Note: This report is Truworths specific as Office is dealt with in the Office Operational Report. All references in this report are therefore to ‘Truworths' rather than to ‘the Group'.
11%off a stable active account base
Deteriorating credit environment
After showing an encouraging improvement in the early part of the reporting period the South African credit environment deteriorated as the worsening economic conditions and new affordability assessment regulations impacted on the credit health of consumers in the second half.
The TransUnion Consumer Credit Index, which is a measure of consumer credit health, declined from 52.1% in the fourth quarter of the 2015 calendar year to 46.1% in the first quarter of the 2016 calendar year, the lowest level in three years. The Index declined, albeit at a slower rate, in the second quarter of the 2016 calendar year to 47.1% as higher consumer inflation and rising interest rates impacted loan repayment behaviour.
In this environment it was pleasing that Truworths increased its share of the credit wallet among clothing retailers to its highest level ever.
Credit an enabler of sales
Credit is offered to customers across all Truworths brands in South Africa, Namibia, Botswana and Swaziland.
Truworths uses credit as an enabler of sales to customers in its mass mainstream middle-income market, as opposed to operating a financial services business. Many customers have limited access to bank credit and credit cards, and are therefore reliant on store credit to buy better quality fashion merchandise.
Truworths aims to ensure that the cost of credit is balanced by interest revenue, as was the case in the reporting period where the total cost of credit was R1 277 million and total income from credit amounted to R1 273 million.
|Cost of credit||2016
|Total trade receivables interest||1 204||969||828||724||630|
|Trade receivables interest charged||1 111||889||754||646||553|
|Financial services income*||69||67||59||61||44|
|Total income from credit||1 273||1 036||887||785||674|
|Total cost of credit||(1 277)||(1 110)||(1 082)||(877)||(648)|
|Internal and external collection costs**||(488)||(395)||(389)||(335)||(283)|
|Net bad debt and change in doubtful debt allowance||(789)||(715)||(693)||(542)||(365)|
|Cost of credit: (cost)/surplus||(4)||(74)||(195)||(92)||26|
Truworths is increasingly targeting more affluent cash customers, many of whom use credit cards, by broadening its ranges and product offerings, developing an e-commerce platform and loyalty programme, and through its recent acquisitions which appeal to more affluent customers.
Impact of affordability regulations
The National Credit Regulator introduced new affordability assessment regulations in South Africa with effect from September 2015, aimed at ensuring that consumers are not over-indebted through unaffordable credit agreements.
Credit providers are now required to undertake an affordability calculation based on the assumed minimum living expenses of applicants, validate the declared income with documented proof of income and obtain credit bureau information within seven days of granting new credit or increasing an existing credit limit.
The new affordability assessment regulations introduced a standard requirement for all credit applicants to provide their three most recent bank statements or salary advices or other forms of proof of income to validate their income. A large number of Truworths' customers are self-employed or work in the informal sector and are unable to provide the prescribed documentation, while others have found the administrative burden too inconvenient and do not follow through with account opening.
This new requirement has resulted in the credit application acceptance rate declining to 24% from 30% in the prior period and an estimated loss of at least R200 million in credit sales for the reporting period.
Prior to the introduction of the new regulations cash sales grew by 26% and credit sales by 18%. Cash sales subsequent to the implementation of the regulations grew by 19% while credit sales growth slowed to 8%.
Mitigation strategies have been implemented to attempt to limit the impact of the regulations on credit sales. All store staff have been trained on the process of collecting proof of income documentation from customers, with stores empowered with technology to assist customers. Call centre staff are supporting stores by contacting customers who have not provided the relevant documentation and assisting them through the process.
Capping of interest rates
Regulations capping the maximum interest rate that can be charged on new credit agreements were introduced with effect from May 2016. As Truworths offers credit as an enabler of sales, management took a decision not to levy additional fees at this stage on customer accounts to compensate for the loss of interest revenue.
Credit performance in 2016
Gross trade receivables on the debtors book, including Truworths, Identity and YDE, grew by 11.6% to R5.8 billion. The growth in the book is attributable to Truworths' credit sales growing by 11.0% over the prior period.
Credit sales contributed 69% (2015: 70%) to retail sales in Truworths for the period.
Overdue accounts as a percentage of the total debtors book remained at 14%.
The doubtful debt allowance as a percentage of gross trade receivables has improved to 12.3% from 12.5% in the prior period. Net bad debt as a percentage of gross trade receivables improved to 12.4% (2015: 12.5%) as a result of improved collections. The increase in the monetary value of the doubtful debt allowance, together with an increase in collection costs, contributed to trade receivable costs increasing by 14% to R1 092 million (2015: R960 million).
Credit risk management
All credit strategies across the portfolio, from new account acquisition to credit limit management, as well as marketing and debt collection to bad debt recoveries, are subject to rigorous review. From this review, opportunities are identified where improvements can be made in the portfolio.
Challenger credit strategies are then developed with the goal of outperforming the existing approach. These challenger strategies are closely monitored and, once performance confirms that they deliver a better outcome, they are then applied to a larger portion of the portfolio.
Developments this year include:
- A suite of challenger strategies has been developed and implemented for new account applications that leverage more predictive scorecards that were developed by the internal analytics department.
- Enhancements to the process that proactively manages a customer's credit limit through the life of her/his account.
- Commissioning of new technology in the call centre that supports customer acquisition, customer retention and collections.
- Continued focus on improving the efficiency and effectiveness of processes to obtain proof of income documentation from customers by using all contact channels.
Enhancing omni-channel offering
In line with the strategy to develop an omni-channel retail capability, Truworths is enhancing the customer experience, as well as order fulfilment and payment systems on its e-commerce platform.
The shop front website is being developed to offer a broader online product catalogue, ultimately providing access to the full range of merchandise available in flagship stores as well as unique online-only product.
The new e-commerce platform and online store is expected to launch in the second half of the 2017 reporting period.
Truworths has invested in a customer engagement platform for its new loyalty rewards programme which is aimed at increasing both the basket size and frequency of shopping of account and cash customers. As a credit retailer Truworths has unique insight into its customers' buying behaviour and preferences, and this platform will enable multi-channel customer communication and allow for personalised offers and promotions. The current testing phase will continue into the 2017 reporting period to enable Truworths to evaluate the impact of the loyalty programme on profitability.
Managing credit risk in 2017
The rising interest rate cycle is expected to continue and current market consensus indicates the likelihood of a further 25 basis point increase in the repurchase (repo) rate in the second half of the 2016 calendar year. This is not expected to have a material impact on portfolio delinquency and Truworths will benefit from the resultant increase in interest income.
Plans to enhance credit risk management in the 2017 reporting period include:
- Further improve processes and systems to collect new affordability assessment documentation.
- Launch the new loyalty programme for both credit and cash customers to offer personalised promotions and increase purchasing frequency and basket size.
- Relaunch e-commerce with significantly enhanced functionality, order fulfilment, communication and payment capabilities to facilitate omni-channel retailing.
- Develop predictive models and strategies across the credit portfolio to respond to the changing economic and trading environment.
- Continue to invest in technology to unlock the value in the vast customer data available internally and externally.
- Commence development of new collections software.