Local is lekker again for House of Busby

02 JUL 2017

Most of the group’s 21 brands are international, but CEO Mark Sardi says the group will not acquire any more licensing rights for international brands

About two years ago, the House of Busby had about 300 stand-alone and concession stores, but the retailer hit the pause button on expanding when it picked up signs of a crisis in the retail sector.

“We regularly review our brand portfolio and adjust our brand mix dependent on market conditions and consumer preference. Those that don’t meet the return hurdles are placed in the departure lounge,” said Mark Sardi, CEO of the House of Busby, while strolling through Sandton City on Wednesday.

Warning signs included the stringent regulations that made it difficult to extend credit to customers, declining consumer confidence, limited discretionary spend and an influx of new global competitors.

Harder look at retail

As he visited the group’s new cosmetics store, 3INA (pronounced Mina), Sardi reflected on the state of the retail sector.

“All retailers are going to take a much harder look at their retail portfolio” and ask whether they should be in certain environments, they should move, or they should close down, said Sardi.

As if to underline his point, 3INA – a few shops away from competitor MAC’s store – had no customers when the boss stopped by.

The House of Busby, owned by private equity groups Ethos Private Equity and Sphere Holdings, has rights to top international brands including Aldo, Forever New, GUESS, Call it Spring, Kipling, Steve Madden, Karen Millen, Topshop/Topman and Tumi.

Most of the group’s 21 brands are international, but Sardi said the group would not acquire any more licensing rights for international brands.

“What we’ve got to do now is to consolidate and optimise what we have and then, when things start to reflate again, we get better and then look to our expansion.”

Just a few months ago the retail group closed down two of its brands, Mango and Nine West. They contributed less than 5% of the group’s total revenue, Sardi said.

“All the staff that were in those brands we redeployed to the rest of the business, and for a business like ours it’s normal to review them from time to time based on price, value and whether the business model works.

“We got ahead of this quite early and in September 2015 we had already looked and engaged to rightsize those operations and there was little to no impact on the rest of the business,” he said.

The group would look at investing in local brands, Sardi said, which included local production and greater strategic alliances with local factories that would help drive local manufacturing – and “allow us to mitigate the rand-dollar volatility”.

According to Sardi, 80% of internationally branded products for the House of Busby are produced offshore, but 60% of the products for its local brands are made in South Africa.

Alec Abraham, a senior equity analyst at Sasfin Wealth, said one of the issues for licence holders of international brands was that “you pay your way a lot”.

“Essentially you are buying wholesale and putting on a retail mark-up and paying a royalty fee and licence fee.

“It’s not as profitable as something that you own or have,” he said.

Brands such as GUESS were not as profitable as house brands, he said, which was the reason why MRP had decided not to sell any more brands at MRP Sports, and why Woolworths in Australia had ended contracts with brands as part of its turnaround strategy.

Abraham said House of Busby would have a lot more “pricing power and generally a much better margin with own-branded products”.

“I would imagine their pricing is cut-throat in the market at the moment and all you need now is to go even lower on margin [on own-branded products] because you are not paying royalties and licence fees.”

Sardi said the group’s youth market shoe brand, Call it Spring, was performing better than the other shoe brands, Aldo and Steve Madden which are at higher price points.

Danger of job cuts

Stefan Salzer, partner and MD at the Boston Consulting Group, said South Africa was an extremely price-driven market, which had forced retailers that were are not traditional discount retailers to offer lower prices. This had resulted in a price war.

Given current market conditions, Salzer said, part of the reduction of costs by retailers might include job cuts.

But when it came to the battle between local and international retailers, Salzer said it could be easier for local companies “because they know what’s happening and they can manoeuvre within the context of the economy, and they will certainly understand what is too much in terms of cuts and what is not enough”.

The House of Busby will look at deepening its local operations. Relisting on the JSE – it delisted in 2008 – may be part of this.

“I don’t think the market conditions are right to list, and for the retail sector there’s just too much noise … eventually, certainly,” said Sardi.

“It is an entity that was listed and at some point the shareholders that took the business off the market would want to exit, but I’m not sure if listing is the right thing right now.”