By  on August 26, 2014

JOHANNESBURG (Bloomberg) — Edcon Holdings Ltd. is turning to international brands such as Topshop and Tom Tailor as South Africa’s biggest clothing retailer seeks to restore profit seven years after being acquired in a leveraged buyout.

Edcon, controlled by U.S. private equity firm Bain Capital Partners LLC, plans to bring in more of the labels through its flagship Edgars stores, chief executive officer Jurgen Schreiber said in an interview at the company’s Johannesburg headquarters. The strategy is intended to fend off local and foreign competition from Inditex SA’s Zara and Hennes & Mauritz AB, which are both carving out footholds in South Africa.

“We realized we needed something that was long-term, sustainable and different from our competition and brands could do that,” Schreiber said. Other international labels available in Edgars outlets include Dune London, Mango and T.M. Lewin.

Edcon has struggled since its 25 billion-rand ($2.3 billion) purchase by Boston-based Bain in May 2007, failing to make a profit in at least three years. The deal saddled the retailer with debt, hampering its ability to invest in stores at the same pace as South African rivals Truworths International Ltd. and Mr Price Group Ltd. The arrival of Zara in 2011 also caused shoppers to defect.

“The debt has been a huge distraction and management took its eye off the ball,” said Roger Tejwani, an independent retail analyst based in Johannesburg.

Bain isn’t planning an initial public offering of Edcon until the retailer has reported multiple quarters of profitability, Schreiber said.

Clothing and footwear sales in South Africa, the continent’s second-biggest economy, are dominated by a small number of homegrown chains. Eight South African retailers accounted for almost half of the value of apparel sales in the country in 2012, according to data from Euromonitor. That compares with about a quarter of sales by the top eight retailers in Brazil.

“There is an opinion in the market that it takes a long, long, long time for brands to have any type of deep penetration,” Schreiber said. “I think that’s a myth.”

For years, South Africans who wanted clothes from Zara or Topshop could only get them from abroad. Local malls stocked labels such as Edgars’ Kelso or Truworths brand OBR - fashion that had limited brand recognition or prestige in Europe or the U.S. Edcon has built up about 50 international brands over the past 18 months, with more to be introduced.

Edcon, which operates chains including Red Square and low-cost Jet as well as Edgars, has been revamping outlets in an effort to claw back market share that fell to 17 percent in 2012 from 22 percent a year after the Bain buyout, narrowing the gap with competitors Truworths and The Foschini Group Ltd. Sales growth was a combined 65 percent in the eight years through 2014, compared with a 163 percent gain at Truworths.

The turnaround plan is taking place as South African retailers struggle with more than 25 percent unemployment and annual inflation that was 6.3 percent last month. Retail sales were unchanged in June, the worst performance since December 2009, while the South African Reserve Bank raised its benchmark interest rate for the second time this year on July 17, cutting disposable income for borrowers.

Edcon has signed exclusive trading agreements with brands such as Topman, U.K. tailor and shirt maker T.M. Lewin, U.S. denim-dominated Lucky Brand, and British women’s wear chain Lipsy as part of the revamp. Some are sold in concessions in Edgars shops and others in stand-alone stores under a local partnership agreement.

At Edgars, international brands still account for less than 20 percent of revenue, Schreiber said. Edcon will open another 30 to 40 more stand-alone foreign-brand stores this fiscal year, he said. The rights for Topshop were acquired in July 2012 with the first store opened in November that year. The first stand- alone Tom Tailor and Dune stores opened in August 2013.

Absorbing new brands comes with inherent risks, Schreiber said. Some brands work from the “get go” while others don’t. Even so, there’s a benefit in trying out these “wild cards” in the search for one that takes off, he said.

“One Green Elephant -- hardly anybody actually knows the brand, it’s Japanese,” Schreiber said. “It’s a little out there, the color palettes are a little bit crazy. So with some of them we take a risk.

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