Not all markets friendly for Spar ‘wherever they are’
The year to the end of September was tough for Spar, as was the case for most local food retailers. Total group turnover rose by 5.3%, masking a mixed segmental and geographic performance.
Spar Group is one of SA’s largest food retailers. However, it differs markedly from its two main competitors, Shoprite and Pick n Pay, insofar as it owns few stores and makes its money through wholesale distribution to Spar franchisees.
Unlike the other two, it also has limited African exposure outside SA, preferring to seek incremental growth in Europe and, more recently, Asia.
It services a network of 3,768 stores, with 2,138 in SA, 1,330 in Ireland and 300 in Switzerland.
For the year under review, in the South African division, combined revenue from Spar and its TOPS liquor business grew by 4.9%. That is relatively poor in comparison with the growth of Shoprite (10.5%) and Pick n Pay (5.1%), and it’s safe to assume Spar has lost market share.
To support this, it is worth comparing Spar’s local turnover growth to Statistics SA’s retail sales figures, which for the year to September 2017 grew by 5.4% in real terms, or about 10% in nominal terms.
The rand-denominated turnover of the group’s Irish arm dropped by 11.1%, thanks to the strength of the euro versus the rand. On a constant currency euro basis, Ireland’s turnover only grew by 1.5% as Irish retailers battle deflation, which makes meaningful turnover growth difficult to achieve.
So, for South African businesses with offshore operations that lazily rely on the regular currency translation benefits of a constantly weakening rand, be careful, as the ZAR can sometimes show unexpected recovery and backfire as a dependable hedge.
Spar gross profit margin in SA dropped from 8.24% to 8.17%; in Ireland it rose from 10.82% to 12.11%; and in Switzerland, it leapt from 14.03% to 17.97%, where it is expected to stabilise. The South African margin has been flat for the past three years and could even contract slightly in the coming year, as the company continues to invest in price reductions.
At the results presentation, CEO Graham O’Connor tried to convince analysts that Spar has a price-competitive offering.
But that is not the impression of most consumers, who view Spar as expensive relative to Pick n Pay and Shoprite. It will be difficult in
an increasingly competitive marketplace to persuade cashstrapped South African consumers of the Spar brand’s inherent virtues and in turn may lead to difficulty in recouping the obvious lost market share.
Looking to Asia, the first Spar outlet in Sri Lanka is scheduled to open in 2018.
Management is optimistic about the prospects for trading in this country of 21-million people and an unemployment rate of only 5%. As is the case in many parts of Asia, Sri Lanka is not well-served by supermarkets and the potential to expand over time is good.
Spar has several appealing factors – a high-margin liquor segment, interesting geographic spread and a growing upmarket component of delicatessen and ready-to-eat offerings.
And in a declining rand environment, which may be the case over at least the next couple of years, the exposure to hard currency areas such as Ireland and Switzerland should hold it in good stead.
Additionally, it sits on a price: earnings ratio of 19.7 times that is not overly demanding in comparison to Pick n Pay at 25.3 and Shoprite at 21.5.
But it also has its detractions. An obvious risk is how to achieve overall sales growth and expand the number of franchised stores. All the while, the Shoprite behemoth gobbles up any weak spots in food retail.