24 of 2023

Newsletter No 24/23 June 2023                              

                  

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How TFG’s big bet on making clothes at home is paying off

By Adele Shevel

As the economy stagnates, unemployment increases and consumers buckle under the cost-of-living crisis, the retail group is bringing prices down by focusing on local manufacturing, having invested R1bn on rebuilding capacity in the sector. It’s not just buyers who are reaping the benefit; the communities around its five factories are thriving too

An hour and a half outside Cape Town  sits a town  that represents ground zero for a bold new shift in South African fashion retail.

Caledon is known for its hot springs and farming businesses, surrounded as it is by barley, grain fields and wind turbines. Yet it is here that TFG — founded 98 years ago when American immigrant George Rosenthal opened his first clothing store on Joburg’s Pritchard Street — has thumbed its nose at the notion that running a fashion empire requires a string of offshore suppliers hawking bargain-basement clothes made in Asia.

Instead, TFG’s Prestige Clothing factory, which uses its base in Caledon to make clothes for the firm’s 3,301 South African stores, is going from strength to strength. Already the factory has 750 staff, making it the largest employer in the town, apart from the farms.

The good news for South Africa’s wheezing manufacturing sector is that Prestige is one of five plants owned by TFG, which has invested R1bn into rebuilding local capacity to make garments locally.

This shift has been emphatic: in 2016, TFG produced 6-million garments in South Africa; last year, it produced 17-million; and it plans to hike that to 24-million within two years.

For the first time in years, you’re seeing far more clothes made in-house, rather than imported, on the shelves of TFG’s South African stores, including Foschini, The Fix, Exact, Markham and Fabiani.

It’s an inversion of the conventional wisdom of “offshoring” — a dominant theme in fashion retail over the past decade — where half the stock on shelves seemed to have been made in Asia, mostly China. The benefits were supposedly manifold: lower costs, looser labour rules in places where  those clothes are made, and vast economies of scale to slash costs for consumers.

“I wouldn’t share that view in the slightest,” says TFG CEO Anthony Thunstrom. “We have spent nearly a decade learning how to outcompete international suppliers across a range of strategic product categories. We have learnt lessons along the way, but today we can produce a lot of products locally at parity, or better, to imported prices, and we take significantly less fashion risk because of the reduced lead times.”

This has happened partly because the global economy changed. The gentrification of China raised the prices at which garments were made in that country, while greater pressure not to buy from firms that produce clothes in sweatshops changed the labour dynamic. Simultaneously, South Africa’s spluttering rand, which has lost 40% of its value in the past five years, made it cheaper to produce clothes locally.

In TFG’s case, its 34 store brands aren’t obliged to buy from its local factories, like the one in Caledon, but they’re increasingly choosing to do so. It’s a no-brainer: the quick response time means they get the clothes earlier, with less working capital tied up in inventory, fewer markdowns and, ultimately, greater profitability.

Exact was the first brand within the group to place large orders with Prestige two years ago, ordering garments in July and taking delivery in September. That’s a two-month turnaround, rather than the typical eight- to nine-month wait for overseas shipments.

The result: that summer season was Exact’s best yet. And the momentum was evident in its record-breaking turnover for the year to March, unveiled on Friday by Thunstrom.

The Instagram factor

Despite six months of unprecedentedly severe power cuts, and with interest rates at the highest level in 15 years, TFG was able to pump up revenue 19.4% to a record R51bn in the year to March. (Its recent purchase of Tapestry helped, but its revenue would have been up 15.4% anyway.)

There were dark spots. The group’s net profit rose just 4% to R3.03bn — partly because of rising bad debts among its customers, the extra R200m it spent on alternative power to mitigate load-shedding, and the higher interest rates it now pays on its R7.1bn debt.

But on the plus side, its local market share for women’s, men’s, children’s and babies’ clothes grew from 13.7% to 14.1%; its share in sports clothing grew from 36% to 39%; and it added 8,000 new jobs in South Africa.

Analysts from SBG Securities say while the results are “below expectations”, they still recommend TFG as a “buy” partly because of its shift towards manufacturing more locally. “Though yet to reflect meaningfully in metrics, [the] impetus behind onshoring manufacturing could further assist working capital and gross profit margins,” they say.

Retailers might be struggling in South Africa — DebtBusters tells the FM that most South Africans have 38% less disposable income and 30% more unsecured debt now than in 2016 — but TFG is just about keeping its head above an ever-rising tide.

One of the ways it has done this, says Thunstrom, is by increasing its South African manufacturing by a remarkable 45% this year, to lower costs for its customers.

“Local, quick-response manufacturing has been a strategic advantage for us, especially [with] women’s fashion, where we’re increasingly getting [told] the fashionability in our brands is similar to the best of the international brands, but at half the price. We couldn’t manufacture that on a short lead time, if not for local manufacturing.”

Anthony Thunstrom: TFG can produce a lot of products locally at parity, or better, to imported prices. Picture: Moeletsi Mabe/Sunday Times

What people see on Instagram today, they want to see in the stores tomorrow, he says. To compete with the best retailers — Zara or H&M, for example — Thunstrom says they had to revamp their ideas rather than try to squeeze more from an outdated model.

“One of the biggest turnarounds we’ve had in our local business in the past 12 months has been Foschini. It’s become much more fashionable through its increased reliance on quick-response manufacturing,” he says.

Today, he says, Foschini competes with the best international brands in terms of fashion, while “outcompeting significantly on cost”.

It’s a big strategic shift and one that its rivals have been slow to replicate.

Evan Walker, portfolio manager at 36One Asset Management, says while rivals such as Truworths, Woolworths and Mr Price Group source their stock largely from other countries, TFG has taken another route. “It allows the flexibility to turn volumes on and off, and be a bit more nimble and run businesses more effectively,” he says.

It’s a strategic shift that’s yet to be reflected in the share price. On the JSE, TFG’s stock has fallen  26% in the past year — worse than Mr Price (down 21.6%), Truworths (up  7%) or Woolworths (up 34%).

Yet analysts are more hopeful about TFG than any of the others, with most calling it a “buy”, expecting the share price to rise 37% in the next year.

All Weather Capital chief investment officer Shane Watkins expects that its local manufacturing strategy will bear fruit because of the weakening rand.

“The TFG share price is weak because like-for-like sales growth in South Africa is going backwards for reasons not necessarily related to TFG, but related to load-shedding and consumer demand. I guess people are concerned at how winter plays out,” he says.

Local manufacturing, the company evidently believes, will put it in a prime position for when the clouds lift from the local economy.

How to build a town

Thunstrom’s “local is lekker” philosophy — which has seen TFG invest R1bn in local clothing manufacturing, with Prestige employing 4,300 workers — hasn’t gone unnoticed.

Two years ago, at the opening of parliament, President Cyril Ramaphosa wore a TFG suit and shirt manufactured at Prestige’s Epping plant, showing symbolic support.

Part of the reason for the switch is the desire to cut costs for customers.

Says Thunstrom: “Even in our more expensive brands, such as Fabiani, our customers want to feel that they’re getting value for money. The principle has been adopted through all our brands in South Africa, and is appropriate, given that consumer discretionary spending will be restrained for some time to come.”

As an accountant, he’s well aware that having a shorter lead time frees up more working capital — which would have previously been held to cover inventory — which can then be used to open new stores, and invest in its new online retailer, Bash.

“Rather than have that money tied up in a debtors book or in stock, you’d far better utilise that money and spend it on something that will give you future growth,” he says.

The story of Prestige Clothing, which TFG bought in 2012 from an industry veteran named Graham Choice, is fascinating. Choice had opened the company in 1989 and today remains MD of TFG Merchandise Supply Chain.

The demand for locally made clothing is “insatiable”, he tells the FM.

“The uniqueness of what TFG has done, is being bold enough to be the only current retail apparel retailer saying ‘I will invest locally and on a significant scale,’” says Choice. “The more efficient our local ‘quick response’ supply chain becomes, the [closer] our retail divisions are to their customer, the bigger we grow this model.”

It was Choice who, in 2008, picked Caledon as the base for the factory, seeing it as near enough to Cape Town so that clothes could get there quickly. “Caledon was close enough and rural enough with a large underemployed population,” he says.

First, he found an empty barn, where he planned to start a school to train clothing workers. Then he asked the municipality if he could rent the barn. “They couldn’t get the paperwork done quickly enough,” says Choice.

The factory started with six employees, and today it dominates the town.

Recently the FM visited Prestige. It’s an impressive sight: the equipment is modern, training was taking place in breakaway rooms and Prestige’s in-house radio played music for the workers, many of whom are in their 20s and 30s.

Like Prestige’s four other factories, the Caledon factory uses Japanese Juki machines, an energy-efficient system which infuses smart technology into the equipment to enhance efficiency and reliability, along with Astas from Turkey for advanced automation.

Workers get food hampers every month, and sandwiches are provided every day. “The sandwich means something, as does the subsidised transport to all our staff,” says Choice.

It’s a case study in small-town economics. Prestige’s Caledon workers pump R50m of their earnings back into the surrounding economy every year, and the spin-off is more contractors, more bakeries, more electrical services.

“There are now four chicken bars, a Pick n Pay, Spar, a Wimpy, KFC … all these have opened since 2008. Those little towns around Caledon come here on a Saturday morning to shop,” says Choice.

Reviving a depleted manufacturing sector

If it seems like sunshine and roses today, the reality is that in April 2021, at the height of Covid, local clothing manufacturing was at risk of losing it all.

It was then that TFG took the gamble of buying the ex-Seardel manufacturing companies of Monviso, Bibette and Bonwit with their 600 employees, as well as House of Monatic from Brimstone. These now form the base of Prestige’s formalwear factory in Epping, which employs 1,300 workers.

That same year, Prestige Durban was launched, when TFG bought clothing company TCI Mobeni from the South African Clothing & Textile Workers Union. This was in addition to its factories in Caledon and Maitland, and its T-shirt factory in Joburg which runs with a staff complement of hearing-impaired workers in Hillbrow.

The factories weren’t in a good state, says Choice. Efficiency and morale were extremely low. Yet within two years they’d expanded by 2,000 people and added 1,000 people on learnerships.

Choice says Prestige also created a “culture of caring” for staff, which ultimately led to better efficiency. This yielded about R250m in savings for TFG in the past year.

Graham Choice: Started Prestige Clothing in 1989. Picture: Supplied

“A lot of unemployed South Africans would be very grateful for a job that paid R3,500 or R4,000 a month. But what they’re not going to be happy about is if you employ hundreds of people with a few toilets, minimal lighting and no fresh air. South Africa’s workforce is not unproductive as is so often claimed, provided the right conditions exist,” he says.

Perhaps, but “quick-response manufacturing” was an entirely new thing, coming into a market where a lack of investment had all but destroyed skills.

“The model is about 28-58 days lead time from order to delivery, compared with a long lead time [of] more than 180 days,” Choice says. “Planning production in a quick-response factory is more like Tetris — [there’s] a lot more preparation required beforehand and that can become challenging.”

The benefits are obvious: greater flexibility to react to consumer trends and market conditions. But over the years the apparel industry has seen the demise of manufacturing skills and leadership.

Thunstrom says there has been mass disinvestment in local clothing manufacturing for 20 years. “Most [manufacturers] were privately owned and people have sweated the assets. They’ve either emigrated, retired, or tried to sell them on, but very few have invested in the assets,” he says.

TFG wants to reverse this trend — and not just in clothing.

Besides Prestige Clothing’s five facilities, TFG has bought other local manufacturing plants and homeware retailers, including Granny Goose, Cotton Traders and Tapestry (which owns Coricraft, Volpes and Dial-a-Bed).

The Coricraft factory, for instance, has started to manufacture the sofas it used to import from China. This is 20% cheaper for customers, as the company doesn’t have to pay shipping costs, or hold this stock in inventory.

“It’s a game changer,” says Thunstrom.

TFG, it must be said, isn’t alone when it comes to local manufacturing capacity, but it is the largest overall.

Its rival Pep has the country’s single-largest local manufacturing factory, in Parow, while about a third of the products that go into Cape Union Mart stores are made locally.

Cape Union Mart group CEO Andre Labuschaigne says his group plans to boost the amount of product it buys from local suppliers too. Largely, it gets this from its two in-house factories, K-Way Manufacturers and Green Thread Manufacturers.

“We strongly believe in owning the path,” he says.

Asked why more companies don’t manufacture locally, Labuschaigne tells the FM it’s difficult, and not always profitable, to do so.

“First, there is a scarcity of capacity, capability and competitiveness, The South African apparel value chain has experienced a hollowing out of the installed manufacturing and labour base over the past two decades,” he says.

This skills deficit, as well as the lack of up-to-date machinery, makes it difficult to ensure the quality of the product is up to scratch, he says.

Where is the support?

This illustrates that despite what people such as trade, industry & competition minister Ebrahim Patel would have you believe, localisation is not universally popular. Nor is it even necessarily the winning model.

Investors, for one thing, fret about the risk that demanding trade unions impose on fashion retailers with large manufacturing arms.

Justin Barnes is an expert in industry policy development and manufacturing, and chair of BMA (Benchmarking & Manufacturing Analysts). He says TFG’s strategy is “100% correct and it’s a brave bold move in a very difficult environment — but it’s not necessarily the only winning model”.

In places such as Mauritius, Turkey and Colombia, models where the retailer doesn’t own the manufacturing company also work. “You don’t have to own the capability; it’s the nature of the South African environment that lends itself to ownership as an advantage.”

Many retailers adopt a blended model — placing part of their business in-house with their own manufacturers, and part with long lead-time, low-cost suppliers, often based far away. But one problem in South Africa, says Barnes, is that except for the automotive sector, the country’s “manufacturing capabilities have deteriorated alarmingly”.

Barnes has worked with manufacturers, in places such as Turkey, who will buy millions of dollars of fabric based purely on a customer’s phone call. But this only happens because Turkey is a “low-risk, high-trust environment” where suppliers have a relationship with retailers “who never let them down”.

The result is that the Turks develop their factories, their products and people — there are now 1.5-million people working in their clothing, textile and footwear industry.

But South Africa, he says, is the opposite, with a high-risk, low-trust environment — and the result is the country’s industry employs fewer than 100,000 people.

It’s a tangible consequence of the crisis of confidence in the country’s business sector.

“The president can have as many investment conferences as he likes, but the only businesspeople I know that are presently investing capital in South Africa are doing so to replace ageing capital,” says Barnes.

That, and putting money into providing their own energy. TFG, for example, says load-shedding cut R1.5bn from its revenue last year and lost it 360,000 trading hours — the sort of gut punch that would have killed weaker companies.

Barnes says South Africa needs more manufacturers like Choice. “He comes from a working-class background and has great appreciation for the workers in his factories. He understands that value is ultimately created on the factory floor, and that developing workers is key to being internationally competitive”.

He says South Africa is losing these intergenerational family-run businesses where the family would kill for their workers. “Turkey is the same. There’s a pride — it’s not about making money. It’s about what the firm does, what it makes,” he says.

But while manufacturing has served as the foundation for wealth in many countries, South Africa’s government has dropped the ball by allowing industrial areas to collapse.

“Our government does very little in comparison to our competitors. In Turkey, the government builds advanced infrastructure  such as water treatment facilities, and puts in high-speed transport systems so the products can move rapidly, and workers can get through to work safely and quickly,” says Barnes.

But in South Africa, the government expects the private sector to do all of this — all while negotiating with local “community forums” that are little more than organised mafias, while the police stand on the sidelines.

Barnes says that if we want to revive South Africa’s manufacturing sector, our policymakers should do far more to assist those actually taking the lead in doing this. Companies like TFG, in other words.  FM

Quietly keeping up appearances

By Sandiso Ngubane

Image: Illustration; Manelisi Dabata

Is Succession dressing a fad worth following?

In case you have yet to come across it, “quiet luxury” is the trend du jour and everyone — from TikTok to Vogue — has been going on about it for months, with even fast-fashion retailers on cue to position themselves to benefit from what I can only describe as the new peacocking. It’s defined by the kind of pared-back styling championed by, among others, Khaite, Bottega Veneta, and Zegna, while Vogue has described it as “less austere than minimalism but more polished than normcore”.

The aesthetic prioritises investment pieces and logo-free, understated fashion that includes suiting, chunky rollnecks, hoodies, and cotton tees. It favours a neutral palette and demands high-quality wearability. But while the editors of some of the world’s most revered fashion magazines have embraced the trend, it does have its detractors. “It’s another form of elitism,” lamented The Evening Standard’s Martha Alexander. Over at The Cut, Tiana Randall concluded that it was “actually very loud”. The rise of this nonetheless inconspicuous aesthetic dovetails with the popularity of the HBO series Succession, which follows the ultra-wealthy Roy family.

It’s also been quite evident on runways, where restraint has seen many designers “going back to basics”, as it were, at a time when LVMH boss Bernard Arnault has surpassed Elon Musk to become the world’s richest man with a fortune of US$211-billion. Arnault commands the world’s most valuable luxury-goods conglomerate. His wealth is fuelled by his company’s US$500-billion market value and, as talk of his retirement ramps up and speculation about his successor goes into overdrive, many have dubbed him the real-life Logan Roy, the patriarch played by Brian Cox in Succession.

“Stealth wealth” is, of course, nothing new for the rich. You might recall a few years ago, when Meta founder and CEO Mark Zuckerberg claimed that he wears the same plain tee every day. Many will also be familiar with late Apple founder and CEO Steve Jobs’s uniform of a black rollneck and jeans. While the current trend is a little more lustrous, it is a reminder of inherent social hierarchies that are involuntarily evident in the way we dress.

Unlike those of us mere mortals who gravitate to logo-bearing Gucci shirts, caps, and loafers, for the super wealthy, drawing attention to themselves is not a priority. So, why are we so fascinated by the way they dress? I can make an educated guess, but before I do, let’s take a moment to look at said fascination.

In a recent study of Google trends, fashion brand Karen Millen found that searches for terms such as “quiet luxury”, “stealth wealth”, and “old-money style” had grown 373%, 334%, and 568%, respectively, over the past year. Business of Fashion reports that the Ermenegildo Zegna Group is currently seeing double-digit growth and remains bullish about outperforming a global luxury market that is widely expected to see a slowdown. The quiet-luxury boom can only pay off for the 111-year-old brand that recently underwent a rebrand.

The neutral silhouettes at Zara, Mango, and others can also only bode well for these more affordable brands precisely because — as it appears — we all want in on the look. As I think about this trend and where it might go, I am reminded of something South African musician Zakes Bantwini said in a TikTok video, where he speculated about the reasons for most newly successful young Black South Africans’ fascination with loudly expensive fashion. I don’t remember his exact words but, as far as I can recall, Bantwini was defending those who acquire even a bit of wealth and begin to prioritise an aesthetic that the Roys, for example, might deem crass. What critics of “crass materialism” often choose to ignore is that these obvious displays of wealth grant the newly successful the social status they crave, and perhaps need, in a world where image can define future success.

Wearing your wealth on your sleeve becomes a way of commanding respect and, in a sea of rampant poverty, Succession dressing, as some refer to the quiet-luxury trend, will not do the job of distinguishing them from the less successful. Yet quiet luxury is catching on — firstly, because even fast-fashion retailer Shein now has a “quiet luxury” section and, secondly, because fashion is not merely about dressing up, it’s also about keeping up appearances.

At a time when sustainability and circularity have become important concepts in business, done right, quiet luxury is certainly a trend worth one’s attention, as it demands a more considered approach to dressing up and a focus on quality over quantity. By buying into it, you’re investing in understated elegance, careful craftsmanship, and attention to detail that have stood the test of time.

Mr Price reports decline in profit and like-for-like sales

By Nico Gous

Power cuts cost the clothing retailer about R1bn in sales and 318,000 trading hours

Fashion retailer Mr Price reported lower annual profit and fewer like-for-like sales in its latest year-end results as interest-rate hikes dampened consumer spending and the impact of load-shedding cost it about R1bn in revenue.

The company, valued at about R35.9bn on the JSE, saw its net profit decrease 3.6% to R3.2bn, while headline earnings per share (HEPS), a common profit measure in SA that excludes certain items, and diluted HEPS was 6% to 1,205.7c and 1,178.4c, respectively.

As a result, the total dividend declared for the year was 5.8% lower at 759.6c as Mr Price maintained its 63% dividend payout ratio of headline earnings.

“Times are difficult, but cycles are not permanent. The group has an experienced team who have seen cycles come and go. Now is not the time for negativity,” CEO Mark Blair said in its results for the 52 weeks to the end of April 1.

The group reported a 3.4% decrease in retail sales when looking at comparable stores, but grew 18.0% when including the acquisitions of a 70% stake in Studio 88 in October.

‘Heavy discounting’

Mr Price faces an uphill battle in trying to lower its higher inventory levels — leading to more promotions to entice customers — but in part lowering its gross profit margin by 1.5 percentage points to 39.5%. This trend is expected to continue.

“The heavy discounting in the market undermined the group’s everyday low-price positioning and compromised its ability to showcase its relative value to its customers,” Mr Price said.

Most of the retailer’s customers prefer to buy with cash, but greater inflation squeezing disposable income meant credit sales grew 8.3%, while credit applications were up 30.9%. But a more conservative approach amid tough times led to credit approval ratings falling 10.1 percentage points to 23%. Bad debt write-offs surged 29.4%, leading to the group’s net bad debt to book percentage rising to 8.4%.

To offset the impact of load-shedding, the Mr Price had backup power installed in 37% of its core business at the end of September.

“As a value retailer, the group had been conservative in its backup power investment, as the historical implementation of load-shedding was manageable until September 2022, after which date it escalated to unprecedented levels,” Mr Price said. The 2022 calendar ended with record-high load-shedding and rolling blackouts that have become part of daily life in SA in 2023.

As a result, the cumulative amount of load-shedding from September 2022 to March 2023 for the group was more than the 15 years combined. The estimated annual loss of 318,000 trading hours is the equivalent to about 36 years, costing Mr Price about R1bn in sales.

More backup power, such as batteries and inverters, has been installed and an investment of R220m should see all the group’s stores covered by the end of June 2023. According to Mr Price, this has lifted the average sales growth by 5% compared to before these solutions were installed.

Looking ahead, the company noted that further rate hikes from the Reserve Bank have not significantly reduced inflation, leading to customers spending more on non-discretionary items.

“However, an anticipated improved performance from September 2023 should start to be seen. Power outages will be in the base, inventory levels should be at desired levels, and hopefully inflation and interest rates start abating,” it said.

“The potential higher stages of load-shedding throughout winter threaten to extend this disruptive retail cycle. Load-shedding has become a permanent and tiresome obstacle to businesses in [SA] and the cost of doing business has materially increased, stifling economic growth,” the company added.

Despite opening new stores over the past year, Mr Price has pulled back on some budgeted store openings in the new financial year, because of a lack of good trading locations.

The group ended the year with R1.4bn in cash on hand after settling the acquisition of Studio 88.  BL

Mr Price – board and board committee changes

Mr Price advised shareholders of changes to the composition of the Company’s board. Following the annual board review by the Remuneration and Nominations committee (Remnomco), the changes are being affected to enhance independence and bolster retail skills at both board level and across various committees.

Keith Getz will not be offering himself for re-election as a non-executive director at the 2023 AGM and will accordingly be rotating off the board effective 30 August 2023 following conclusion of the Company’s AGM on that date.

Steve Ellis will not be offering himself for re-election as a non-executive director at the 2023 AGM.

Lucia Swartz will assume the role of SETS committee chair from 31 August 2023.

Jane Canny was appointed as a SETS committee member from 1 September 2023.

Harish Ramsumer was appointed as an independent non-executive director of the board with effect from 1 July 2023. He has also been appointed as a member of the ACC and the Risk and IT committee (RITC) from this same date and is the intended successor to chair the ACC following Daisy Naidoo’s retirement.

Daisy Naidoo will retire by rotation from the board at the 2024 AGM.

Richard Inskip was appointed as an independent non-executive director of the board with effect from 1 July 2023.

Neill Abrams was appointed by the board as an independent non-executive director and will consequently step down as Stewart Cohen’s alternate director, effective 1 September 2023.

Cotton is the most widely used clothing material, but it only became common in mid-1800s, when Eli Whitney’s cotton gin made it easy to separate the cotton fibers from the seeds

 

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