“If I go back into my research into retail companies, I can recollect that this issue has been brought up time and time again over the years. There have always been threats of government investigations but in fact nothing has happened,” Syd Vianello, former retail analyst at Nedbank Capital, told CNBC Africa.
“This is the first time that we’ve actually seen something concrete come out of some research that’s been done and obviously what has now been exposed.”
Vianello added that the stark reality is that the credit-based furniture retailers were cross subsidising the profits on the sale of furniture and enhancing it alongside the profits from the sale of their credit insurance-type products.
“Maybe the Financial Services Board – because I would guess this is where the jurisdiction would lie – I guess they’ve had far more relevant other issues to investigate rather than go into this matter. It’s now come to a head, and something’s got to be done about it,” Vianello explained.
Some of South Africa's credit-based furniture retailers include [DATA LEW:Lewis], Ellerine and Price 'n Pride.
(READ MORE: Ellerine sale unlikely to affect ABIL's balance sheet)
While the various furniture retail groups have the same charge rates across the board, a significant concern, according to Vianello, is that the furniture retailers will find another way to produce the same level of profitability that they produced before. The insurance companies linked to the furniture retailers will however leave unscathed in the investigation.
“The cross subsidising is going to disappear, because if the government goes ahead and regulates the rates [furniture retailers] can charge, ultimately the price of furniture will have to go up. [This applies to] every single furniture retailer which sells this product, and that’s essentially all of the credit-based ones. The insurance company with whom they ‘contract’, is generally a wholly owned subsidiary of the furniture retailer in the first place,” said Vianello.
“[As] a credit-based furniture retailer, think of their profit line: profit from financial services, generally, that’s where the insurance line is, and that line item is normally the biggest single contributor to the bottom line. The insurance company is generally owned by the furniture retailer itself, so as far as the ‘traditional’ insurance companies, the Santam or Mutual and federal, they’re not affected.”