Spar battening down the hatches

At a Capital Markets Day presentation on March 12, retailer Spar delivered a message that was largely defensive, as management laid out its two primary strategic objectives: strengthening the balance sheet and recovering margins. However, both objectives face the same underlying challenge — weak sales growth.

Central to Spar’s strategy is a review of its European operations, which could lead to the disposal of its struggling Switzerland and UK businesses, while retaining its profitable Ireland business. Management said a decision on the future of these assets would be announced by June 30. The potential sale of the European operations brings the group full circle, as its debt load was accumulated largely through offshore expansion.

In the case of Switzerland, despite a NAV of R3bn that’s underpinned by owned properties, the business’s declining turnover could make finding a buyer at the right price challenging. As a result, any proceeds from a potential sale are likely to be fully absorbed by debt reduction.

The decision to potentially exit European markets is also influenced by a changing regulatory environment. New pension fund rules, which now allow local fund managers to invest up to 45% offshore, have reduced the need for JSE-listed companies to pursue offshore diversification. With this shift, Spar can now focus more on stabilising and improving its South African operations without the pressure of maintaining an extensive international footprint.

This renewed focus on South Africa is critical, as the business continues to struggle with weak sales growth in its home market. This, in turn, is making it difficult for Spar to deliver on its promised recovery to a 3% operating margin. In fact, given the disappointing trading performance in recent months, management admitted that achieving this target remains out of reach in the near term.

One factor weighing on profitability has been the troubled IT system implementation at the KwaZulu-Natal distribution centre, though management noted that this project has now been stabilised. Financial benefits from the improved system, however, will start to reflect only in the second half of the 2025 financial year. The full IT upgrade is expected to be completed by the end of 2027, with the Build it distribution centre being the next target for rollout.

A core challenge in Spar’s South African business remains the voluntary nature of its wholesale model, where independent retailers are not obligated to purchase from Spar’s distribution network. Over the past year, loyalty from these independent retailers in the core grocery and liquor segments has declined from 81% to 79%. One driver behind this has been the outperformance of stores serving lower-income consumers, where loyalty levels are traditionally lower. In this segment, sales growth has been robust at 8.6%, while the middle-income segment grew at just 2.2%, and the high-end market remained virtually flat at 0.03%. While all three segments contribute roughly equally to turnover, the middle-income segment remains slightly larger than the other two.

In response, Spar is pursuing a two-pronged strategy to address both ends of the market. To capture growth in the lower-income segment, the group plans to accelerate the rollout of its small-format SaveMor stores, which are more comparable to compact versions of Shoprite’s Usave than Pick n Pay’s Boxer. These stores are being introduced in rural and township areas where larger-format stores are not viable.

At the same time, Spar aims to defend its position in the high-end market with the introduction of Gourmet-branded store conversions, targeting Kwikspar outlets that already cater to more affluent customers or offer a niche product range. The Gourmet format will include partnerships with premium brands such as Vida e Caffè and Frozen For You. Unlike SaveMor, which is a growth initiative, the Gourmet rollout is aimed at improving profitability and differentiation rather than aggressive expansion.

Recognising the need for more proactive growth strategies, Spar’s head office will also play a more active role in identifying and securing new development sites for independent retailers. This approach is particularly focused on underrepresented regions, such as the Western Cape, where Spar sees significant growth potential. However, as a wholesaler, Spar remains limited in its ability to directly drive store expansion and must rely on its network of independent retailers to execute on these opportunities.

Management believe the recent weakness in Spar’s core South African grocery segment is not due to uncompetitive pricing, but rather poor public perception. They believe that consumers, particularly in urban centres, are not fully aware of Spar’s value-for-money offering and superior product quality, something they aim to address through improved marketing and advertising campaigns. The strong performance of lower-end stores, where price sensitivity is highest, supports this argument to some extent. However, the divergence in performance between urban and rural markets could also be due to heightened competition in cities, not only from traditional retailers such as Checkers and Woolworths but also from emerging players such as Checkers Sixty60 in the online delivery space.

National turnover figures paint a stark picture. Woolworths, Shoprite and Boxer posted strong sales growth in the latest period, with increases of 11.4%, 10.4%, and 10.8% respectively. In contrast, Spar trailed significantly, managing just 3.4% growth — enough to edge out the struggling Pick n Pay, which limped along at 1.6% — but a far cry from the leaders.

Beyond traditional retail, Spar is also looking to drive top-line growth through value-added services, including media retail, Flex, mobile and other adjacent offerings. These initiatives aim to leverage Spar’s extensive store footprint and customer base to generate additional revenue streams.

Adding further complexity to Spar’s turnaround efforts is the ongoing legal battle with its franchisee, the Giannacopoulos Group, a long-standing dispute that management have been unable to resolve through arbitration. With settlement discussions failing, the matter now seems destined for court, a process that could drag on for several years and continue to be an overhang on investor sentiment. During the presentation, CEO Angelo Swartz took an unexpected swipe at the media, claiming their reporting was “emboldening” the Giannacopoulos Group, though he offered little clarity on what he meant by this.

Ultimately, Spar’s strategy is clear: strengthen the balance sheet through the disposal of underperforming European assets while acting as an enabler to unlock the potential of its independent retailer network in South Africa. Yet, with rising competition, weak consumer spending and a stagnant domestic economy, Spar faces an uphill battle in regaining market share and recovering margins. Investors, who have seen the group’s share price decline steadily over the past five years, will be hoping that management’s strategy can deliver.