ACCOUNT SALES COMPRISE
of Truworths' retail sales
RECORD NEW ACCOUNT
(2021: 3.8 million)
ACTIVE ACCOUNT BASE
INCREASED 2.3% TO
GROSS TRADE RECEIVABLES
INCREASED BY 9.4% TO
(2021: R5.4 billion)
NET BAD DEBT TO GROSS TRADE RECEIVABLES
OVERDUE BALANCES TO GROSS TRADE
RECEIVABLES IMPROVED TO
EXPECTED CREDIT LOSS ALLOWANCE TO
GROSS TRADE RECEIVABLES REDUCED TO
TRUWORTHS HAS EMERGED FROM THE COVID-19 PANDEMIC WITH AN IMPROVED QUALITY ACCOUNT PORTFOLIO AND PAYMENT RATIOS IN LINE WITH PRE-PANDEMIC TRENDS.
The payment performance of the South African credit market during the pandemic was better than expected for most credit providers. While many providers curtailed credit granting over the past two years, Truworths continued to open new accounts, gaining market share of new accounts opened. As competitors have re-entered the market and are now growing accounts more aggressively, Truworths' market share has returned to pre-pandemic levels.
Truworths' account strategies were consistently applied throughout the pandemic, with predictive models being constantly monitored and adjusted. While the risk appetite and credit granting criteria remained unchanged, predictive models adjusted the percentage of customers offered accounts or limit increases.
The widespread damage to shopping centres during the civil unrest in KwaZulu-Natal and parts of Gauteng in the early part of the financial year, affected customers' access to stores to pay their accounts. The response from Truworths customers was encouraging, with many travelling much further afield to other stores that were still trading to make their monthly payments. This highlights the loyalty to the brand and the desire of customers to maintain good payment records to continue to buy our quality, aspirational fashion.
The macro credit environment deteriorated in the second half of the financial period owing to mounting pressure on consumer disposable income from rising fuel, electricity and food prices. Borrowing costs have been increased in response to the rising inflation, with the SA Reserve Bank raising its benchmark repo rate from 3.5% in November 2021 to 6.25% in September 2022 (refer to Retail trading environment).
The TransUnion Consumer Credit Index, which measures the credit health of consumers in South Africa, declined to 49 index points in the second quarter of calendar 2022 from 55 points in the first quarter, and down from 60 points a year earlier. The decline in the index reflects the deterioration in household credit health as higher living costs are adversely impacting domestic finances.
ACCOUNTS ENABLING MERCHANDISE SALES
Truworths uses credit to initiate an ongoing relationship with its customers in the mainstream middle-income consumer market. Truworths' strategy is to use credit as a tool to facilitate merchandise sales; this strategy differs from the traditional banking approach where interest and transactional income are key.
Many consumers in the middle-income market have limited access to traditional bank credit, such as overdraft facilities and credit cards, and are therefore reliant on store accounts to buy fashion merchandise. For many customers, their first credit exposure is with Truworths and they utilise the credit to not only purchase merchandise but also to start building a credit track record and profile. The Truworths account is low cost, with an annual account service fee of R42, and no initiation, club or magazine fees are payable. Financial services income constitutes only 0.6% of sale of merchandise in Truworths.
Account facilities are offered to customers across all Truworths merchandise brands in South Africa, Namibia, Botswana and Eswatini.
Payment options include offering customers 6, 9 and 12 months to settle their accounts. Customers are billed monthly and as long as they pay the minimum 90% qualifying payment of the amount due, accounts are not aged in terms of delinquency.
Customers who do not qualify for an account can make use of the lay-by (set aside) payment facility, enabling customers to select merchandise and pay it off over three months. This gives non-account customers access to Truworths' merchandise that they would have not been able to purchase for cash.
During the period a new, internally developed, financed and managed 'buy now, pay later' payment option was introduced, targeting consumers who do not want a traditional account and who prefer no interest on their purchase, with payment over a shorter period. This product fits between the Truworths account and the lay-by option. A deposit is paid up front with subsequent payments over two consecutive months. Results have been promising, testing is ongoing and the roll-out will continue based on collections performance.
ACCOUNT MANAGEMENT IN 2022
A major focus of the past year has been on the new account application process, with enhancements being made to the application, data capturing, opening and activation processes for new accounts.
New account management software was implemented, enabling a wider range of data, features and predictive models to be used in the customer decision strategy.
New technology has been implemented to enhance Truworths' ability to deliver an omni-channel experience to customers. This includes the introduction of a cloud-based e-commerce platform, which is integrated with a new customer engagement system. The point-of-sale system, which is currently being upgraded, will be incorporated into the central customer engagement tool when it goes live in the second half of the 2023 financial period.
Advanced analytics and machine learning are used pervasively across all aspects of customer and account management. Key levers in the process are modelled, including response, spend, risk, payment and recovery, and all these factors are incorporated into decision optimisation systems to determine the optimal account management action for each customer.
Chatbot software was introduced to support store customer service requests through automated online conversations instead of dealing with a live agent, resulting in a large reduction in call centre volumes.
Customer engagement across account acquisition, account management and collections is increasingly on digital media, in particular mobile phones. Accounts can now be opened on mobile devices while the majority of account payments on the e-commerce site are via mobile phones.
IMPROVED ACCOUNT PERFORMANCE
Truworths continued to experience strong demand for new accounts, with applications continuing to grow as additional channels are opened.
The risk approval rate declined from 21% of applications in 2021 to 19% in 2022 due to the increased risk profile of applicants and the channel mix. The percentage of account applications resulting in opened accounts decreased from 15% to 13%.
Gross trade receivables on the Truworths debtors book, comprising the Truworths, Identity and YDE books, increased by 9% to R5.9 billion (2021: R5.4 billion).
The number of active accounts grew by 2.3% to 2.6 million.
Account sales contributed 69% (2021: 68%) of retail sales in Truworths and active account holders able to purchase was consistent at 82% at the period-end. Overdue balances to the total debtors book improved to 14% from 15% in the prior period.
The expected credit loss allowance reduced from 23.4% in 2021 to 20.9% of trade receivables for the reporting period. The decrease in the allowance compared to the 2021 period-end reflects the improved account collections performance and expectations of future recoveries.
Trade receivable costs increased 11% to R851 million (2021: R768 million) while net bad debt decreased 32% to R661 million (2021: R969 million).
GROWING CUSTOMER LOYALTY
The TruRoyalty (Truworths) and iDream (Identity) customer loyalty programmes are aimed at attracting and retaining customers, while increasing both the basket size and frequency of shopping of account and cash customers. Loyalty programme members spend on average more than cash customers.
The combined membership of the loyalty programmes has increased by 2.5 million to 16.4 million, comprising 3.75 million account customers and 12.65 million non-account customers.
All account customers and account applicants automatically become loyalty programme members. Lay-by customers also qualify for membership of the loyalty programme and receive customer communication to encourage repeat purchases while also being potential future account customers. Cash customers can join the loyalty programme at no cost.
Members are offered a suite of exclusive benefits, including personalised merchandise promotions, additional sale discounts, vouchers and competitions.
DEBT RELIEF LEGISLATION
Shareholders will recall that debt relief legislation was announced in August 2019, aimed at relieving over-indebted South Africans who are unable to ease their debt burden. When the National Credit Amendment Act comes into operation, 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 on application and after due process, be extinguished by the National Credit Regulator (NCR).
No further details have been announced on the regulations required to implement the legislation and there have been no further developments on the status of the legislation in the past year. Truworths continues to engage with the Department of Trade, Industry and Competition, as well as the NCR, through the National Clothing Retail Federation (NCRF) to propose workable alternatives to debt relief and these proposals are being reviewed by the regulators.
Post the reporting period-end, Truworths has worked with the NCRF and its members to recommend changes to the proposed amendments to schedules to the Financial Intelligence Centre Act 2001. Engagement continues to take place with various government entities, including the Select Committee on Finance and National Council of Provinces in this regard.
ACCOUNT MANAGEMENT IN 2023
Enhancements to the new account process will continue into 2023, with a digital onboarding process being introduced, so customers no longer need to go into stores when opening accounts. In addition, the range of customer payment channels will be expanded to increase the number of customers making account payments using channels other than physical stores.