New Spar CEO Reeza Isaacs has some work to do to turn around the financially and operationally distressed wholesale group.
However, the former CFO of Woolworths is mindful of the challenges ahead and has already offered an early diagnosis of what went awry at Spar.
Isaacs, who took over from Angelo Swartz on March 1, has not blamed intense retail competition, the macroeconomic environment or depressed consumer spending. He’s looked internally and identified “own goals”.
“These are not market problems; they are execution problems, and they are fixable,” Isaacs told investors on June 10 after unveiling Spar’s interim numbers, underscoring that top-line and profit growth are constrained and debt levels are too high.
“We allowed our cost base to outgrow revenue for too long. We also failed to treat retailer profitability as our primary metric.”
Spar is not a fully integrated retailer; it primarily operates as a distribution and wholesale business, providing independent retailers, operating under the Spar banner via a voluntary trading agreement, with stock and support, while allowing them flexibility to source some products outside the group. This means independent retailers earn the gross margins, while Spar itself carries a large logistics and distribution cost base. Rising fuel and transport costs have posed a risk to profitability and, as Isaacs says, Spar has not been good at keeping these costs in check.
While the market was primed to expect a shock on the earnings front, the final numbers solidify that Spar’s blunders over the past four years are still haunting it today.
The blunders are: an ineffective Black Friday campaign that failed to deliver a return on investment as it cut into profits by a staggering R212m; a botched SAP enterprise resource planning implementation in KwaZulu-Natal that resulted in its customers (the independent retailers) abandoning ordering stock from the group’s distribution centre, cutting into profits by R123m; and tight cash flow resulting from money tied up in stock and unpaid bills.
These are not market problems; they are execution problems, and they are fixable
— Reeza Isaacs
“Hopefully, surprises like these are a thing of the past,” says Isaacs.
Spar’s group operating margin — a key measure of the profit a company keeps from its sales after subtracting operating costs — is 1.1%. A decade ago, this figure was above 3%.
Spar says it has a loyalty rate of 78.5% among its independent retailers. Loyalty measures the percentage of goods retailers purchase from Spar. The loyalty levels remain below its 80% target, implying that 20% of independent retailers in the network buy stock from other sources. The troubled KZN distribution centre achieved 70.5%, nearly 10 percentage points behind the rest of its regions in South Africa. This is something Isaacs wants to fix.
Another pressure point is smothering debt levels: group net debt increased by almost R2bn to R7.3bn.
Isaacs is no stranger to turnarounds. As Woolworths’s finance chief for 10 years, he helped turn the food business in South Africa into a dominant force, generating a large part of the group’s operating profit.
But there were blunders too. He was part of a team that approved Woolworths’s R21.5bn purchase of David Jones in 2014. After many turnaround initiatives, that deal bombed and eroded shareholder value as Woolworths sold David Jones for about R1.5bn — 93% less than what it shelled out for the business.
His turnaround plan at Spar has begun. A new leadership team has been appointed across merchandise, finance and regional operations, and a new marketing officer has been installed to fix the group’s promotional strategy and avoid repeating the Black Friday blunder. Other aspects of the plan entail “going back to retail basics”, including stronger procurement, pushing private-label products (usually a strategic powerhouse for sales growth and higher margins) and modernising retail systems and processes.
A more ambitious part of the turnaround plan is major investments in Spar’s on-demand service, Spar2U — a space dominated by Checkers Sixty60. Isaacs admits that Spar has “been late to the on-demand journey and, in some ways, we are playing catch-up”. Despite this, he believes that Spar’s independent retailer model — neighbourhood stores providing for daily needs and enjoying “good market share” — gives Spar2U a fighting chance.
The Spar2U service has already been extended to more than 600 stores and has entered an arrangement with Uber Eats to allow customers to order groceries, liquor and other daily goods from 500 Spar stores on that platform.
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