Truworths is asking shareholders for more money to stay in business and grow, at a time the clothing brands that once dominated are under pressure from informal retailers.
The company wants to raise ZWL$2.2 billion through a renounceable rights offer. By asking shareholders to buy more shares, the company would raise more money for the business.
If shareholders don’t do this, Truworths warns, “the company will be unable to effectively sustain its operations and growth. The company will face severe cash flow constraints, high finance costs, and reduced working capital.”
Once, Truworths occupied an exclusive corner of the market; its key customers were the salaried middle class, among them civil servants who formed the core of a guaranteed base of customers who could buy clothes on credit.
That class of customer has been decimated. According to Zimstat, 88% of Zimbabwean workers are now in the informal market. Retailers have to compete with the informal market, where shoppers can choose everything from cheap second-hand clothing to trendier boutiques.
Truworths tells shareholders that it is facing threats from the “informalisation of the economy which has resulted in cheap and fake imports selling at below manufacturing costs against which the business could not compete.” Not even Number 1 Store, Truworths’ budget brand, has been spared.
Paying on credit
The credit model, which carried Truworths and Edgars for years, no longer works because of inflation. Last year, the government temporarily suspended all lending to cool inflation. Overnight, credit sales, which had made up 38.2% of Truworths’ total sales a year before, were reduced to zero.
Even when the business could lend, high interest rates of 200% made it unprofitable. The company sold 45% fewer items in the six months to January than in the same period last year.
“It was not viable for the business to finance the credit at those interest rates. In addition, it was not affordable for our customers to service their account obligations at rates in excess of 200% per annum,” says Truworths.
But will new money help the company win back customers who have new shopping options? According to Truworths, its strategy to counter the competition is to open what it says are new format Truworths Chain stores and to improve the product assortment. There is no detail on how the new stores will be different from current outlets. The company also hopes increased USD sales will revive sales.
The company has 46 stores nationwide, with over 11,577 square metres of store space.
Truworths is not the only clothing retailer facing problems dealing with the informal economy. Edgars recently moved its shop out of Bulawayo’s CBD, where the shop front had been hogged by traders and forex dealers.
In the last financial year, Edgars’ costs grew 65%, with rentals, salaries, the intermediated transaction tax and fuel being the biggest costs. The business could not recover these costs from customers, Edgars says. Informal traders, meanwhile, dodge taxes and even council rates, allowing them to sell cheaper.
Unlike supermarkets, clothing retailers also have to deal with a complex supply chain.
Reports Edgars: “Unlike FMCG, with the specialty retail that Edgars is in, merchandise has to be ordered and paid for six months before it is received. Further to that, merchandise is then sold on a six-month basis and clearly interest rates are not suitable for this type of business.”
Out of fashion?
One of the problems that formal retailers face is keeping up with trends. Last year, Edgars had to cut prices on some items after they had stayed too long in the shops after Covid.
“As a result, there was a build–up of aged merchandise, which due to lack of desirability had slower than planned stock turn levels. The Board took a conscious decision to markdown inventory to its most realistic realisable value,” says Edgars.
Informal traders, meanwhile, are able to switch up their fashion quicker and keep customers interested.
Still, Edgars plans to open new stores by targeting “strategic locations”.
For shareholders of such companies, they face tough decisions; trust the recovery plans and reinvest in a turnaround, or give up the fight against informal competitors and look elsewhere.
