Clever offshore acquisitions give Spar a boost — and vindication
When Spar Group decided to venture into the developed countries of Ireland, England’s southeast, and Switzerland some years ago, it was heavily criticised by analysts and the media. But this offshore move has undoubtedly brought a much-needed addition to Spar’s local SA operations, and solid results for the year to end-September have largely vindicated the management’s decision.
Spar Group is part of an association of global retailers called Spar International, headquartered in Amsterdam, which confers upon its members the right to trade in certain geographical areas in exchange for a fee. This global organisation is represented in 48 countries, operating out of 246 distribution centres and 13,100 stores. It has a combined turnover of €35.8bn (R587bn).
Spar Group on the JSE is the only listed Spar globally, and its components are notable players in the international network. Spar Southern Africa is the second-largest operator in Spar International after Spar Austria, with Spar Ireland in 10th position, Spar Switzerland in 17th place and recently acquired Spar Poland in 19th.
Unlike more conventional SA food retailers such as Pick n Pay and Shoprite, Spar has very few corporate-owned stores. Instead, its model is that of wholesaler and distributor of goods and services to independently owned Spar retail outlets. On rare occasions, Spar will buy stressed franchise stores from independent Spar operators, hold them for a brief time to prevent them falling into the hands of rival chains, and then reallocate the licence.
Its “voluntary trading model” allows franchisees to access its various brands and support structures, but also affords them the freedom to stock their stores from any supplier of their choosing.
Group turnover rose 8% to R109.5bn, while operating profit grew 7% to R3bn. Spar Southern Africa contributes 68% of group turnover, Ireland contributes 23% with Switzerland making up 9%. Gross profit margins vary significantly, 9% in Southern Africa, 13% in Ireland and 18% in Switzerland.
Headline earnings per share rose 17% to 1,129.1c, while the dividend increased 10% to 800c per share. Within Southern Africa, the standout feature was liquor retailer Tops, where turnover grew 18%.
Ireland was best regional performer, with a 10% rise in turnover to R24.8bn, up 6% in euro. Swiss turnover rose 6% to R10.4bn but declined 1.5% in Swiss francs, operating in a deflationary environment. However, there are signs of it turning the corner, with a noticeable improvement in the second half compared with the first.
Spar Group recently acquired 80% of the distressed Polish Spar business, Piotr I Pawel. This operation has a retail footprint of 66 supermarkets and a distribution warehouse. Spar is also finalising the right to operate the Spar brand in that country, which is the fastest-growing economy in Europe. There is opportunity to pursue a further 130 stores and Spar CEO Graeme O’Connor is optimistic about Poland’s prospects, as the country is currently underserved by formal supermarket chains, with 50% of retailing occurring in informal outlets.
SPAR IS NOT ONLY COMMITTED TO DEVELOPED COUNTRIES AND WILL GO TO WHERE THE GROWTH IS. POLAND IS RAPIDLY GROWING
Spar Group is not only committed to developed countries and will go to where the growth is. Poland is a rapidly growing emerging economy in Central Europe and if current growth rates are sustained, it will soon join the ranks of developed countries. The SA group also has a presence in Sri Lanka, for example.
Spar’s steady performance has resulted in its share price significantly outperforming food retailing rivals Shoprite and Pick n Pay. For the year to date, the Spar share price is relatively flat at about R202, while Shoprite has fallen 32% and Pick n Pay is down 8%.
Spar’s portfolio is now well balanced, with a steady, though perhaps unexciting, performance coming out of Southern Africa, strong growth opportunities in Ireland, a slow turnaround materialising in Switzerland and the potential for high growth from a low base in Poland.