Retail

SPAR going from zero to hero 

SPAR is beginning to emerge from troubled times. In recent years, it has been plagued by a botched software integration and a costly European expansion that has not performed as expected. 

Historically, SPAR has been known as a consistent compounder of earnings and has held its own against the retail juggernaut of Shoprite.

With over 2,000 grocery and liquor stores nationwide, the retailer has the second-largest footprint of any South African food retailer. 

Since its launch in South Africa in 1963, SPAR has been known for its convenience, quality products, and community-focused stores. 

However, in recent years, its image has been tarnished by the botched integration of a SAP enterprise resource planning (ERP) system and its poor European acquisitions. 

The SAP integration is a once-off event that the company has contained, with significant upgrades made to the system. 

SPAR will begin rolling out the new system at its other distribution centres throughout the next financial year. 

While the impact of this integration has been contained, the run of poor acquisitions abroad is a more fundamental concern. 

Following its success in South Africa, SPAR went offshore in 2014 and capitalised on the low cost of borrowing in Europe to buy up operations in Ireland and Switzerland. 

Mohamed Mitha, an investment analyst at Camissa Asset Management, said the Irish business has performed well, nearly tripling profits in eight years to deliver a return above its cost of capital.

Its Swiss operations have fared poorly due to the high cost of living and price of groceries, with many residents resorting to cross-border trips to shop in neighbouring countries, where prices are lower. 

The result has been anaemic sales growth, declining profitability and minimal cash flow to service the debt that financed the purchase.

Mitha said that its expansion into Poland has been the group’s most problematic to date. Purchased for just one euro, the group took over the existing debt and invested heavily in the ailing business. 

SPAR Poland has had low retailer loyalty and operates a sub-scale DC – generating significant losses and high-interest costs from its mounting debt burden. 

With fewer than 200 stores and under 2% market share, management overestimated their ability to turn the business around and grow it. 

Smart Money - SPAR CEO Angelo Swartz
SPAR CEO Angelo Swartz

The strain from the high debt balances of the Swiss and Polish operations has been exacerbated by the higher interest rates in Europe. 

Additionally, the offshore debt has ballooned in rand terms as the rand has sharply weakened, and the debt has recourse to SPAR’s South African cash flows.

Amid the strain from its foreign debt and losses in Poland, SPAR began a major IT overhaul in South Africa, replacing an old system used to run its distribution centres (DCs). 

The new SAP system was implemented at SPAR’s largest DC in KZN, resulting in major challenges for the company. 

Fulfilling orders to retailers was extremely challenging, compounded by staff being inadequately trained to deal with such a scenario. 

SPAR had to resort to encouraging their KZN retailers to source products from other suppliers, leading to a drop in loyalty. Some bigger SPAR retailer groups opened accounts at rival wholesalers, businesses that SPAR is still fighting to win back, Mitha said. 

The sharp drop in their earnings from the South African business combined with growing foreign currency debt led to SPAR breaching its debt covenants. 

At the same time, SPAR’s largest competitor, Shoprite, went from strength to strength and is consistently gaining market share from other retailers. 

The Checkers brand has thrived with the success of Checkers Sixty60 and the launch of smaller store formats like Checkers Foods. Mitha explained that these initiatives challenge SPAR’s convenience proposition. 

Source: Camissa Asset Management

The comeback

SPAR has made vital progress in repairing its weakened balance sheet, and the looming disposal of its Polish operations before the end of 2024 should stem annual losses of around R500 million. 

 Mitha explained that they could raise cash by selling non-core properties or conducting a sale and leaseback on their local DCs and truck fleet, potentially releasing up to R2.4 billion.  

The underperforming Swiss business is also under strategic review, which could further reduce debt if sold.

SPAR’s new management is also taking steps to improve performance in its core South African grocery division by changing consumer perceptions of high pricing. 

New product ranges, including the premium Signature Collection and value-focused SaveMore range, have been launched together with a revised customer rewards platform. 

Despite the intense competition and operational difficulties at a warehouse level, SPAR’s like-for-like store sales growth has remained strong, keeping up with the formidable Woolworths Foods when indexed to 2019. 

Mitha said Camissa is encouraged by the recent strengthening of SPAR’s board, which has addressed governance issues such as conflicts of interest and ignored whistleblower complaints while repairing relations with aggrieved store owners. 

SPAR also has considerable competitive advantages, with its franchising model enabling it to function almost as a wholesaler and distributor to stores operating under its brand as opposed to an integrated retailer. 

This system also enables independent retailers to source better deals from other wholesalers and to stock products not supplied by SPAR. 

SPAR’s business model of independent store ownership offers strong financial incentives to store owners who directly participate in their operational success. 

This is a strong motivator given that the financial upside is uncapped, unlike for corporate-owned grocery store managers. 

Owners have the freedom to tailor operations, customise their store’s appearance, offer high levels of service and adapt stock to local needs.

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