Connection Group believes in future of retail

By Phillip de Wet for Connection Group

Johannesburg, 12 Jul 2001

The Connection Group has reported figures which it says continue the turnaround the company achieved in its previous financial year.

While net profit was up only 4.8% to R13 million, profit before taxation was up 68% to R16 million, a discrepancy explained by a change in accounting policy for deferred taxes which led to the restatement of profit for the previous financial year.

Retail chain Incredible Connection was responsible for more than 80% of turnover and increased its own turnover by 11% for the year, largely on the back of new retail stores. Six stores were opened during the year, bringing the total number to 23. CEO Pierre Joubert says that could be increased to between 30 and 35, although the company does not plan a repeat of the 1998/1999 growth spurt which sent it heavily into the red.

"As a group we got into a lot of trouble and had to cut back on the business," he says. "We will approach it cautiously."

The immediate goal for Incredible Connection is to achieve R1 billion in sales during the 2003 financial year with a 4% return on sales. The company considers this to be critical mass.

Joubert says the stores did see a decrease in consumer spending on hardware, which makes up the bulk of turnover, but that price sensitivity has decreased slightly.

"The buying patterns are maturing. People`s dependency on IT is increasing, and they are spending more." He says second-time buyers are likely to pay more for a brand in which they have confidence.

He does not foresee Incredible losing its dominance in the direct retail arena, but says both general retailers such as Makro and Dion, which dabble in PCs and capture the lower end of the market, and one-man-band stores continue to claim a large part of the market. But Joubert believes both these and direct sellers such as Dell would have trouble eroding much of Incredible`s market share.

Enterprise Connection stabilises

Enterprise Connection, the business-focused part of the group, reported a turnover almost identical to that of the previous year, with operating profit down to less than R1.5 million. However, the company says its move from a box-dropping reseller to a provider of infrastructure solutions has been completed. It believes margins will improve, as will recurring income, as it targets mid-sized corporate customers.

"The process [of change] took us longer and cost more than expected," the company says of the profitability drop in its results.

Joubert says the box-dropping model was not sustainable, but that there is no intention of immediately going too big in the solutions business.

"Many companies make the mistake of moving too broadly into the solutions market," he says. Enterprise Connection is to focus on Microsoft and Compaq along with products from a handful of other vendors.

Ultimate Connection to go American?

Ultimate Connection, the software side of the group, contributed less than 2% of group revenue, but reported an operating profit nearly twice that of Enterprise Connection.

The company was disappointed at the loss of a major client, Marks & Spencer Lingerie, which closed all retail outlets in continental Europe during the year. But it says its ActiveRetail software has already been sold to a big clothing store chain in the UK.

Joubert says the Marks & Spencer loss was a disappointment, but that it had not been a complete loss. The software has been localised for Germany and France, and is ready for more sales.

"We have decided to focus heavily on Europe with the software," he says. Initial plans were to launch the product in the US during the 2001 year, but that has been postponed indefinitely. "The timing of a launch in the US is a function of the progress in Europe," he says.

The African continent also may prove a high-growth area for Ultimate, as South African retailers increasingly expand northward.

Yet despite the high margins and easy expansion of the software business, Ultimate Connection is never expected to be the flagship group company.

"The bulk of our turnover is always going to come from Incredible," Joubert says.