Small and medium business are in a particular squeeze right now as the quantitative easing measures from Government are not filtering down to them fast enough. In the United Kingdom, it is estimated that the economic impact of the coronavirus could lead to one in five SMEs running out of cash. In South Africa, Brendan Mullen from Secha Capital, whose biggest business is Stoffelberg Biltong, is an investment professional who has experienced the fall-out from the credit crunch in 2009. He says this time round the “war” as he calls it is not a Top Down one in the previous crisis; it is a Bottom Up War as the real victims are the SMEs. He told Alec Hogg that there should be a public-private partnership where credit lines can be extended quicker to keep the economy moving. The large supermarkets, he said should be more lenient with the smaller suppliers on payment terms. – Linda van Tilburg
Brendan Mullen joins us now. He’s from Secha Capital, an impact investing firm. Brendan your biggest business is a company called Stoffelberg Biltong or your biggest operating business. Now this is an interesting situation because we’ve heard before in the programme today about the township economy and the informal economy and how they’ve been hit by the lockdown but in, I guess, more formal businesses, but still small businesses, the impact here has also been pretty difficult and it’s primarily on working capital. Just take us through what’s been going on at Stoffelberg.
___STEADY_PAYWALL___
Sure, of course and thank you so much Alec for including me on this call. As you mentioned Secha Capital invests in small and medium enterprises rights, small but growing businesses and in this environment the fact that these local businesses that, you know Stoffelberg makes meat, Rush Nutrition makes energy bars. They are more important than ever based on the local supply chain but the issue that you’re addressing there is with the informal economy is, has it actually parallels with the companies that we’re seeing in the SMME market and I think it’s actually worth taking a step back. I worked at a hedge fund in 2009, you know, the last kind of great financial crisis and I think borrowing from that, that term, generals always fight the last war, right, the last war was top down because Wall Street and how it affected Main Street and what I haven’t heard a lot of people talk about is that this war is actually bottom up and it starts with Main Street and with Main Street what you need is not necessarily big government injections of cash, that’s crucial but it’s not sufficient, what you need help with is that working capital. If you’re going to stay working as Stoffelberg Biltong is, you know, they can shut down some fixed costs, they’ve closed some of the smaller retail shops but you want to still make this this kind of fast moving consumer product, you need that working capital and if customers are not paying or lines of credit aren’t extended, it gets stuck in the system and that is calamitous for the 75,000 SMMEs that are 60% of the South African labour force that’s almost a half the GDP, that’s what we want to focus on today. There’s some great ideas in place but what’s crucial on this is that this is different than 2009. This has to be, you know, lines of credit extended very quickly to keep that working capital, to keep the economy moving.
Has the Reserve Bank moved in the right direction with the announcement last week about quantitative easing and putting money into the system, on a miniature scale of what the US Fed is doing?
Yes, yeah, so moving in the right direction but I think what we’ve found, you know, again with ten years ago, it was going to take a little while to trickle down since we’re starting at the bottom here. Since we’re starting at the basic, you know, spaza shops or in case of Stoffelberg, a place where you get your biltong, your meat, the meat that’s on the shelves at Spar stores, at Clicks stores. You need to act quickly and that is being a little bit more innovative and maybe that means government guaranteeing lines of credit, major invoice discounters getting government guarantees. You need to get that capital into the system otherwise things will slowly but surely shut down because everybody’s getting tight and when it gets tight the SMMEs are the first ones to be affected and when there’s uncertainty, it’s very difficult to, you know, pay your full bill when you owe the Stoffelberg’s some money and then if Stoffelberg doesn’t get money from their customers, it’s difficult to then go buy the carcasses and the [inaudible] as inputs to turn into meat for you to consume on your dinner table tonight.
So where does the problem begin, just use Stoffelberg as an example, where would it start that it would actually create a working capital problem for your business?
Sure, so Stoffelberg has been growing 20/25% month over month over the last two and a half years, so that cash that it has been generating is not on the balance sheet, it is part of working capital. It’s paying for the inputs; it’s extended to their customers throughout this country. So unfortunately where it started was one of our primary customers who makes up a third of our revenue and yes, that’s absolutely a risk that we saw coming, it’s a major risk to have, such a major customer as part of your percentage revenue but they’ve delayed their payments by a week or two, they still don’t know and where did that start, well some of their smaller customers are trying to hold on to cash as you can understand and that just goes through the system. As again, as I mentioned, it’s kind of from the bottom up. If the payments of our major customers or for our wholesale customers are slowing down, even if they will come, the two weeks, we need to go buy that mean, we need to dry it, we need to ship it out to get on the shelves of Spar, of Pick ‘n Pay, so that’s where it happens, it’s when the rotation of the economy starts to slow down.
And how do you fix it?
And that’s why we need to act with with speed, I mean it’s a distribution issue and it’s a speed issue. Right, it’s not easy and again I would say I’m really impressed with the leadership of President Ramaphosa and a lot of the ideas in place but it’s just happening too slowly. This is one public and private need to work together. I think back to 2009 and it’s actually one of the reasons that inspired Rushil Vallabh and I had to start Secha Capital because capitalists [inaudible] desk and be the greatest catalyst for growth and innovation. Finance made some mistakes leading up to 2009 but it also, when you acted quickly, you could fix it, so I think here what we need is some government guarantees on major lenders. Lower rates, 12 month cheap credit done quickly to growing businesses so it’s the only way you can it out there. I think the focussing on salaries and rent, yes, that’s crucial but you can just shut down your business if you have kind of a, some people can, I don’t want to be dismissive. With some of our portfolio companies, it’s been a little bit easier for them to kind of shut down and wait but if you provide an essential product like Stoffelberg Biltong, like Rush Nutrition and you want to keep going, you need that working capital to continue flowing through the economy
So what role do banks play in all of this, what’s their critical role?
The critical role and we have a lot of credit with a major bank and they’re working from home and they’re taking any major meeting so they are slow to extend us additional credit so I do think a lot of people have been caught surprised by this as the entire world has which is totally fair but this is where people need to get together, the banks and even, you know, other invoice discounters. Now is not the time to be pulling back capital. We need to be extending these lines faster and with some confidence and so the banks are crucial, I think the banks could, are big enough to come in. As we’ve seen some leadership from the major banks too and then it would be helpful to have a guarantee from government. Yes, if there is an invoice, even if it’s small, it’s not Clicks but it’s a small distributor in Cape Town, we can guarantee that because we know that the economy will get back to moving sooner rather than later. I mean that’s what we need because when you ask specifically of Stoffelberg Biltong as we’re trying to make sure we can feed thousands of people on a daily basis. That’s what we need; we need the money to come in so we can turn that into more biltong and sell it off into, you know, into almost every LSM available in this country. Everybody likes meat, it’s a high protein, game meat is still healthy and we have some of the best in the business and also we can just turn it into mince. We have those capabilities having an abattoir, having a drying room, having the distribution capabilities. We just need to make sure that the capital is still going through the system so that we can provide these products.
Brendan what about the retailers, there’s often criticism that the big guys, Pick ‘n Pay, Checkers and so on, extend or don’t actually pay until they’ve pretty much sold the product that’s on their shelves. Is there not a role to be played by them as well?
Yeah, absolutely, just quicker payment terms. I mean we love working with Clicks but if you look at our cash conversion cycle with Clicks, it’s over 100 days. By the time we buy the meat, we make it, we drop it off at the DC, that’s when 60 or 90 days starts going on. Right now, still on the plus side, I think Spar, we have good relationships with them, we’ve been able to discuss terms with them. Pay as quickly as they can and they’ve been alright with it, so they do play a major role. Again, sometimes these organisations, when they are larger bureaucratic top down, it’s hard to ask, hey, can you pay me ten days sooner than you’d expected or can you, can we not do the back end payment terms at this point but let’s just focus on getting the shelves full. They absolutely have a role to play but I think that’s even a level up, it’s going to be the bulk breakers that buy from a Makro and bring to a spaza shop. That’s where I think it’s going to start so it will be our distribution customer, the people that run the trucks from here to Cape Town, they’re going to be the first ones to say, we need payment up front and that will cycle through the system. It really is, I think you’re right to talk about the major retailers, they have a role to play but this is a bottom up solution and it’s getting it to the SMMEs as quickly as possible because then I trust them. I mean these are entrepreneurs, these are traders. They know what to do with their working capital. This is not going to go anywhere but for keeping the wheels in motion.
But how do you physically get it there? I ask this because surely if there were a compact amongst the retailers, instead of paying 100 days, they pay everything 15 days because it is a crisis, that would put a lot of cash into the system.
That would be huge.
And they themselves can be supported in that perhaps by the banks who would extend facilities for them, so it would be more of a top up because to get the cash into the hands of smaller businesses the other way around sounds like it’s going to be quite a challenge?
I agree, so I think that’s a fantastic top down solution and then the other one is, is invoice discounting, is credit lines, is lines of credit done quickly, guaranteed for 12 months that are cheaper and these businesses already have them. I’m talking about the more formal that are doing anywhere from five to 60 million rand a year. The informal markets, I don’t have a solution for that, unfortunately and that’s how we play so I don’t have the expertise either though I think no less important if not even more so but yes, I think any kind of major corporate, they can pay upfront, they can tighten that cash conversion cycle. That will keep this economy going. Keep our supply chain secure and keep our shelves full.
And perhaps that’s the answer that should be discussed in these public, private partnership. Just get the big guys to start paying their accounts sooner and it will make sure that the credit doesn’t freeze in the way that it has. That was Brendan Mullen and he is with Secha Capital.
