Spar continues to back its trading model
• Wholesaler defends its approach, despite stores facing lower profitability and cost pressures
Wholesaler Spar has defended its trading model, even as stores face lower profitability and growing cost pressures from the recent minimum wage increase and sustained load-shedding.
In SA and Switzerland, Spar acts a wholesaler selling food and liquor products to independent retailers who also pay it royalty and marketing fees.
In a pre-close investor call CEO Angelo Swartz was asked if the Spar business model, similar to that of a franchise model, is still relevant.
Questions have been raised among investors about whether SA grocery franchises are still sustainable after leaked court papers revealed a Johannesburg Pick n Pay franchisee with 10 stores and nine liquor stores lost more than R151m in 2023. Pick n Pay as a business is also struggling and some feel franchisees may be too.
Shoprite CEO Pieter Engelbrecht was asked about the franchise model at a results presentation and said the model was coming under pressure from nonfranchise retailers such as Checkers.
“Franchise as a concept in SA food retail is becoming more and more challenging because of how competitive the market is and how efficient the [nonfranchise] operators, [including the Shoprite group] are in the marketplace,” Engelbrecht said.
“So it becomes a tussle between the ability for the franchisee to actually make a profit and a decent return on their investment and the corporate or the franchiser’s [ability to make a return].”
Swartz said the company believed Spar’s model was the best system available to entrepreneurs.
“Our entire business depends on the voluntary trading model and therefore we are structured in a way that is most favourable to retailers. We believe that our offer is the most compelling combined with a well-developed, centralised distribution system entirely focused on servicing retailers and lots of support in terms of marketing, retail operations, IT systems and the like.”
But he admitted the profitability of retailers was under pressure as they faced rising costs.
Spar is investing in incentive systems to increase retailers’ loyalty so they buy goods from its warehouses, rather than directly from suppliers.
“We are planning on rolling out a new rebate scheme within the Spar system towards the end of the year, but we also have a strong promotional programme coming up in the next few months,” Swartz said.
Spar in a 20-week voluntary update to February 16 reported its SA grocery wholesale business increased sales 5%, but prices increased 7.2%. It is thus selling about 2% lower volumes of food in SA.
Its liquor business grew, with sales up 12.8% in the 20 weeks. Loyalty from retailers was also slightly down as retailers in KwaZulu-Natal are buying directly from food producers after a failed SAP software rollout at the distribution centre.
Improved profitability will take time. In the investor call, CFO Mark Godfrey said Spar would only return to an operating margin of 3% in the 2026 financial year.
In the 2023 financial year, Spar SA’s operating margin was only at 1.3%, compared with almost 6% at Shoprite and Woolworths.
Spar is in talks about exiting its loss-making Polish business in which it bought a retail franchise and wholesaler in 2019 for €1, taking on their debt, but has not made a profit.
It gave little away about the sale in the call, only revealing that it is happy with how discussions are proceeding.
The Polish business has R1.3bn in debt, which apparently will not be extinguished by the sale. The group is deciding whether some debt will be refinanced in SA, Switzerland or Ireland where it owns a business.
Spar management also appears reticent to move out of Switzerland despite extremely low profits of R113m in the year to end-2023 and declining sales. Chair Mike Bosman had been quite open to leaving Switzerland.
Spar reported a decline in turnover of 4.7% in Swiss currency terms in the 20 weeks to February 16. The Swiss division’s operating margin was 1.5% in 2023.
But Swartz said there are “no plans to exit Switzerland”. It would prefer improving the Swiss business’ profit margin over leaving.
Only after concluding the Polish disposal would it consider the future of the Switzerland business. Unless business profitability improved, it could consider exiting, he said.
In SA, Spar said it was likely to convert some Spar stores selling to lower-end consumers to the Savemore brand by end2024, making them more distinctively aimed at the mass market.
Spar’s share price was down 0.33% to R87, down just more than 25% in the year to date.