Spar has a simple and robust recipe for success
THERE is a meme going around that says 2020 is a unique leap year: February has 29 days, March has 300 days, and April 5 years. This is so true!
Every week now feels like a year, considering everything that happens on an hourly basis. A lot has changed, most of us used to be allergic to grocery shopping, and now it is the highlight of the week. Everyone loves it. It makes sense that these shops must be beneficiaries of the coronavirus in some way. Obviously, they are only allowed to sell essential goods, while their clothing, liquor and household goods are gathering dust.
In South Africa, nobody can eat takeaways or restaurant food, and the grocers at least have the prospect of selling more food and have some form of compensation. Many other companies are hulled in uncertainty and have no way of predicting their chances or future opportunities.
The SA Reserve Bank (SARB) is now projecting an economic contraction of more than 6 percent for the full year for the country. Uncertainty of when and how exactly we will be coming out of lockdown, and how it will affect the economy and businesses in general, is uncertain.
Against this backdrop, companies’ earnings prospects remain opaque, and finding safe havens is more complicated. Quality stocks with proven resilience and secure high-quality dividend yields are worth considering. Local food retailers might benefit, but it remains to be seen what their foreign operations will bring to the table. The one exception might be Spar, with their offshore businesses in relatively good health.
Spar’s expansion internationally includes Ireland and Switzerland, and more recently Poland. The weaker rand might be positive for their foreign earnings, which constitute about a third of their revenue. Poland is an exciting opportunity, since it is probably not valued by the market at all and not reflected in the share price.
Spar SA acquired 80 percent of the Polish Spar business Piotr i Pawel with 66 stores. They have the Spar licence for Poland, and are expecting about 150 of a possible 250 stores to be signed on in the next few months. For this financial year, Spar still expects an operating loss, but by 2021 to break even. The future looks rosy for the Poland operations, with management anticipating that Poland will reach the same size as their Irish operations, which currently contribute 28 percent of their operating profit.
Poland has an attractive retail consumer market, with family-orientated grants and minimal wage growth of 15 percent for the next 12 months, which is highly correlated to retail sales growth. Before the coronavirus outbreak, Poland was among the fastest-growing economies in the EU, according to the World Bank. Household consumption, fuelled by increases in budgetary expenditures, a tight labour market, and rising wages, continued to grow. This, together with continuing low-interest rates and the execution of European funds-related investments, helped Poland’s economic growth prospects.
Spar Group on the JSE is the only listed Spar globally, and Spar Southern Africa is the second-largest operator in Spar International after Spar Austria. Spar has a simple, robust model, with a market share of about 30 percent of the local food and grocery market.