth in the contribution of credit sales to turnover has been driven by the increase in the number of accounts over the past year. Edgars grew their accounts from 38 000 in December 2009 –– 60 000 by end of July 3 2010.
The challenge by both outlets, and many other clothing retail stores, has been to grow their books at the same time enforcing tight screening for new accounts to keep default risk at a minimal. Initially these outlets were reluctant to extend credit and hence their period of payment was generally below three months. However, recently, as business conditions improved credit periods were extended to six months, and this has lured more people to open accounts. As sweeteners, the accounts do not accrue any interest and shoppers are not asked to pay any deposit when making purchases. Obviously all these incentives should have a positive impact on the retailers’ performance.
The threat of competition is however very apparent. Although no clear-cut facts are on the table on the prospective new entrants and when they will be coming, outlets like Edgars have acknowledged that this is a great possibility. There is widespread speculation that South African retailers such as Woolworths and Mr Price are planning to establish themselves in Zimbabwe with the former supposedly negotiating for space at the newly opened Joina City shopping mall. Existing retailers reckon the best way to defend their market shares is through increasing their book size by opening more accounts. This, however, is arguable since increasing the book size is only a part of what needs to be done. What is more important is credit utilisation by customers. Edgars, for instance, highlighted that currently credit utilisation level is only at 37% because customers are only spending what they can afford pay for.
While increase in utilisation of buying power will result in growth of both revenue and earnings, the lower utilisation is, in a way, positive because it reduces the level of defaults. Word coming from the retailers is that the credit culture in this country is still very much entrenched despite having gone through more than 10 years of economic problems where informal activities and corruption were rife. An average Zimbabwean pays up his debt obligation probably better than any other nationalities in the Sub-Saharan region.
Currently, the traditional clothing retail outlets are facing stiff competition locally from the clothing boutiques and informal markets like Mupedzanhamo –– although management at listed retailers always argue that they serve a different market altogether. The boutiques are benefiting from importing cheap products from China which they are also selling at more affordable prices. Not only are they relatively cheap, but in many cases the fashion and style are seemingly more acceptable to the customers than the traditional retailers’ conservative styles.
Edgars indicated that their fashion trends are more high street which is in contrast with the boutique style which is more American and streetwise. The bigger retail stores have since failed to penetrate such a market and their casual fashion line has not been relatively competitive.
The recent turnaround of the clothing retail sector shows good prospects. Credit initiatives are expected to continue driving the business. As credit increases concerted effort should be channelled to managing customer accounts to limit bad debts.