Fashion group Mr Price will buy a 70% stake in Studio 88 group, a sneaker and branded clothing retailer, paying R3.3bn in cash in its biggest acquisition to date.
The deal will allow it to grow within the burgeoning township and informal economy, which is drawing interest from mainstream retail firms.
Studio 88 has more than 700 stores, and chains include the more affordable Skipper Bar and premium footwear brand Sidestep.
Its stores are mostly aimed at the younger market and are present in large malls and in the more informal economy operating near taxi ranks, city centres, peri-urban malls and rural high streets.
The stores primarily sell casual and athletic men's wear and sneakers, complementing Mr Price, which sells more female clothing and unbranded inexpensive shoes.
The deal still requires the Competition Commission’s approval, and the firms have set an end-October date for regulatory approval — if the buyout is to go ahead.
More consumer-facing firms in SA are expanding to focus on township consumers and the underpenetrated larger informal economy. Capitec CEO Gerrie Fourie said this week: “I think the economy is stronger in the informal market than anyone anticipates.”
Mr Price says the purchase will help to grow its presence in the “aspirational value segment”, where it is underrepresented.
Studio 88 is the largest independent retailer of branded leisure, sporting apparel and footwear in SA, generating revenue of R5.6bn in its year to end-September, meaning the group will boost Mr Price’s revenue by about a quarter.
If the deal gets competition authority approval, Mr Price’s revenue will be on track to reach almost R30bn a year, putting it behind TFG, owner of Markham, Jet and Foschini, which earns about R36bn in sales a year from SA, UK and Australian stores.
Mr Price is focused primarily on SA, with only 8% of stores in neighbouring countries.
Mr Price CEO Mark Blair said in an investor call that the decision to focus primarily on SA benefited it as it was not distracted by challenges in other territories.
With the Studio 88 acquisition, the Mr Price clothing, sport and homeware brands will account for only about 40% of revenue — down from over half — with about 18% of turnover coming from Studio 88, and the rest from Mr Price Money, cellular, Sheet Street, Miladys and Yuppie Chef divisions.
“We are quite satisfied that we want a multipronged strategy. So there’s no one big bet on anything,” Blair told investors.
He said Mr Price had improved in the past few years, and under new leadership in that division “it’s performing a lot more consistently”.
In the past two years, Mr Price has acquired discount clothing retailer Power Fashion and high-end kitchenware supplier Yuppie Chef, and both deals were also debt free.
“We are not done yet,” Blair said, adding Mr Price is still looking for acquisitions and has plans to grow internally. “We will be constantly looking for category extensions. The idea is to keep that freshness and that interest in our business.”
Mr Price believes it can expand Studio 88 and improve its
e-commerce division.
All Weather Capital analyst Chris Reddy praised the deal, but said muted consumer spending remained a risk in SA. Reddy said Mr Price would gain from greater bargaining power with landlords and suppliers due to its increased footprint.
Studio 88 founder Laurence Wernars will continue running the business with his management team.
“We are delighted to be partnering with an iconic SA retailer who has the vision and retail expertise that will be key to realising our considerable trading opportunities,” Wernars said.
Mr Price is buying out the RMB Ventures stake in Studio 88, as private equity typically invests in the growth phase of a business.
Studio 88’s management will keep 50% of their ownership stake until 2026, and the other half will be bought for 90% in cash and 10% in Mr Price shares.
Studio 88 is a large seller of Nike and Adidas branded footwear and clothing. Nike is moving to cut out the middleman with its global consumer direct strategy, putting wholesaler and retailers at risk. Nike has cut the number of retailers it works with in half over the past four years.
But Blair said: “Studio 88 is one of the strategic partners of the international brands.”
This suggests Blair does not see Nike’s focus on direct selling to consumers as a major risk in SA or to one of Studio 88’s big sellers.
At the JSE’s close, Mr Price’s shares had gained the most since May 2021, up 6.87% to R225.75. The shares have risen about 65% over the past two years, while the JSE’s retail index has gained about 21.5%.
Update: April 13 2022
This article has been updated throughout.
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