annual report 2009
Peter Meiring
FG Financial Services
FG Financial Services division manages the group’s in-store credit card programme, which consists of 14 different card formats. This includes managing the acquisition of new accounts, customer services, debt collection and recoveries as well as all the support services such as forensics and risk analysis.
This division also looks after the group’s interests in the Club and its associated magazines and insurance products. These insurance products include policies related to card loss, cell phone loss, personal protection and jewellery loss. In addition, certain group responsibilities relating to the procurement and management of cell phones as well as the direct sales of air time are included in this division.
The Customer Relationship Management (CRM) department which was established late last year has developed significantly. It too reports into this division.
REVIEW OF THE YEAR
Local and global economic conditions prevailing during the year were enormously challenging. Despite interest rate relief during the latter part of the year, interest rates remained high. Fuel and energy costs which rose substantially in the previous year reduced last year but this coincided with devaluation in the local currency. All of this created an inflationary environment, with food at the forefront. As a result, consumers experienced pressure on their discretionary disposable income, leading to higher levels of indebtedness. Many consumer lenders reported the outcome of this in terms of higher write-offs.
These conditions manifested themselves in several ways in the group’s retail portfolios. Those credit customers in a position to pay down their outstanding balances did so at a faster pace and some reverted to buying for cash. Other customers who were in some degree of difficulty looked to restructuring their debt obligations either directly with their credit providers or resorted to the Debt Review process as introduced under the National Credit Act (NCA).
Attracting new customers became difficult and encouraging those with available credit and good payment patterns to use this available credit also proved challenging.
In anticipation of these changing consumer patterns certain strategic initiatives were adopted early in the year to address impending issues. The initiatives included:
| 1. |
The establishment of the CRM department whose primary aims are: |
|
|
| 2. |
Introducing a 12-month payment plan as an option for new customers and customers who require lower instalments and in some instances more credit. |
| 3. |
Further expansion of the division’s collections capability in order to meet the increased levels of delinquency being manifest. |
The net result of these initiatives has been a positive growth in the number of active customers on the book, a 49,8% growth in profit contribution and a healthy debtors’ book.
| 2009 | % | 2008 | |
| Rm | change | Rm | |
| Interest income | 526,1 | 36,5 | 385,5 |
| Other income | 164,7 | 14,4 | 144,0 |
| 690,8 | 30,5 | 529,5 | |
| Net bad debt | (261,5) | 20,4 | (217,2) |
| Credit costs | (209,0) | 26,5 | (165,2) |
| Profit before tax | 220,3 | 49,8 | 147,1 |
INTEREST INCOME
When the NCA became effective the group converted its entire account base to operate under the framework and regulations of the NCA. Comment to this effect was made in last year’s annual report. This process was adopted to give the division a uniform method of dealing with both new and existing customers. As a result of this strategy all our customers are governed by a single published Foschini interest rate. This rate has been well below the NCA rate for the year and is currently marginally above the rate under the old Usury Act.
The weighted average interest rate for the year applied to customer accounts was 26,7%. 68% of accounts are now attracting interest (2008: 62%) resulting in a 36,5% growth in interest income.
Two factors influenced the increase in interest income. The first is the higher interest rates and the second a move to extended credit. In order to accommodate the growing number of customers preferring extended repayment periods, the 12-month plan was introduced as the default option for all new accounts. While the 6-month facility continues to be available to all customers, the 12-month product was well received and enjoyed a 90% take-up. The lower instalment requirements on the 12-month plan also supported the allocation of higher credit lines in many instances and as a result increased the account holder’s capacity to purchase.
On average there was an 8% shift between purchases on 6-month plans to purchases on 12-month plans.
OTHER INCOME
Insurance
Profit in this area grew by 45,3%. Much effort has gone into the telemarketing of insurance products across a spectrum covering jewellery, cell phone and card protection insurance. This product range was augmented by the launch of two new insurance products focusing on life and health benefits. These products were well received.
Club and Sports
The Club grants a range of benefits for subscribers who are holders of the group’s credit cards or those of the RCS Group.
These benefits include:
- automatic death insurance;
- account balances protection;
- medical and legal helpline;
- qualification in the monthly R300 000 draw;
- discounts at several retailers;
- promotional item discounts;
- bursaries to the value of R2 million per annum; and
- a monthly magazine with topics of interest.
Currently there are more than 880 000 paying subscribers of the Club and 95 000 of the Kids SuperClub. Club profit grew by a modest 1,7%. Club billings are heavily influenced by delinquency levels and in the prevailing economic circumstances billings have come under pressure.
A new niche Sports Club, together with an associated magazine, was launched in June 2008. The offering was well received and by the end of the year membership had reached 79 000 paying members.
Based on the success of the Sports Club, other niche offerings are being considered.
One2One
One2one is a discounted airtime offer sold through telemarketing and provides the convenience of an airtime contract linked to a group credit card. After rapid initial growth the profit from this source contracted by 9,7% during the year. This was attributable to the grant of increased product subsidies to deepen the market share and increase the attractiveness of the offering to consumers. Capacity was added to the telemarketing call centre during the year and performance improved significantly during the second half. Customer services resources are being augmented and a solid platform has been laid for a strong recovery during the next year.
NET BAD DEBT
In the collection process the division has remained focused on rehabilitating early-stage arrear accounts and returning them to a buying position. This has been a successful strategy which has yielded very positive results. Arrears improved from 25,1% to 24,2%. Although net bad debt grew by 20,4% compared to the net receivable growth of 12,3%, the contractual arrears state of the book looks to be on a positive trend.
Applicants for new accounts are evaluated against a combination of internal risk scorecards and credit bureau scorecards. Over the past period new account acceptance rates have dropped off from 60,0% in the previous year to 56,8%. The factors influencing this decline are largely related to the deteriorating consumer bureau scores which, in turn, are reflective of the reality of the current economic situation.
Write-off policy on bad debt remained consistent with the previous year. Non-performing accounts, defined as accounts whose payment profile scores and recency fall below fixed criteria, are written off monthly.
Fraud
Incidences of application fraud continued to increase over the past year. New fraud detection scorecards were introduced to allow us to isolate these fraudulent applications. The Foschini group processes many new customers who have no previous credit history on the bureau. Currently 43% of applications fall into this category. This high incidence of new customers to credit requires special management and we have long been at the forefront of customer education in this regard. This factor also necessitates specialised management of credit limits to avoid over-exposure to new accounts. We have developed sound and tried practices to manage the credit limits of these customers, limiting the incidence of application fraud to below three in 100 applications.
Debt Review
The Debt Review process is a mechanism created under the NCA to provide suitably qualified but over-committed debtors with a means to make application for debt relief.
The number of Debt Review matters being presented as new claims has escalated to an average of R2 million monthly. These claims are outsourced to a specialist credit review agency that evaluates each claim and follows up on objections and also negotiates terms on our behalf.
Often these debtors are not in arrears with the group but are in arrears with their mortgage, car or personal loan repayments. Despite legislation stipulating a resolution period of 30 business days, in practice these matters are taking much longer to resolve and also for payment to be received from the debtor.
An industry solution is being sought that should assist in resolving these matters more expediently.
All accounts in the Debt Review process are fully provided for in the net bad debt figures.
Provisions
The division continues to use the Markov model to identify inherent risk within its customer base. Markov relies on 12-month default roll-rates and predicts which accounts are likely to proceed to write-off. This information is used to create a provision for doubtful debts. In the past year the Markov model required a R31,7 million charge to the income statement as against R25,9 million last year. The doubtful debt provision now stands at R252,5 million, which represents 8,5% of the closing book compared to 8,3%** of the closing book in the previous year.
Net bad debt to credit transactions increased to 4,0% from the previous year’s 3,5%. Net bad debt write-off increased to 8,7% from the previous year’s 8,2%**.
** Restated to exclude credit balances in trade debtors.
CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
The Foschini Group has until recently treated customer relationship management (CRM) as an activity to be undertaken by the trading divisions individually. During the 2009 year a departure from the past was made and a new department was created to consolidate the CRM function into a central one providing services to all the retail trading divisions.
The new CRM department is headed by Kathryn Sakalis, who headed up the Foschini trading division’s marketing department for several years. She is assisted by staff members whose collective skills and backgrounds encompass the fields of marketing, design, brand management, communications, project management, research, database marketing, media planning, training and analytics.
The purpose of the CRM function is to attract, retain, nurture and grow the customer base with which the group does business, and so to increase sales opportunities, market share and loyalty, all with a view to generating additional profit for the group.
The new department has already undertaken various activities to extract benefits from the group’s possession of a large customer base. Local and international best practices have been thoroughly researched and a substantial three-year plan has been developed with the appropriate budget support. Care has been taken to avoid over-capitalising in complicated systems support for this area, a mistake which could easily be made.
One of the many benefits of centralised CRM is the ability to quantify the results of every CRM-initiated campaign undertaken anywhere in the group. A stringent process of analysis has been put into place to calculate return on investment from all campaigns undertaken, and then fine-tune the planning and execution of future campaigns in the light of experience. Since starting operations, the department has ensured that for every campaign planned, several options were tested, each time refining and enhancing the proposal in order to gain the best possible results.
As with any start-up activity, the department has had greater success with some campaigns than with others, but it has been able to measure and learn from each result.
Having available multiple vehicles to reach the customer base, the department uses different forms of communication according to the message and offer to be conveyed and to customers’ known preferences. The use of electronic media in various formats has proved exceptionally successful, particularly when used in multiple layers.
Emphasis has fallen in the first year of operations on customer acquisition and retention. The department has made successful invitational mailings and national drives for new accounts, resulting in a discernible growth in the customer base despite the difficult economic climate.
One can never know too much about one’s customers, and in line with the group’s customer-centric approach, analysis at depth has been done in a number of areas to enhance understanding of customer trends and needs in order to be in a position to provide customers with better service.
In addition, the department has heightened awareness of an important benefit that the group offers in its ability for customers to cross-shop across all 14 retail chains using any of the chains’ account cards.
It is expected that the focused, holistic approach which the new department brings to the group’s CRM, will accelerate the acquisition of new customers as well as leveraging off the existing base.
CREDIT COSTS AND CUSTOMER RELATIONSHIP MANAGEMENT
Credit costs rose by 26,5% as a result of the introduction of the CRM programme and the use of invitational mailings. The expanded collections and telemarketing capacity also contributed to the increase. Much of this cost was focused on CRM initiatives, particularly on new account acquisition. Although the growth of net active accounts was moderate at 3,8%, our analysis shows that in the absence of these initiatives growth would have been strongly negative, and the group would now have been trading with far fewer customers.
The positive results achieved in expanding our base of customers and adding new financial products to our offering has led us to believe that further investment in our telemarketing and CRM capability will position us well to deal with an upturn in the economy.
PROFIT
The year’s profit contribution increased by 49,8%, driven by greater interest income over bad debt and by a 14,4% growth in other income.
| 2009 | 2008 | |
| Number of active accounts (’000s) | 2 247 | 2 165 |
| Credit sales as a percentage of total retail sales | 61,8 | 63,6 |
| Net debtors’ book (Rm) | 2 746,3 | 2 445,6** |
| Arrear debtors as a percentage of debtors’ book | 24,2 | 25,1 |
| Net bad debt write-off* as a percentage of credit transactions | 4,0 | 3,5 |
| Net bad debt write-off* as a percentage of debtors’ book | 8,7 | 8,2** |
| Doubtful debt provision as a percentage of debtors’ book | 8,5 | 8,3** |
| Percentage able to purchase | 81,5 | 82,0 |
| * |
Including VAT, excluding movement in provision. |
| ** |
Restated to exclude credit balances in trade debtors. |
STRATEGY
The group will continue to focus on the acquisition of new accounts as well as exploring innovative insurance products and Club offerings. In addition, we believe that there are great opportunities associated with the division’s mobile telephony offering. During the next financial year the division will consider the possibilities of restructuring this area to recognise the growth in the mobile base as well as the capabilities that this medium offers in terms of staying in touch with customers.
PROSPECTS
The present economic situation continues to present challenges and as a result we believe that bad debt will continue to deteriorate at similar rates to those of the past year. We are anticipating a degree of retrenchment in certain segments of the economy and are presently modelling various scenarios and stress-testing our portfolios against these scenarios to determine where corrective measures in the form of adjusted credit criteria may be warranted. Our interest management strategy has been formulated to allow us to cover the anticipated growth in bad debt whilst still providing a reasonable return on the investment represented by the debtors’ book.
We do believe, however, that we shall see some easing off in consumer credit pressure towards the early part of the 2010 calendar year as the reductions in interest rates and government’s heightened infrastructural expenditure start to exert influence on the economy. Once these effects gain momentum we believe that the quality of our debtors’ book together with the growth initiatives launched this year should position us to take advantage of the better economic times.
