Managing account risk
The COVID-19 lockdown affected every aspect of the account portfolio and while initial indications are that the debtors book is slowly recovering, it is too early in the cycle to determine whether this level of recovery will be sustained.
The TransUnion Consumer Credit Index, which reflects a worsening credit environment in South Africa when below 50 index points, was at 46 index points for the second quarter of calendar 2020, having declined from 48 points in the first quarter. Market analysts believe the index is not yet reflecting the deterioration in economic conditions due to COVID-19.
Reduced living expenses during lockdown, lower interest rates, payment holidays from credit providers and government assistance programmes have provided relief in the short-term to off-set household financial stress.
The South African credit environment is expected to deteriorate in the third quarter of 2020 as aid packages and payment holidays come to an end, living expenses normalise and also possibly increase, and job losses mount.
Refer to Material issues, risks and opportunities for more detail.
Accounts enabling merchandise sales
Account facilities are offered to customers across all Truworths merchandise brands in South Africa, Namibia, Botswana and Eswatini.
Truworths uses accounts as an enabler of sales to customers in the mainstream middle-income market, as opposed to operating a financial services business which is common practice in the retail sector. Many consumers have limited access to bank and other financial institution credit and credit cards, and are therefore reliant on store accounts to buy quality, aspirational fashion merchandise. Truworths account customers do not pay initiation, club, collection or magazine fees, and only pay an annual account service fee of R35. Financial services income only comprises 0.5% of sale of merchandise.
Truworths is increasingly targeting more affluent cash customers, many of whom use credit cards, by broadening its ranges and product offerings, and through its loyalty programme and e-commerce platform.
Impact of lockdown on account management
The start of the lockdown with effect from midnight on 26 March 2020 resulted in the closure of all stores, offices and call centres in South Africa for five weeks. As the majority of customers pay their accounts physically in stores, management responded by urgently opening new digital payment options and enabling customers to pay accounts at major food retail chains which traded during lockdown.
A core team of collections staff was enabled to work from home to continue servicing the debtors book and driving digital collections. The lockdown restrictions relating to call centres were ambiguous and changed several times, and Truworths responded immediately when regulations changed to enable call centres to operate. The outsourced collections agencies contracted to Truworths also responded positively to the challenge of working under these lockdown conditions.
Several debtors book scenarios were modelled to assess the potential short and long-term impacts on the portfolio. Based on these models account portfolio interventions were implemented to accommodate the store closures. These included a one-month ‘skip payment’ to customers whose accounts were in good standing and likely to repay their accounts, while the charge-off to bad debts was postponed for a month for a limited number of customers.
Collection rates for March and April were materially lower than the prior year but recovered steadily once stores reopened.
The pandemic and lockdown presented an opportunity to test new processes with minimal lead times with positive outcomes, including the following:
- Business process automation facilitated by artificial intelligence (AI) in customer services and collections
- Automation of significant volumes of decisions in the customer acquisition area
- Collections operations with a blended ‘in office’ and work-from-home workforce
Account sales comprise
of Truworths’ retail sales (2019: 70%)
Record new account applications of over
(2019: 2.8 million) despite COVID-19 and lockdown
Active account base 2.3% down to
(2019: 2.7 million)
New accounts opened as a percentage of applications decreased to
Gross trade receivables down 6.7% to
(2019: R5.9 billion)
Net bad debt to gross trade receivables increased to
Doubtful debt allowance to gross trade receivables at
(2019: 19.2%) owing to impact of COVID-19
Account management in 2020
Truworths experienced another record year for new account applications with over 3.4 million (2019: 2.8 million) applications. The number of accounts opened was 3% lower than the prior year, owing to store closures impacting on customers’ ability to conclude the opening process.
Account applicants represented a broader risk profile than before which resulted in the risk approval rate declining from 29% of applications in 2019 to 25% in 2020. The percentage of account applications resulting in opened accounts decreased from 22% to 17%.
The primary driver of the increased demand for accounts is Truworths’ compelling merchandise offering. Truworths continues to appeal to youthful fashionable customers, with 48% of new account applicants being under the age of 30.
Gross trade receivables on the Truworths Africa debtors book, comprising the Truworths, Identity and YDE books, totalled R5.5 billion (2019: R5.9 billion).
The number of active accounts declined by 2.3% to 2.6 million.
Account sales contributed 70% (2019: 70%) of retail sales in Truworths and active account holders able to purchase were at 77% (2019: 83%) at the period-end. Overdue balances to the total debtors book rose to 20% from 13% in the prior period.
An increase in expected credit losses due to the impact of the COVID-19 pandemic resulted in the doubtful debt allowance increasing significantly from 19.2% to 30.1% of gross trade receivables, and trade receivable costs increased accordingly by 55.7% to R1.6 billion (2019: R1.0 billion). Net bad debt and related costs increased 8.5% to R1.2 billion (2019: R1.1 billion).
Accelerating online sales
E-commerce performed well off a low base and sales growth accelerated rapidly during the lockdown and in the months that followed. In the period prior to lockdown, e-commerce sales grew by over 100% and post lockdown sales have grown more than threefold. E-commerce sales contributed approximately 1% to total retail sales for the period, up from 0.4% in the prior period.
The digital commerce business in Truworths includes orders placed by customers online and those placed by customers in-store via the Fashion Delivery service.
The online brand offering was extended during the period to include selected Loads of Living homeware product, cosmetics, fragrances, jewellery, branded watches and sunglasses. An e-commerce website will be launched for Identity in the 2021 financial period.
Customers continue to respond positively to the lay-by payment facility, with over 320 000 lay-bys being processed during the period, contributing approximately 2% of retail sales, compared to just over 1% in the prior period.
The lay-by (set-aside) offering allows customers to select merchandise and pay it off over three months. This gives non-account customers, who are unable to pay upfront or qualify for an account, access to Truworths merchandise.
Lay-by customers automatically become members of the loyalty programme and receive customer communication to encourage repeat purchases while also being potential future account customers.
Growing customer loyalty
Combined membership of the TruRoyalty (Truworths) and iDream (Identity) customer loyalty programmes increased by 2.3 million members to 11.1 million, including 3.3 million active and inactive account customers and 7.8 million non-account customers. All account customers, account applicants and lay-by customers automatically become loyalty programme members, while cash customers can join the programme at no cost.
The loyalty 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.
Managing account risk in 2021
Given the uncertainty that lies ahead, credit strategies have been developed to cater for several economic scenarios and these strategies will be adjusted as customer purchasing and payment behaviour becomes apparent in the months ahead.
Truworths will focus on the health of the account portfolio to manage the impact of higher credit losses arising from the economic downturn in the wake of COVID-19. Bad debts are expected to increase while the provision for doubtful debts is expected to reduce as bad debts roll through the portfolio. Interest earned on the book is anticipated to decline materially owing to the lower interest rate environment.
The impact of the one-month skip payment option granted to good-paying customers will take time to work through the system and the quality of the debtors book is expected to improve by the end of 2021.
Debt relief legislation
Debt relief legislation was announced in August 2019 aimed at relieving over-indebted South Africans who are unable to ease their debt burden. In terms of the National Credit Amendment Act the debts owed to credit providers by customers earning less than R7 500 per month with unsecured debt of less than R50 000 and who are considered critically indebted, can be extinguished by the National Credit Regulator (NCR).
No further details have been announced on the regulations required to implement the legislation. Truworths continues to engage with the Department of Trade, Industry and Competition, as well as the NCR, through the National Clothing Retail Federation, to propose workable alternatives to debt relief.