TFG octopus extends tentacles around furniture

Beauty, fashion and home retailer TFG plans further expansion locally and abroad after announcing the proposed R2.3bn acquisition, subject to competition authorities approval, of Tapestry Home Brands.

Tapestry owns Coricraft, Volpes, The Bed Store and Dial-a-Bed, and has 175 stores in SA, Namibia and Botswana. It has factories in Johannesburg, Cape Town and Gqeberha.

The price far exceeds the R385.3m that TFG paid in 2020 for 425 Jet stores. Last year TFG which owns Foschini, snapped up Granny Goose, House of Monatic, Trade Call Investments, Radeen Fashions and Playtex — to beef up its local production base.

CEO Anthony Thunström said this week there is still room for further acquisitions if TFG finds the right assets at the right time. “We have got a pipeline of potential opportunities in SA, Australia, the UK and even further.”

For other South African retailers international expansion has not always gone as planned, but Chris Reddy, an investment analyst at All Weather Capital, said: “TFG have done a better job than peers with the acquisition of RAG in Australia — especially when compared to Woolworths and the David Jones acquisition.”

TFG raised R4bn in a rights issue at the beginning of the pandemic, and Thunström said its balance sheet has never been stronger.

“We did a rights issue because at that point nobody knew how long or how bad Covid was going to be. So we said we would rather have a strong balance sheet if things get terrible for the next three or five years, which thankfully they are not.

We wanted to have the money available to move very quickly and not worry about how we were going to fund those acquisitions

—  TFG CEO Anthony Thunström

“We also said we expect there to be really good acquisition opportunities over the next year or two and that we wanted to have the money available to move very quickly and not worry about how we were going to fund those acquisitions when we found them,” he said. 

TFG, which also owns @Home, Markhams, Totalsports and Donna Claire, said it will not raise debt for the Tapestry transaction.

Thunström said more than 80% of TFG’s business has come through buying companies and finding a way to grow them.  “It is very much part of what we do; and our DNA. It is not like we suddenly woke up this year or last year and said let us do M&A [merger & acquisition] activity,” he said. 

Andrew Bahlmann, CEO of corporate & advisory at Deal Leaders International, said TFG had net debt of R800m and so the group’s balance sheet would not be stretched by the acquisition. 

He said with this acquisition, TFG would add 2,500 Tapestry employees to its own staff of more than 27,500 in SA — an increase of less than 10%. 

“Management had the vision to not only expand their portfolio into a new offering, but also to develop competitive local manufacturing and procurement capabilities. It has for almost the past decade been leading the way with local manufacturing and made it a strategic imperative to reduce its reliance on offshore sources like China”, said Bahlmann.

He said Foschini now sources 35% of its clothing from SA, whereas five years ago as much as 80% was imported from Asia. “This type of foresight will have paid dividends in this time of uncertainty and global supply chain bottlenecks we are now witnessing.”

Thunström said the group is profitable and has grown market share ahead of its peers partly because it is not nearly as exposed to international supply chains.

“The cost of shipping goods from China to SA in the past six-eight months has gone up over 10 times,” he said.

Reddy said “given that Tapestry has local manufacturing in three cities, it will strengthen TFG’s local manufacturing and distribution capabilities” and increase its market share in homeware and furniture.

He said the target market for Tapestry does have some overlap with TFG in the middle to upper LSM segments, and therefore allows TFG to obtain a greater share of that consumer's wallet. “Coupled with Jet Home’s expansion strategy, TFG will be able to cover the full spectrum of LSMs,” he said.

Euromonitor research analyst Steven O’Ehley describedTapestry as a strategic acquisition that would help the group to expand its market share in the home furnishings segment and challenge such rivals as Truworths' Loads of Living. 

“The homeware and home furnishings market has proven resilient and shown renewed interest from consumers, who have been spending increased amounts of time at home in response to the pandemic. This has motivated consumers to invest in their homes, making them as pleasant as possible.”

Bahlmann said the risks associated with the transaction are primarily taking on a new sector and product line with which TFG’s management is not familiar.

“At the moment, furniture is underperforming other retail segments,” he said citing data from StatsSA that showed retail sales for household furniture, appliances and equipment grew just 2.4% from 2020 to 2021, compared with 16.4% for textiles, clothing, footwear and leather goods.

“The risk here lies in the speed of that expected recovery,” he said.