Lewis: debt, with a side of furniture

It might be the best-performing retailer on the JSE in recent times, but you wouldn’t necessarily know it were you to walk into one of its stores.

More likely, you’d see the sort of scene described by one of my colleagues, who happened to go into a Lewis store in one of the many small towns where the group operates. “There weren’t many customers. Instead, there was a store assistant asleep on one of the beds they were selling,” he recalls. “It was a cold, rainy day, so he had pulled a blanket over himself to stay warm.”

This speaks as much to how hard retailers are battling as it does to the demise of small-town South Africa, laid waste by delinquent and rent-seeking municipal officials.

Lewis, which sells furniture on credit to 782,000 customers through its 976 stores, under brands including UFO Furniture and Beares, has seen this devastation firsthand.

Yet it has left rivals standing. Lewis’s stock has soared 206% over the past five years, trumping food retailers such as Shoprite (94%), pharma retailers such as Clicks (-2%) and clothing chains Pep (10.4%), Truworths (2.2%) and Woolworths (-3.1%).

If you want to know how, take a look at its results for the year to March, released in late May. This reveals why Lewis is often mistaken for a microlender with a sideline in furniture.

Of its R10.3bn in revenue, only 52% (R5.4bn) came from selling furniture. The rest came from interest on the loans people take to buy that furniture (R2.38bn), insurance premiums on those goods (R1.37bn) and “ancillary services” (R1.1bn).

The point is, its financial services arm is booming, while actual merchandise sales grew more slowly, at 7.3%, compared to the overall 11.1% growth in revenue.

CEO Johan Enslin tells the FM that he has heard the view that Lewis is more bank than furniture store. “Those comments aren’t new – that is the business model. But at the end of the day, our job is to go and find exclusive merchandise that speaks to the taste of consumers and then make it affordable by providing credit,” he says.

Enslin says Lewis’s credit model is crucial since traditional banks won’t extend loans to cover these purchases. “The banks do play in that market, but the level of credit they are prepared to extend is lower than our appetite.”

From the outside, the terms can look hugely onerous. For instance, if you fancy a Galaxy coffee table with two drawers, it will set you back R2,999 in cash, or you can pay it off over three years, at a cost of R9,360.

The question is whether customers comprehend this trade-off.

A decade ago, Lewis ran into trouble for “mis-selling”, ultimately repaying R67m to customers who had been convinced to buy “unemployment insurance” even though they were pensioners or self-employed.

Enslin acknowledges that “mistakes were made due to human error” but says Lewis has ratcheted up its controls to ensure it couldn’t be accused of abusing customers’ trust.

“We’ve implemented a compliance centre and processes to ensure we go above and beyond to ensure customers fully comprehend the total cost of credit and all the components of that.”

The upshot, he says, is that Lewis has increased the proportion of credit applications it rejects from 35% last year to 42% now. This shows, in Technicolor, the strain on lower-income households.

But while it is true that customers are often to blame, in other cases the fault lies with the provider. Nerosha Maseti, the credit ombud at the National Financial Ombud Scheme, revealed last week that 62% of the 3,126 complaints lodged against credit providers last year were decided in favour of the consumer.

“Too often, credit providers prioritise profit over fairness and in doing so, some sidestep the due legal processes meant to protect borrowers,” Maseti said.

The report showed that 90 formal cases were opened against Lewis last year, accounting for 2% of complaints. This was far lower than the 491 complaints against the RCS Group including Edcon; 362 against MTN; 212 against Vodacom; 136 against Woolworths Financial Services; and 111 against Foschini.

Roughly half those cases against Lewis were overturned. While this was way better than MTN’s and Foschini’s performance, it illustrates that, as much as Enslin has worked to improve Lewis’s processes, there is still some way to go.

A stagnant economy

The inconvenient truth, however, is that credit providers carry serious risk.

Lewis’s debtors’ book now stands at R9.1bn, for which it has set aside an impairment provision of R3.4bn. Of that, R828m is “nonperforming”, while R1.4bn is with “slow payers”. The silver lining is that 82% of customers, who owe R6.9bn, are “satisfactory” payers.

If it sounds fragile, Enslin says Lewis’s credit book is close to the healthiest it has ever been. “Last year, we added 78,000 customers, and most of them are servicing their accounts really well. But obviously, there’s a lot of work that goes into maintaining that quality,” he says.

You can see why: unemployment has risen sharply over the past decade, from 26.5% to 32.1%, putting many of its customers out of work.

And Enslin isn’t particularly optimistic. “If you ask me if that’s going to improve in the short term, no – things are going to get tighter and tighter. Our target market will likely stagnate or decline.”

In this context, he says, Lewis’s goal is to snaffle market share and position itself for the eventual recovery. But to do this, a company in such a fragile pocket of the economy cannot afford to cut corners on treating its customers fairly.

Enslin says there is no danger of this. “Those historical issues are behind us now. It was a troublesome time for us, so we have no intention of going back there.”

This story first appeared in the Financial Mail. Currency and the Financial Mail are part of the Financial Mail Group.

ALSO READ:

• Lewis – can you believe it’s the JSE’s best-performing retailer?
• The real story behind South Africa’s retail results
• The fintechs muscling in on South Africa’s credit gatekeepers

_{Top image collage: Rawpixel; Currency.}