Jd Group Limited's Background

1. JD Group Limited's Background

JD Group Limited (hereinafter referred to as "JD Group") carries on the business of furniture and appliance retail (i.e durable goods). It also provides financial, insurance, micro-lending and debt recovery services, which is a secondary focus that became a separate business unit post the introduction of the National Credit Act 34 of 2005 (hereinafter referred to as the NCA) as well as contact centre solutions.

The company currently operates 1041 stores across South Africa and 74 stores in Poland, with the ultimate goal of being considered "world class" in the industry. The JD Group operates through 5 business divisions, namely:

• Traditional retail (main brands: Joshua Doore, Barnettes, Morkels and Russels)

• Cash retail (main brands: Hi-fi Corporation and Incredible Connection)

• International retail (single brand: Abra, operates in Poland)

• Financial services (provides credit to customers of the traditional furniture retail chains)

• New Business development (new financial services products)(2010 Annual Financial Report)

2. Shifts in the macro and micro economic environment

2.1. The broader economic environment and shifts in the last five years

Over the past 5 years major changes in legislation, monetary policy and the labour market have had a significant impact on how JD Group conducts business. Firstly, the introduction of the NCA has led to a decrease in access to credit by consumers, resulting in a decline of sales in the furniture retail industry. As a consequence, JD Group changed its operating model by severing the activities of retail from financing, as well as introducing affordability checks. JD Group repositioned itself in the middle market arena by becoming a traditional retailer focusing more on the value of the product and the consumer value for money.

Secondly, the onset of the recession and tremendous economic downturn, led to debt in South Africa climbing to an all-time high. As interest rates increased, the demand for credit decreased, disposable income decreased and bad debt write-offs increased. JD Group was forced to cut prices in 2008 which affected margins by 2.8% and decreased operating profit by R531 million to R111 million. As bad debt continued to increase, the company centralized their debt collection process to store level relying on the relationships between consumers and employees.

Thirdly, the labour market has seen a sharp spike in unemployment with wide spread industrial action. JD Group has announced the Art of Service initiative to provide quality customer service by continually enhancing the skills of employees. The initiative is a high priority and has been implemented in each of the 949 Traditional Retail stores.

2.1.1. Market structure

JD Group'scurrent market structure is that of a differentiated Oligopoly.Factors indicating that the furniture industry is an oligopoly include:

• The fact that barriers to entry are high

• Limited number of participants in the industry

• Product branding

• Interdependent decision making indicates that firmsidentify what competitors in the furniture industry will do to counter their actions

• Non-price competition wherebyfirms find other forms of differentiation e. g. free deliveries and installations, extended warranties etc.

• The positioning of JD Group's different brands is driven by a differentiation strategy and allows clients to enter at the lower end and migrate to the upper end as their diverse needs, aspirations and requirements change over time. (2010 Annual Financial Report)

2.1.2. Threat of new entrants

In order for firms to compete in the furniture retail market they require suppliers to produce products at the lowest possible cost in order for retailers to remain competitive. This has led to allegations of collusion between players in the industry.

The substantial capital requirements needed to enter the market and compete with the major players for market share makes it unlikely that any major retailer would look at this segment as being attractive. This is illustrated in figure 2.1 below