Spar vs the scooters

The full scale of the damage inflicted by wholesaler Spar’s ill-judged foray into Switzerland and Poland is only now becoming clear. Beyond the billions of rand in direct financial losses, these ventures diverted senior management’s attention at precisely the time when rising competitive pressures in South Africa required unwavering focus — leaving the group now having to play catch-up.

CEO Angelo Swartz nonetheless struck an upbeat tone when presenting the full-year 2025 results, arguing that the successful disposal of the Swiss and Polish assets represents meaningful progress in reducing debt and restoring balance sheet strength. It is, admittedly, a little like a pyromaniac congratulating himself for putting out fires of his own making — even if, in this instance, the flames were lit by Swartz’s predecessors.

The numbers support Swartz’s argument. Group debt has been cut by 40%, bringing leverage down to 1.74 times ebitda, and the ongoing operational drag from those two troubled offshore units has finally been eliminated. What remains is a far more streamlined group: South Africa now delivers roughly 75% of sales and 60% of operating profit, and Ireland supplies nearly all the rest. The only remaining outliers are a loss-making UK operation earmarked for disposal and a nascent Sri Lankan joint venture that is still immaterial in financial terms.

Not that the aftershocks have fully faded. The Polish exit, in particular, carried a hefty price tag. To get out, South Africa had to settle offshore loans with local debt. That hiked up interest costs and, unhelpfully, the interest on that funding is not tax deductible in South Africa because it is deemed “nonproductive” under local tax rules. As CFO Reeza Isaacs explained, net finance costs jumped 19% and the effective tax rate rose by 4.2%. The net result is an odd-looking income statement: operating profit from continuing operations rose 2.3%, but headline earnings per share fell 8.9%.

Neither the balance sheet repair nor the operating profit improvement is as good as it looks on the surface. Spar has shifted to a 52-week retail reporting calendar, meaning this year’s accounts closed a few days earlier than they otherwise would have. That pushed out some payables. Management concedes the early cut-off flattered net debt by about R800m-R1bn. Without that working capital tailwind, net debt to ebitda is closer to 2.2 times — not alarming, but high enough to be uncomfortable for a wholesaler whose South African operating margin is just 1.7%.

Operating profit growth also gives a somewhat misleading impression. The comparison is buoyed by last year’s botched SAP implementation, which plunged the KwaZulu-Natal distribution centre into a R300m loss that has now reverted to profit. It is low-hanging fruit, offering little evidence of sustained rejuvenation. That reality is echoed in the turnover numbers: South African revenue rose a muted 2.3%, while in Ireland it edged up just 0.6% in euro terms.

For Spar, the nub of the issue lies in its model. Unlike Shoprite or Pick n Pay, it is not a chain of company-owned stores; it is a wholesaler that supplies a network of independent retailers. The group owns the brand and the distribution centres, but the bulk of consumer-facing assets are in the hands of franchisees and independent entrepreneurs.

A decade ago, this model was an advantage. Spar could seed smaller stores closer to suburban middle-class and affluent communities at low capital cost, with franchisees tailoring ranges to local tastes. Convenience and proximity justified a pricing premium.

The only real pockets of growth are in Spar stores serving lower-income consumers, where online shopping has yet to gain meaningful traction

That equilibrium has shifted. The advent of on-demand grocery and liquor delivery has redefined convenience. Shoprite’s Checkers Sixty60 has conditioned urban consumers to expect near-instant, competitively priced deliveries from an expansive product range. When groceries and liquor can be summoned from a smartphone and delivered to people’s front door within an hour, the traditional convenience premium enjoyed by a Spar around the corner quickly evaporates.

The only real pockets of growth are in Spar stores serving lower-income consumers, where online shopping has yet to gain meaningful traction. Spar is attempting to tap into this segment through its Savemor format — a stripped-back, value-focused model aimed at price-sensitive shoppers. But penetration remains limited: just 61 of Spar’s more than 2,500 stores operate under the Savemor banner.

The strain shows in Spar’s margins. Operating margin in the first half came in at about 2%. In the second half it dropped to just 1.4% — uncomfortably far from the 3% target management has set for 2028. Asked to explain the drop-off, Swartz pointed to “a little bit of seasonality”, weaker profitability at the still-recovering KZN distribution centre in the second half, and, crucially, elevated bad debt charges after two large retail groups and a Build it defaulted.

Bad debts are especially problematic in Spar’s model, because the debtor book is enormous: trade and other receivables exceed R16bn, mostly amounts owed by independent retailers. When bad debts spike, as they did in the second half, it signals mounting strain across the retailer base. More troubling still is that these impairments appeared abruptly, without any prior provisioning — suggesting that the deterioration caught management off guard.

At the same time, Spar has had to lean heavily on promotions and marketing support to keep its retailers competitive — a defensive move to prevent market share erosion.

Against that backdrop, Spar’s push into omnichannel looks both necessary and challenging. SPAR2U, its app-based delivery platform, is now live at 636 sites, while 300 stores offer Spar and Tops via Uber Eats. Order volumes are up 136% year on year. But management refuses to disclose what percentage of South African retail sales now come from online delivery. COO Megan Pydigadu told analysts only that growth is strong and that SPAR2U’s fee structure is broadly comparable to peers, with Uber Eats taking its cut through product mark-ups rather than delivery fees.

That omission is telling. Shoprite has said publicly that Sixty60 already accounts for almost 10% of sales. Spar’s reluctance to give a comparable figure strongly suggests its online share remains much smaller, despite eye-catching growth rates off a low base. This means the disruptive impact of on-demand grocery is likely to continue weighing on Spar’s core suburban franchise until it becomes a meaningful player in this channel.

If the core grocery and liquor businesses are grinding through structural change, the adjacencies are the bright spots. Build it delivered retail sales growth of 4.3% and like-for-like growth of 6%, even as the hardware market cooled. The group is pushing the mix away from low-margin “wet” building materials towards higher-margin categories such as general hardware, plumbing and electrical. Pharmacy at Spar and the broader Spar health cluster are growing more briskly still: wholesale sales rose 8.6%, Scriptwise — its script management and patient support business — grew 20%, and loyalty in the health unit improved from 55% to 60%. Pet Storey, the new pet retail franchise, is tiny for now at 12 stores, but early take-up from retailers suggests healthy pipeline demand.

Capital allocation remains a key investor concern. Spar has been a reliable dividend payer historically, but for now, there is no dividend and no firm timetable for its return. When pressed, Isaacs reiterated that the group is “highly cash generative” and is reducing gearing but stressed that there are “still some lumpy SAP costs coming through” and delayed capex rolling into 2026. He indicated that buybacks are likely to come first, dividends later. “Our share price, we believe, is substantially undervalued,” Isaacs said, adding that buying back shares “might be the best way to create value for shareholders before we commit to a dividend policy over the long term”.

Management is emphatic that its model still has merit. “We serve a network of independent entrepreneurs, tied to their communities, and our role as a group is to empower them to succeed. Independent retailers can adapt faster, localise their offers and protect their customers.”

Ultimately, Spar’s experience stands as a cautionary tale for South African retailers contemplating offshore expansion. Retail is an unforgiving business, deeply shaped by local habits, market structures and cultural idiosyncrasies; what works in one territory rarely transplants neatly into another. Yet, judging by Mr Price’s recent purchase of a European value retailer, this lesson has not been universally absorbed. If any group has learnt it the hard way, however, it is Spar.