It was something of an understatement to describe Spar’s 2023 as “challenging”, as nonexecutive director Trudi Makhaya did. Six of the group’s directors retired or resigned, including chair Graham O’Connor and CEO Brett Botten; five new directors were appointed, including a new CEO and a COO. Two more nonexecutives are set to join next month.
The company is also selling its Polish business, forcing a R444.2m impairment of goodwill. A new SAP IT system turned out to be an expensive failure, costing R1.7bn in lost sales and R780m in lost profit. That’s before any compensation that might be paid to the independent retailers who lost sales or were forced to use more expensive suppliers.
Mark Huxtable, the group’s technology chief, who selected and implemented SAP to replace the Sigma back-office software, quit in September. The sudden nature of his departure suggested he was regarded part of the problem, not part of the solution.
Spar’s integrated annual report ranks SAP as its second most significant strategic risk, after the possible costs of leaving Poland.
The SAP rollout is on hold and being reviewed. “This includes a review of whether the technology solution, as initially envisaged, is correct for the business,” Spar said. The board is being advised by an independent service provider “whose team includes SAP implementation expertise”. They will have to move fast or, at the very least, risk the permanent loss of business in KwaZulu-Natal.
The rollout reflects management’s cavalier attitude to the independent retailers and is at odds with the board’s gushing statements that these entrepreneurs are the core of the business.
And then there were the interest rate hikes, which hit all the group’s operations. The weighted average interest rates in Ireland, with a hefty R3.3bn of debt, shot up to 4.2% from 1.7%. In Switzerland, where interest rates rose to 2.1% from 1.4%, the business is loaded with R3.4bn of borrowings. Both countries’ debt is ring-fenced and serviced entirely by the local operations, but any extra payments to the banks mean that much less for shareholders. In South Africa and Poland interest rates also shot up — to 4.8% from 2.2% on Poland’s R1.4bn debt and to 6.9% from 6.2% on South Africa’s R130m.
Given all the bad news, the share price has held up well, but it’s difficult to imagine investors will tolerate further unpleasant surprises
Not forgetting the sluggish local economy and load-shedding, which cost the independent retailers R1.1bn in diesel.
And still, the plunge in return on equity to 4% from 23.4% in financial 2022 was a shock. It probably tells us all we need to know about Spar. The new directors and executive management team are going to have to work hard to get the business on the road to recovery.
Given all the bad news, the share price has held up well, but it’s difficult to imagine investors will tolerate further unpleasant surprises. This means the board needs to ensure all the problems are in the public domain and being dealt with by a refreshed leadership team.
In light of all that has dogged the company in recent years, many shareholders will struggle with the R25m Botten was paid for the four months he served in financial 2023. The package did include a lump sum of R12.7m and there were gains of R7.3m on his share options. Still, it’s a generous package considering what Botten is leaving; it was probably influenced by the desire to avoid a legal battle and by the total length of his tenure at Spar, 28 years.
Makhaya, who is interim chair of the social, ethics & sustainability committee, refers to an increase in whistleblowing reports resulting in numerous investigations having to be done. “Some of these investigations are still ongoing,” she says, but gives no details.
Still, it’s encouraging that the board now appears to be taking whistleblowers seriously. In early December 2023 it emerged that in October 2021 three directors ignored a whistleblower’s letter warning about potential problems with the SAP implementation.
Chair Mike Bosman said the letter did not indicate corruption. However, note 42.4 to the annual financial statements describes a conflict of interest between a former member of management and a “consultant” dealing with the SAP contract. In light of the recent high-profile prosecution of SAP South Africa by the US department of justice, shareholders must hope this is rigorously investigated.
As the board notes, there are many reasons to invest in Spar. It provides exposure to groceries, pharmaceuticals, liquor, building materials, offshore operations and, critically, the entrepreneurial drive of independent retailers.
But right now, as the group’s annual report highlights, there are probably more reasons to be wary of investing in the group.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.