The man leading SPAR

Angelo Swartz has been SPAR CEO for just over a year and has led the company through a significant overhaul, with the retailer refocussing on its core South African market.

The company is well-positioned to benefit from a Pick n Pay that has come under immense pressure in the past few years and leverage its unique operating model to take on Shoprite.

SPAR is South Africa’s second-largest food retailer in terms of revenue and store footprint, but it has been beset by operational challenges in its local and European operations.

The company has been particularly hard hit by the botched integration of a SAP enterprise resource planning (ERP) system and poor performances from its European businesses.

In the past financial year, which ended on 30 September 2024, the retailer managed to contain the impact of the failed integration on its distribution centre in KwaZulu-Natal and made significant upgrades to the system.

SPAR said that the new system has improved the visibility of pricing and subsidies for buyers and has addressed warehouse management inefficiencies.

This financial year also saw the implementation of a two-year plan to reshape its balance sheet, with SPAR saying it will complete its debt restructuring by the end of the calendar year.

As part of this, the retailer will dispose of its Polish business in early 2025 and review its operations in Ireland and Switzerland, which it acquired in 2014.

Its Swiss operations have struggled due to the high cost of living and expensive groceries, prompting many residents to shop across the border in neighbouring countries where prices are more affordable.

As a result, sales growth has remained weak, profitability has declined, and cash flow has been insufficient to cover the debt incurred for the acquisition, investment analyst at Camissa Asset Management Mohamed Mitha said.

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

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

As this played out, the retailer began a major IT overhaul at its South African distribution centres (DCs), beginning in KwaZulu-Natal.

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, Mitha explained.

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.

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

Angelo Swartz was identified as the man to lead SPAR through this difficult period and take on the Shoprite juggernaut in South Africa.

Swartz is an extremely experienced retailer, being at SPAR for over seventeen years and previously worked at Woolworths as a store finance manager for four years.

Starting at SPAR in 2007, he worked his way up rapidly from being a project manager to divisional managing director in KwaZulu-Natal.

Thrown into the deep end, Swartz has spent much of his time repairing the damage of the botched SAP rollout in the company’s largest business region.

“It really has been a misstep on our side and was not very well-handled initially,” he told Smart Money in an interview earlier this year.

“In the immediate aftermath of the rollout, we had three key issues. One being that our customers as storeowners felt the impact immediately.”

SPAR uses a decentralised franchise model, which enables it to function effectively as a wholesaler and distributor to stores operating under its brand, Mitha explained.

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

Thus, when disaster struck, many of its customers simply switched to sourcing products from other wholesalers to stock their shelves.

Swartz has said the impact on SPAR’s customers has been greatly limited. However, the company still needs to win back some of its customers.

Another impact of the botched SAP rollout was that the company had to increase its stock and inventory levels to mitigate the inefficiencies at the KZN DC. This carried a financial cost for the retailer.

Swartz explained that inventory levels at its KZN DC were around 200 to 250 million units higher than they would have been if it had been functioning properly.

Productivity at its KZN DC is now back to normal, and SPAR can reduce its stock and inventory levels. This should boost the company’s profitability in the current financial year.

Swartz has also led the sale of the company’s Polish business, which has been a significant drag on its financial performance.

In the financial year to the end of September 2024, the company’s profit after tax rose by 21% to R1.65 billion for the year. Headline earnings per share were up 11% to 917.9 cents.

This performance excludes the impact of the Polish business, which contributed a R1.3 billion loss for the year.

SPAR expects the sale of the Polish business to be concluded in January 2025 as it has received approval from the country’s competition authorities to complete the transaction.

“Our journey towards future-proofing SPAR and solidifying our status as the retailer of choice has gained strong momentum in recent months,” Swartz said.

Focus on growth

Swartz’s focus is now firmly on growing the company within its core market of South Africa, where the retailer is set to benefit from a misfiring Pick n Pay.

However, it will have to compete with Shoprite, which has gone from strength to strength in recent years and gained market share from its competitors.

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.

Swartz believes that SPAR has an edge from its independent retailer model, which enables it to tailor offerings to local communities through franchisees and be relatively capital-light during expansion.

Furthermore, SPAR’s food retail business has generated strong like-for-like sales growth in recent years, keeping up with Woolworths Food when indexed to 2019.

The company also plans to expand its product ranges to take a slice of the higher-income market from Checkers and Woolworths.

Simultaneously, it is going after Shoprite’s stranglehold on lower-income market segments by launching its value-focused SaveMore range and enhancing the efficiency of its DCs to drive down costs.

SPAR’s franchising model also enables independent retailers to source better deals from other wholesalers and to stock products that SPAR does not supply.

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.

Swartz has also been clear that once SPAR gets its debt under control, it is planning to acquire smaller retailers to help it win market share and expand non-food retail businesses.