Can Spar deliver against the tide of low-cost competition?

After offloading its loss-making Polish unit in January, Spar has put two more underperforming European operations — Spar Switzerland and the UK-based Appleby Westward Group — up for sale.

This time it shouldn’t have to repeat the Poland fiasco of paying a buyer to take the business, yet the R4.2bn impairment of the Swiss and UK assets shows that any sale proceeds will be modest. The real win lies in removing roughly R3bn of debt and easing leverage to about double earnings before interest, tax, depreciation and amortisation. This is still steep for a low-margin grocery wholesaler, but a clear step in the right direction.

Just as important, management can concentrate on a leaner portfolio, containing the South African wholesale engine, Ireland’s well-regarded BWG franchise network and a small, fast-growing foothold in Sri Lanka.

With market dynamics at home shifting, that management focus is sorely needed. The Spar model historically relied on independent franchisees moving lower volumes than supermarket chains yet charging a “convenience premium” for being situated close to neighbourhoods. But the very meaning of convenience is being rewritten by e-commerce: rather than spending time and money trekking to a shopping centre, consumers can now summon groceries with a few taps on a phone or clicks on a laptop.

Checkers Sixty60 has normalised 60-minute grocery drops in the country’s larger cities, and Amazon joined the fray in early June. For now, Amazon’s local grocery offer is limited to mainly Tiger Brands pantry staples, but its reach runs far beyond major metros and its prices undercut those of many rivals.

Globally, groceries are central to Amazon’s playbook: in the US they are its fastest-growing category and account for roughly one in every three items shipped. Amazon is content to run the segment on razor-thin margins because the real rewards lie in more Prime subscriptions, increased advertising revenue and a deeper reservoir of customer data.

Evidence of a market share squeeze was visible in Spar’s results for the half-year ended March. South African grocery and liquor turnover inched up just 1.1%, with the number of middle- and high-income shoppers shrinking, while stores aimed at lower-income customers eked out mid-single-digit growth. Yet thanks to tighter procurement, a better mix and disciplined promotions, South African operating profit rose 5.5% and gross margin ticked up to 10.7%. In other words, Spar made more money out of every rand it sold even as volumes decreased. That margin rescue, plus strong working capital management, lifted free cash flow to just more than R900m for the half and kept the dividend prospects alive for 2026, provided leverage keeps falling.

Amazon’s stated ambition is to be the lowest-price grocery retailer in every market it enters, and history suggests it is willing to forgo profit to win share

Bulls base their case on valuation: at the current interim run rate the shares trade at about 12.5 times forward earnings, noticeably below their long-term average, and cheaper than those of rivals Shoprite and Boxer. They can also point to the self-help levers still to pull: two more distribution centre conversions to SAP will automate forecasting and cut logistics waste; private-label penetration is rising; and the Build it hardware chain and the Spar Health pharmacy platform are both outgrowing core groceries. Spar CEO Angelo Swartz is guiding for a 2.1%-2.3% South African operating margin this year, stepping up towards 3% by late 2026 — a level that would translate into meaningful upside for free cash flow and, eventually, dividends.

The bear case centres on top-line fragility. Convenience, as traditionally defined, may simply be less valuable in a world where a broad basket of pantry goods ordered online can land on a customer’s doorstep the same afternoon, often at a price point a franchised store cannot match without eroding its own margin.

Spar’s wholesale and franchise model also complicates the rollout of its own on-demand service, Spar2U. Even though the platform is chalking up strong growth off a small base, competitors will pounce on any weakness. Amazon’s stated ambition is to be the lowest-price grocery retailer in every market it enters, and history suggests it is willing to forgo profit to win share. Checkers, Pick n Pay, Boxer and Woolworths are unlikely to stand still either. If Spar cannot restore volume growth in its home market — first-half foot count was under pressure even as basket size held — cost savings alone will not be enough to prevent operating leverage from turning negative again.

For many investors, Spar looks like a classic turnaround play. A slimmer, more focused portfolio, lighter leverage once the Swiss and UK exits close, and a management team that, at least so far, is delivering margin gains without losing retailer loyalty. However, the uncomfortable reality is that South Africa’s last-mile retail battleground is only getting hotter.

A forward earnings multiple of 12.5 seems attractive if sales simply recover to the group’s historic mid-single-digit growth rate, but should the convenience premium keep eroding under the onslaught of Checkers Sixty60, Amazon and other delivery platforms, that bargain multiple could quickly morph into a value trap. This is not a battleground for the faint-hearted.