Managing the risk of the book
The Group has changed its terminology from ‘credit’ to ‘account’ when discussing ‘non-cash and non-credit card’ customers. Management has to adopt a more generic description of the financial product offering that now incorporates a loyalty programme, in order to distinguish the offering from bank credit used by customers in the form of debit and credit cards.
Account sales comprise 70% of retail sales (2016: 69%)
Continued impact of affordability assessment regulations
Active account base down 4% to 2.5 million accounts
New account acceptance rate improved to 26% (2016: 24%)
Net bad debt to gross trade receivable increased to 15.0% (2016: 12.4%)
Doubtful debt allowance to gross trade receivables increased to 12.7% (2016: 12.3%)
STABILISING CREDIT ENVIRONMENT
The South African credit market stabilised in the second half of the financial period despite the deteriorating economic conditions in the country, showing early signs of improvement across key indicators.
The TransUnion Consumer Credit Index, which measures consumer credit health, increased from 50.8% in the first quarter of the 2017 calendar year to 53.8% in the second quarter. This is a pleasing sign and, if it continues, may indicate improved debt repayment.
There is likely to be caution in credit markets in the months ahead following South Africa’s credit-rating downgrades in April 2017.
While there has been a reduction in the number of active accounts across the large credit retailers, Truworths has increased its market share of total active accounts to 23% (source: Principa).
ACCOUNTS AN ENABLER OF SALES
Purchases on account are offered to customers across all Truworths brands in South Africa, Namibia, Botswana and Swaziland.
Truworths uses accounts 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 accounts to buy better-quality fashion merchandise.
Truworths aims to balance the cost of the book with trade receivable income, as was again the case in the reporting period where the total trade receivable income amounted to R1 426 million, exceeding the total cost of the book of R1 385 million by R41 million.
Truworths is increasingly targeting more affluent cash customers, many of whom use credit cards, by broadening its ranges and product offerings, introducing a loyalty programme and developing an e-commerce platform, which is scheduled to launch in the first half of the 2018 financial period.
Trade receivable income vs cost of the book
IMPACT OF AFFORDABILITY ASSESSMENT REGULATIONS
The affordability assessment regulations introduced by the National Credit Regulator in September 2015 have continued to restrict Truworths’ ability to open new accounts and to grow account sales.
The affordability regulations introduced a standard requirement for all credit applicants to provide their three most recent bank statements, 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.
While Truworths supports the principle of these regulations, the onerous requirement to provide documentation has had the unintended consequence of denying access to credit to many otherwise creditworthy customers.
The regulations have contributed to the Truworths active account base declining by 4% to 2.5 million accounts during the reporting period.
Account granting strategies have been implemented to mitigate the impact of the regulations. Early indications are that the mitigating actions are having some positive impact with the decline in active accounts being arrested in the last few months of the financial period, and new accounts opened showing year-on-year growth for the second half of the financial period, albeit off a lower base.
Legal action was jointly instituted with two other JSE-listed retailers against the National Credit Regulator and the Minister of Trade and Industry. The court case was heard in August 2017, with judgment pending.
BOOK PERFORMANCE IN 2017
Gross trade receivables on the debtors book, including Truworths, Identity and YDE, were unchanged at R5.8 billion. Account sales contributed 70% (2016: 69%) to retail sales in Truworths for the period.
Overdue values as a percentage of the total debtors book remained at 14%.
The doubtful debt allowance as a percentage of gross trade receivables has increased to 12.7% from 12.3% at June 2016. Net bad debt as a percentage of gross trade receivables increased to 15.0% (2016: 12.4%). This was as a result of the book showing no growth while bad debts increased owing to high account sales growth in the prior period. The increase in net bad debts was partially off-set by the relatively lower increase in the monetary value of the doubtful debt allowance, resulting in trade receivable costs increasing by 11% to R1 207 million (2016: R1 092 million).
MANAGING THE RISK OF THE BOOK
All account strategies across the portfolio, from new account acquisition to account 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 account 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.
Strategies to grow sales from long-term customers with good sales and payment history have proven successful during the period.
The strategic focus on collections through enhanced systems, outsource partners and internal resources has contributed to an improved collections performance in the latter stages of the reporting period. While the collections environment has been tough owing to market conditions this was compounded by slower sales growth in Truworths, which placed pressure on the collections teams to improve the quality of the book.
Systems providing a single view of the customer have enabled the risk team to leverage the information across the customer life cycle, which assists with omni-channel customer communication, customer decision strategies and predictive model development.
E-COMMERCE AND ONLINE SHOPPING
Truworths will be enhancing the customer experience through the development of its e-commerce platform as part of the omni-channel retail strategy. The upgraded website and online shop will be launched in the first half of the 2018 financial period.
New order fulfilment and payment solutions are being incorporated into the shop front website and customers will be offered an extensive catalogue of Truworths, Identity and Office London ranges online.
Customers will have several payment options, including the Truworths account card, as well as having a choice of home delivery or ‘click & collect’ in store.
The recently launched TruRoyalty and iDream customer loyalty programmes will be aligned with the new Truworths online offering.
LOYALTY PROGRAMMES LAUNCHED
The TruRoyalty (Truworths) and iDream (Identity) customer loyalty programmes were launched in the second half of the financial period. These programmes are aimed at attracting and retaining customers while increasing both the basket size and frequency of shopping of account and cash customers.
Members are offered a suite of exclusive benefits, including personalised merchandise promotions, additional sale discounts, vouchers and competitions. The benefits have been structured to have minimal impact on the retail margin.
All account customers and account applicants automatically become loyalty programme members, while cash customers can join the programme at no cost. At the end of the reporting period the loyalty programmes, TruRoyalty and iDream, had over 2 million non-account customers.
MANAGING THE RISK OF THE BOOK IN 2018
The credit environment is expected to improve marginally in the year ahead, based on the trends noted in the second half of the financial period. Truworths will maintain its strict risk criteria and expects the net bad debt to gross trade receivables ratio to improve.
The active account base is anticipated to stabilise as the 2017 base includes a full year of the affordability assessment regulations. Account strategies are being implemented to improve sales from existing customers through a combination of account limit management and reactivation of dormant customers. Truworths also plans to improve collection rates through the use of more advanced contact centre technology.