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Due Diligence on Strategic Tie-up between Ellerines Holdings and African Bank
Sample Deliverable
2
© RocSearch. All Rights Reserved.
The recovery in South African economy has been tempered by increasing inflation rates and a depreciating Rand resulting in falling consumer confidence
GDP and Per Capita Income (% Change)
Note: * FNB/BER Consumer Confidence Index (First National Bank/Bureau for Economic Research)
Source: IMF; Stats SA; South African Reserve Bank; news articles; Bloomberg
Inflation Rate (%)
Consumer Confidence Index*
5.5%
3.6%
-1.5%
2.9% 3.1%3.6%
4.0% 3.8% 3.6%
3.4%
2.5%
-2.6%
1.8% 1.9%2.4%
2.7% 2.6% 2.3%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e
Ch
an
ge
GDP Per Capita Income
3.7%
3.7%
4.1%
4.2%4.6%
5.0%
5.3% 5.3%
5.7%
6.0%
6.1%
6.1%
6.3%
6.1%
3%
3.5%
4%
4.5%
5%
5.5%
6%
6.5%
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
23.0
21.1
18.0
22.0
12.0
-6.0
-1.0
-4.0
1.0
4.0
1.0
6.0
15.0
14.0
15.0
14.0
9.0
11.0
4.0
5.0
5.0
-10
-5
0
5
10
15
20
25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2007 2008 2009 2010 2011 2012
ZAR Vs. US$, Euro and JPY (Indexed to 100)
70
80
90
100
110
Jan-11 May-11 Sep-11 Jan-12
ZAR/EUR ZAR/USD ZAR/JPY
South Africa’s GDP growth has been largely driven by strong domestic
demand and consumption expenditure
The Rand depreciated by more than 10% against the currencies of its
major trading partners
Inflation has been steadily increasing since 2011 due to increasing food
and fuel prices
Consumer Confidence fell sharply in Q3 2011, but has recovered
slightly, suggesting improving consumer sentiment
Sample Only- Disguised & Abridged
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Productivity Average Wage
Low High (Six times that of a Chinese worker)
High Low
Source: World Economic Forum; Reuters; Bloomberg; Businessweek
Temporary
Workers
Arbitration
and Dispute
Settlement
• Temporary employment is limited to
genuine temporary work that does not
exceed six months. Any employee who is
employed for more than 6 months will be
treated as a permanent employee with
corresponding benefits
• Additional protection is extended to persons
employed in temporary work and who earn
below an earnings threshold (set at the
Basic Conditions of Employment Act
threshold of R172, 000 per annum)
The South African labour market is regarded as rigid and expensive, withissues ranging from wage determination to general employer relations
• New amendments that deal with the
Commission for Conciliation Mediation and
Arbitration (“CCMA”) and its ability to settle
labour disputes
– These also include the provision to
exclude high-income earners from
bringing unfair dismissal claims to the
CCMA
Global Competitiveness Report 2011-12: South Africa
139
138
138
50
Hiring and firing practices
Flexibility in wage determination bycompanies
Labour-employer relations
Overall Rank
• South Africa performed reasonably well on the Global Competitiveness
Scale, finishing 50th among 146 countries and 2nd among BRIC
countries
• However, the overall ranking is not truly reflective of the structural
issues in the South African labour market, its high ranking contributed
primarily by its economic strength, strong financial markets, business
sophistication and other parameters
– South Africa was ranked lowly on labour-employer relationships
(138th), flexibility in wage determination by private companies
(138th) and hiring and firing practices(139th)
Key Provisions of the Labour Relations Amendment Bill 2012
Comparison of South African and Chinese Workers
Labour in South Africa
• High cost of labour: The recently (1Q12) proposed amendments
in the Labour Relations Bill outline that temporary employment
cannot exceed a period of six months and will have to be
converted to permanent employment after six months
– This may lead to an increase in the cost of labour as
permanent employees are eligible for additional benefits like
medical aid, pension funds and other allowances
• Rigid labour laws: On a global scale, the labour market in South
Africa is ranked low due to structural issues in flexibility to
determine wages and general employer-employee relations
Sample Only- Disguised & Abridged
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Production Agencies
Agency Locations Key Competency/
Specialization
Service by Media Type Exposure to South African Advertisers
Outdoor
(Print Only)
Indoor
(Video/Audio/Print)
Retail/CP1 Furniture Banking
• Johannesburg • Electronic media
• Johannesburg • Visual effects and animation
• Johannesburg • Electronic media
• Johannesburg • Motion media
• Johannesburg
• Cape Town• Electronic media
• Centurion • Electronic media
• Johannesburg • Graphic design specialist
• Cape Town
• Durban
• Johannesburg
• End-to-end print media
solutions
• Johannesburg• Outdoor banners
• Eco-friendly billboards
• Sandton• 3D animation and visual
effects
• Randburg • Post production solutions
Typical production agencies in South Africa appear niche players with some exposure to the consumer products and financial services sector
Note: 1) CP implies consumer products
Sample Only- Disguised & Abridged
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NVP handles all aspects of the production process
Source: NVP website; “The Annual Advertising 2011/12 Report”, Future Publishing House, 2011; news article
• NVP is a production company handling all aspects of the production process
from pre-production through to the final product
• The company specializes in high-end visual effects; animation; editing; final
mix; and scripting for the television and advertising industry
• New Vision is a part of the media conglomerate, New Vision Media
Business Description
• Headquarters: Johannesburg, South Africa
• Ownership: New Vision Media,New Vision
Holding having 60% stake in NVP
(NVH 60%, G Swanepoel 34%,
Others 6%)
• Employees: Permanent: 17
Freelancers: 32
• Website: www.nvpictures.co.za
Key Facts
• Damien Brown, CEO
• Hans Sedgwick, Joint Managing Director
• Graeme Swanepoel, Film Director & head of Creative• Average Cost of Commercial: R350,000
• Key Agency Worked With: Metroplitan Republic, Jupiter Drawing
Room
• Key Directors Worked With: Rick Leed, Producer of Home in
Provments, Dr 90210, What a woman
wants with Mel Gibson
• Biggest Commercials: MTN Samas, Merc, Citroën, Edgars
Key Achievements
• NVP was the first company in the world commissioned to produce content
for mobile
• It was the first production company in South Africa to produce webisodes on
behalf of a corporate
Featured Customers/Advertisers
Key Executives
Operating Highlights
Sample Only- Disguised & Abridged
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Advertising Agencies
Agency Locations Agency Type Revenue
(R mn)
No. of
employees
Revenue per
employee
(R)
Number
of Clients
Segmentation of Activities(1)
• Cape Town
• Johannesburg
• Integrated
communication
group
~ 42 ~ 100 420,000 19
• Johannesburg
• Cape Town
• Durban
• Full service
communication
agency
N.A. 724 N.A. 136
• Johannesburg• Full through-the-
line agencyN.A. 77 N.A. 11 N.A.
• Johannesburg
• Cape Town
• Durban
• Network of
specialist partners
worldwide
N.A. 623 N.A. 300+
• Sandton
• Integrated
communication
agency
30 52 576,923 16
• Johannesburg
• Cape Town
• Durban
• Brand
communication
specialist
40 296 135,135 77 N.A.
• Johannesburg • N.A. N.A. N.A. N.A. N.A. N.A.
• Cape Town
• Johannesburg
• Integrated
communication
agency
155 218 711,009 14
Most established advertising agencies in South Arica have created integrated solutions with Ogilvy and Draftfcb dominating the landscape
65%
35% Above-the-line
Below-the-line
60%
40%Above-the-line
Below-the-line
70%
30% Above-the-line
Below-the-line
60%25%
15%Above-the-line
Below-the-line
Brand Design
60%
40% Above-the-line
Below-the-line
Note: 1) Above the line advertising targets mass audiences using radio, print, TV, Out-of-home to carry the message. Below the line advertising
targets a limited or niche group and uses direct and focused communication to carry the message
Sample Only- Disguised & Abridged
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Operating through eight subsidiaries, King James offers integrated marketing & advertising solutions to its clients
Source: King James website; LinkedIn; “The Annual Advertising 2011/12 Report”, Future Publishing House, 2011
• Founded: 1998
• Headquarters: Cape Town, South Africa
• Ownership: King James Group (100% local
ownership, 26% black owned)
• Revenues: ~ R42 million
• Employees: ~ 100
• Website: www.kingjames.co.za
• King James Group is a South Africa based advertising and communications
company. Its offices are located at Cape Town and Johannesburg
• It provides solutions related to the brand strategy, design, promotional
marketing, CRM and mnemonic (web development)
Business Description
Operating Divisions
Key Services/SolutionsCompany
• RSVP is the design and promotion arm of King
James Group
• Atmosphere Communications is a corporate and
brand communications consultancy based in Cape
Town and Johannesburg
• Proof is a digital retouching and proofing studio
• One Small Seed is a South African media group that
consists of a quarterly print magazine, a blog, a
social network, online TV, a photography
publication, and a production company
• Punk is a provider of interactive marketing, strategy,
product development, design and advertising
services
• Hammer Live Brands executes strategically aligned
nationwide activations on behalf of premium global
brands
• Dare is a media strategy agency that provides tailor-
made channel solutions
• Society creates online and offline communities and
conversations for brands
65%
35% Above-the-line
Below-the-line
• James Barty, Group MD
• Alistair King, Group Creative Director
• Charles Matterson, MD
• Bruce Wright, Creative Director
• Agency Type: Integrated Communications Group
• Core Agency Discipline: Creative Idea Generation
• Preferred Media Agencies: Dare Media (for Strategy/Planning); The
MediaShop (for Buying)
• Number of Clients: 19
• Accounts Won in 2011: Nashua; Galaxy Jewelers; Diageo
Innovation Project
• Segmentation of Time Devoted
on Advertisement:
Featured Customers/Advertisers
Operating Highlights
Key Facts
Key Executives
Sample Only- Disguised & Abridged
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Increased allocation of marketing expenses towards Banking Unitactivities presents an opportunity for client to support ABIL further
Source: Company reports
Marketing Expenses Split by Business Segment
• Bottom Level: New and innovative product development like credit led insurance, introduction of ‘Interest Buster’ for credit card, introduction of consolidation loans, payment break etc.
• Middle Level: Changed the office layout to make it more convenient for the customers. Opened new stores, kiosks (111) and carve-outs (129) and used EHL stores to distribute credit cards
Introducing new
and innovative
products and
services
Improving
customer reach –
physical mediums
• Top Level: Introduced new channels of marketing the product and creating brand image
– The group organized 21 roadshows in 2011 to improve its brand image
– Set up a new and user friendly front end of the group’s website
– Introduced new services such as INSECONDS, loan-by-phone, mobile services and call centers
New
marketing
channels
23.3%
16.8%
12.2%
15.1%
76.7%
83.2%
87.8%
84.9%
0% 20% 40% 60% 80% 100%
2011
2010
2009
2008
African Bank EHL
Although, the retail unit has traditionally received more attention, ABIL started tweaking its marketing strategy for the African Bank unit in 2011
2008 2009 2010 2011
Marketing expenses
(R mn)168 189 161 176
Y-o-Y Growth - 12.5% (14.8%) 9.3%
Marketing expenses as
% revenue1.8% 1.6% 1.3% 1.2%
Revenue per unit of
marketing expense (R)56 61 79 87
Y-o-Y Growth - 9.2% 29.2% 9.9%
Marketing Expenses & Revenue
African Bank’s share of the marketing spend has almost doubled in the
last two years
Sample Only- Disguised & Abridged
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Segmentation1
Branding2
Product & Pricing3
Promotion4
• Re-defined its market segments
on the basis of customer needs
• Besides income, key parameters
used in this exercise were
lifestyle, tastes and preferences
• This was done to determine
brand portfolios and positioning
strategy
• Various brands were mapped to
each target segment
• EHL consolidated its previous
portfolio of 13 brands into six
brands and mapped them to
seven identified target segments
• Established unique identity of
each brand
• Conducts regular category
reviews to refresh range
offerings by brand
• This led to avoidance of product
duplication across brands
• EHL focused on:
– Product differentiation
– New product development
– Enhancement of quality
– Offering products at
competitive prices
• Revamped its merchandise
strategy to avoid “out of stock”
situation
• Entered into strategic
partnerships to provide products
from renowned global furniture
manufacturers
• EHL focused on aggressive
promotion through:
– Print media
– Social media
– Digital Marketing media
• Undertook new initiatives for in-
store promotions and better
customer service
• Innovated credit offerings and
made them available at low cost
to customers
Source: ABIL company presentations, 2008-2011
Brand Proliferation, No product
differentiation across brands
Overlapping segments Poor Quality, lack of innovation,
formula pricing
Ineffective promotion, lack of
analytics in focused promotions
Issues
Solutions
Ellerine’s marketing strategy was re-structured to rationalise its product portfolio and achieve cost savings
Since its acquisition by ABIL in 2008, EHL has focused on bringing a number of changes in its marketing strategy. Marketing audits have taken place
annually, leading to a number of changes over the last four years. These included introduction of new market segmentation, development of new
products, product differentiation and provision of credit at low cost
Sample Only- Disguised & Abridged
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Condensing the brand portfolio to 6 core brands enabled targeting of specific customer segments with a distinct value proposition
Note: 1) Data as on September 30, 2011
Source: “The Annual Advertising 2011/12 Report”, Future Publishing House, 2011
Brand
47%
11%
9%
7%
6%
21%
Overview
Share in
Merchandise
Sales1
No. of
stores1
Key
Products
Customer
Value
Proposition
Target Customer
Segment
Key
Advertising
Channels
• EHL has four brand names under this segment:
Ellerines, Town Talk, Furncity and Savells Fairdeal 627
• Household
Furniture
• Electrical
appliances
• Low cost
products
at credit
• Lower income
group and
mass market
• TV
• In-store
• Database
marketing
• Radio
• Strived to build a reputation for being a caring store
that offers the right product choice in a friendly
environment
217
• Household
Furniture
• Electrical
appliances
• Value for
money
• Middle class –
conservative
and typically
suburban
• TV
• In-store
• Radio
• Developed a reputation for its distinctive and
exclusive furniture
• During the last year, it incorporated McNamee’s
and Glicks furnishers into the fold, expanding the
product base
78• Household
Furniture
• Distinctive
Looks
• Status-
conscious
customer
• TV
• In-store
• Direct Mail
• Targets young people with bright personalities and
an interest in fashion. They are often techno-savvy,
sociable, and go-getters with great aspirations
• Uses a blend of traditional media, social media and
multimedia to communicate with each group
36
• Household
Furniture
• Electrical
appliances
• Affordable
Fashion
• Middle class
with a slightly
higher socio-
economic level
• Radio
• In-store
• It offers local designs, international decor items
and customised furniture
• Established a flagship store on Johannesburg’s
William Nicol Drive with a coffee shop and free Wi-
Fi
32
• Decor
furniture
• Household
accessories
• Living the
Lifestyle
• Higher income
group
• Expos
• In-store
• Brand originally focused on selling mattresses over
the phone but has now shifted to selling in-store
• Positioning focus is to offer products at such low
prices that small stores find it difficult to compete
• Provides 90-day comfort exchange policy
69 • Beds
• Best
brands at
best price
• Middle to
higher income
groups
• TV
• In-store
• Radio
Sample Only- Disguised & Abridged
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Note: 1) Total excludes 1,166 staff employed at central departments; 2) For advertising spend by companies, period considered is as follows: EHL and Lewis data is
for period October 2010 to September 2011; JD Group data is for year ending August 2011
Source: “African Bank Investments Ltd.”, HSBC, November 22, 2011; company annual reports; The Annual Advertising 2011/12 Report
Ellerine Holdings JD Group -
Furniture Retail
Lewis Group
Particulars of Furniture
Retail Segment
Ellerines Beares Furniture
City
Green &
Richards
Dial-a-
bed
Wetherlys EHL Retail
Total
Number of Brands NA NA NA NA NA NA 6 8 3
Number of stores 627 217 36 78 69 32 1,059 988 582
Retail Trading Space (m2) 351,754 152,354 62,681 61,121 19,836 55,056 702,799 496,372 231,184
Merchandise sales (R
million)2,191 994 401 513 300 311 4,710 4,963 2,290
Sales growth 14% 5% -15% -1% 0 -5% 5% 7% 12%
Sales/m2 6,299 6,524 6,398 8,393 15,124 5,649 6,702 9,999 9,907
Credit mix of sales 83% 69% 55% 53% 7% 0 64% 64.1% 71.4%
Employees 4,990 2,101 532 718 269 467 9,1371 9,233 6,842
Sales/Employee (R'000) 439 473 677 714 1,115 666 515* 538 335
Marketing Spend as % of
Revenue22.87% 2.88% 3.67%
Marketing Strategy• Target Group: The combination of 6 brands targets all segments
• Marketing Channels: Print, television, social and digital marketing
• Target Group:
Primarily targets the
mass-middle
market with a
secondary focus on
the entry- and top-
end market
segments
• Marketing
Channels: Monthly
catalogues, special
offers, event-driven
pamphlets, in-store,
club magazines
• Target Group:
Lower and middle
income groups
• Marketing
Channels:
Targeted
marketing
campaigns,
brochure
distribution, in-
store promotions,
customer loyalty
through
membership to
Lewis Club
EHL is also trying to increase its sales density, which lags its peers, by closing redundant stores & using trading areas more efficiently
Sample Only- Disguised & Abridged
12
© RocSearch. All Rights Reserved.
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