Can Spar finally stop tripping over itself?

At the end of a week during which Spar announced a 72.6% plunge in operating profit at its Southern African division, the group’s share price was up 2% to R52.13.

This, after the operating margin slumped to 1% in the six months to end-March and headline earnings per share plunged 56%; sales edged up 4.6%.

Even more remarkable, within hours of the grim interim results being announced, the share briefly touched R55 before easing back – perhaps giddy from the altitude.

Senior analyst Alec Abraham of Otto1890 says the past week’s volatility is down to two opposing analyst camps. “About half of them are warning investors to stay away because there’s too much execution risk, the other half reckon a new management team has put forward a plausible remedial action plan,” Abraham tells Currency.

According to Abraham, the bullish team reckons management is at least concentrating on the problems and believes the downside risk is now minimal. Minimal, in the context of the share having slumped 70% over the past five years and a dizzying 52% over the past year alone. In Spar’s world this means the good news is that investors can only lose R52 from here.

Abraham, who hasn’t been a Spar fan since shortly after the share price dipped below R200, isn’t buying into the “minimal risk” argument. He reckons execution is far from certain.

Missteps and surprises

It’s not as though new CEO Reeza Isaacs attempted to gloss over the group’s existential challenges. He and CFO Megan Pydigadu spent much of the results presentation outlining them in detail. Chief reasons for the appalling Southern African performance were mismanagement at the blighted KwaZulu-Natal distribution centre (DC), as well as the bungled handling of the Black Friday promotional campaign. The combined impact was a R200m-plus hit to operating profit.

“Disciplines, processes and accountability is not where it needs to be,” Isaacs told analysts at the presentation, “hopefully surprises like these are a thing of the past.”

The problem, for those concerned about execution risks, is that Isaacs refers to these problems as missteps and surprises, making it sound as though they were unusual developments in an otherwise smooth functioning system. That hardly seems credible.

The KZN DC has been a source of much destruction for the past few years. The value-destroying rollout of the SAP system back in 2023 demonstrated that few people seemed to know what was actually going on there. If anyone had known – and, given what was at stake, it was surely incumbent on the board members to know – there’s little chance the SAP rollout, which set the company back R1.6bn, would have been attempted.

Three years later, management at the DC thought it would be a good idea to “drive top line and loyalty hard” despite not having the necessary warehouse and fleet capacity. The result – R123m of operating profit wiped out. This doesn’t sound like a misstep; it sounds like a systemically badly managed DC.

And the three consecutive months of profit achieved during a quiet trading period (January, February and March) will not be sufficient to turn the pessimists.

Pity the independent retailers

Similarly, the mismanagement of the Black Friday campaign can hardly be described as a misstep; it was a prolonged strategy that had no benefit for the independent retailers. The result: overspend of R152m and an operating profit hit of R60m.

If head office management had been listening to the independent retailers it would have heard their warnings about the group’s promotional strategy instead of having to wait for the damage to become horribly evident. How galling it must be for the independent retailers, whose hefty fee payments to Spar help to fund these promotional activities.

Yes, let’s not forget, it’s not just Spar shareholders who are losing out. Spar’s independent retailers are being pushed to existential limits.

If Spar’s warehousing, logistics and promotional activity is dysfunctional, it’s the retailers who are the first to know. They feel it almost immediately. So, it’s hardly surprising the specific impairment charge was more than doubled to R273.1m from R112.5m. How are independent retailers expected to survive with this sort of service from Spar? Particularly given the tough competitive environment in which they operate.

Which is why it really is amazing that the loyalty figure is as high as 78%. (That’s 78% of grocery and liquor goods that are purchased from Spar’s DCs or approved drop-shipment suppliers.)

Playing catch-up

And what must the independent retailers make of Spar’s plans to overhaul the Spar2U delivery service in a belated bid to catch up with Checkers Sixty60? Will retailers be required to invest in the initiative only to discover that Spar doesn’t have sufficient capacity to back them up?

Isaacs tells Currency that Spar2U was developed to assist retailers, and the Spar group has invested significantly in the technology, infrastructure and operational support required to build and operate the platform. “Retailers can access 2U without making major upfront capital investments, with the group absorbing much of the development and support costs,” he says, adding that participation in Spar2U is voluntary for each retailer.

Towards the end of his presentation Isaacs promised there would be no major strategy resets or initiatives to turn around the business. What a relief.

Then he added: “At the end of the day we’re a simple wholesale and distribution business working for the benefit of our retailers. We buy smartly at scale, we distribute efficiently and we support our retailers with the right tools and by simplifying their lives.”

If only.

Isaacs’ claim that the group “briefly” lost its way is challenged by almost six years of financial statements. In addition, the claim to be supporting retailers and simplifying their lives seems a bit of a stretch and is hardly credible in the context of the unprecedented push by those very retailers to remove chair Mike Bosman.

Of course, there’s nothing simple about wholesale and distribution, but it is encouraging that the group leadership seems keen to focus on stabilising the basics. That’s a project that will likely take 18 months to show reliable results. Hopefully Spar leadership and some investors will have the necessary patience for this long execution.

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_{Top image collage: Rawpixel; Currency.}