Acquisition activity is intensifying in the clothing sector as retailers look to boost online strategies, add new product lines or expand internationally to retain and increase market share.
Makwe Masilela, head of Makwe Fund Managers, said the activity indicates listed retailers are snapping up creative entrepreneur-founded businesses as they look to make inroads in markets where they feel they are underrepresented.
Because of their large balance sheets they don’t “have to reinvent the wheel and necessarily try and come up with their own creative businesses”. Instead, they can buy them.
“There is pressure as well from shareholders who say the retail environment is changing and there are unique businesses that have identified niches, so go for it,” said Masilela.
At the same time shareholders do not want companies with “lazy balance sheets”.
But Masilela said the market is not seeing major takeovers, such as a listed clothing retailer buying another or parts of businesses. Transactions such as TFG buying Jet from Edcon in 2020 were rare. In that case, Edcon was a forced seller.
Retailers are unlikely to run afoul of competition authorities in the acquisitions process, said Casparus Treurnicht, research analyst and portfolio manager at Gryphon Asset Management.
He said it might become more difficult for retailers to find suitable acquisitions, but as long as there were Mr Price, Woolworths, TFG, Truworths, Edgars, Pick n Pay Clothing and Pepkor there would be “enough competition out there”.
“It’s not a sector with significant barriers to entry that need to be opened up.”
In its most recent acquisition, Mr Price bought 70% of the Studio 88 Group for R3.3bn — a business with more than 700 stores. It brands are Studio 88, which targets a younger, aspirational customer; Skipper Bar, aimed at the affordable end of the market; and Sidestep, offering premium footwear brands.
In August last year, Mr Price snapped up e-commerce and bricks-and-mortar kitchen store Yuppiechef in a deal estimated at more than R400m, while in November 2020 it acquired Power Fashion, a family-owned business with 170 outlets aimed at the lower end of the market.
These new departments account for approximately 4% of the group’s sales and demonstrate that there is further headroom for organic growth
— Mr Price CEO Mark Blair
Mr Price CEO Mark Blair said the group “delivered a new vision to the market in May 2021 to become the most valuable retailer in Africa”. This included a focus on unlocking opportunities in SA, and detailed research to identify segments of the market where it was underrepresented.
Blair said acquisitions are just one of the growth vehicles the group is using as part of its strategy, which includes “new organic concepts” to ensure the group is not reliant on one single growth vehicle.
“Since the new management team took over in 2019, more than 20 departments have been launched out of the existing business. These new departments account for approximately 4% of the group’s sales and demonstrate that there is further headroom for organic growth.”
Blair said the businesses acquired had strong growth opportunities and should increase shareholder returns over the long term, while existing businesses were still growing market share “despite consumers being under pressure for some time now”.
Last month TFG, which owns Foschini, announced a proposed R2.3bn acquisition of Tapestry Home Brands, which has such brands as Coricraft and Volpes. It has 175 stores in SA, Namibia and Botswana and factories in Johannesburg, Cape Town and Gqeberha.
In 2021, TFG bought digital delivery service provider Quench and app development agency Flat Circle. Its most recent high-profile acquisition was in 2020 when it bought Jet for R385m cash. The deal also included R535m in stock.
CEO Anthony Thunström said the group has been acquisitive “for a long time” and has a track record of identifying speciality-type businesses with strong brand equity and high growth potential.
It had been able to upscale them significantly. For example Sportscene, which TFG acquired in 2000, when it had five stores, now has 350.
What Mr Price will pay for 70% of Studio 88 Group.
— IN NUMBERS: R3.3bn
Thunström said because TFG is in a closed period he cannot quote specific numbers for Jet, but the company “comfortably” more than covered the full purchase price within a year. “Acquisitions allow us to grow on top of our own organic initiatives, which has seen the size of TFG increase by more than 2½ times since 2015, despite the impact of Covid.”
In February, Pepkor, which owns Pep and Ackermans, announced a move into Brazil where it bought 87% of value retailer Avenida, which has 130 outlets, for an undisclosed amount.
Pepkor said it has a “long track record of strong, market-leading growth based on organic expansion” and since listing five years ago has grown revenue by 8.6% and operating profit by 15.5% on an annual basis. These figures were achieved despite the pandemic.
On average, the group opens 300 new stores every year and expects this to continue.
“In addition, Pepkor has expanded successfully internationally, with its biggest success being Pepco, started in Poland in 2003 with 14 stores and expanding to 3,500 today.”
As for Avenida, Pepkor said it was “unique and premised on organic expansion” but “very small in our context”.
One concern for analysts is whether the acquisitions are a signal that organic growth opportunities are drying up.
Treurnicht said government spending previously bolstered retail, with salary increases and the like supporting consumer spending. He says this dried up about five years ago, leaving the retail market to find support from the commodities boom.
But this cannot continue forever, with the question being where growth for retailers will come from next. Treurnicht said this void could trigger more acquisitions and the risk of overpaying for assets.
Sasfin Wealth senior equity analyst Alec Abraham agreed acquisition activity could indicate slowing organic growth. He said growth prospects for Mr Price and TFG are tied to economic prospects, which do not look promising — GDP growth of only 1.7% is expected over the next three years.
He said the same applies to Pepkor, whose local operations are aimed at the lower-income segment, in which the pandemic's toll on jobs was most pronounced.
Abraham said Pepkor’s expansion into Brazil and TFG’s exposure to Australia and the UK meant additional international risk.
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