Spar: it just gets worse  

For the past four years, Spar shareholders have been exposed to little other than bad news. You’d think by now they’d have got used to it. Not so. On Friday, a horror trading update caused the share to drop like a stone; down 17% at one point, the stock closed 15% weaker at R48.72, its lowest level since 2005. 

The update was grim enough to prompt one analyst to wonder if new CEO Reeza Isaacs wasn’t doing a bit of “kitchen-sinking” – clearing out everything now in preparation for a turnaround down the line. If true, that would be good news indeed.  

But the reality is things probably are as bad as reported – and one industry source suggests to Currency they might even be worse. It’s not just that the group is struggling with turnover; it seems unable to convert whatever turnover it has into profit. 

The just-released revenue figures are pretty much in line with the figures released in late February for the 18 weeks to end-January. So, no great surprises there. Indeed, all of the slight changes at turnover level have been on the upside. Particularly Build it, where revenue was down 2.4% at end-January and up 1.3% by end-March. 

The real shock was on the earnings front. On Friday, Spar advised shareholders that headline earnings per share for the six months to end-March are expected to be 50% -60% below the previous interims. That was news. And not the good sort, particularly as the previous interims were weak too. 

Loyalty under fire

There’d been no mention of profit in the previous update but, importantly, the board had assured shareholders that Spar continued to achieve loyalty levels of 80% from its independent retailers. (Loyalty measures the percentage of goods retailers purchase from Spar.) Even the troubled KwaZulu-Natal distribution centre achieved 71.5%, according to Spar.  

However, independent sources tell Currency the loyalty figure is closer to 50% than 80%. On Friday, Isaacs would only say loyalty levels had remained largely stable at about the same level as last year.  

Muneer Ahmed, chief investment officer of Aeon Investment Management, says the numbers indicate that Spar’s entire  convenience-based business model is under threat, “which is a long-term structural issue”. He believes that continuing damage caused by the disastrous SAP rollout in KZN has made it almost inevitable that independent retailers would be forced to buy elsewhere. 

Margin call  

Back in February, management did warn about margins. A significantly rising cost base, continued investment in systems transformation, IT infrastructure and the SAP rollout “continue to negatively impact margins”, we were told. But management had plans. 

There was “distribution network optimisation”, as well as “key operating margin initiatives” that included a slew of actions such as improved credit discipline, “strengthened commercial governance”, improved pricing, logistics productivity enhancements, and expanded private-label and omni-channel capabilities. 

Shareholders were assured the financial benefits of all these actions would materialise progressively, and “reposition the business on a structurally more efficient cost base”, said the board. 

Two months is probably not enough time to see some of these benefits materialising, and a change of CEO in the midst of all this has hardly helped, but the signs at the end of March are not encouraging. Margins in Southern Africa have fallen further, between 20 and 40 basis points, said Friday’s update. 

Most worryingly, the decline was largely due to own goals. Spar’s Black Friday promotional activity was a disaster, with excessive price cuts that independent retailers couldn’t keep up with.  

Not on the same page

Alec Abraham, senior equity analyst at Otto1890, tells Currency he is irked by the fact that management’s latest troubling account of the Black Friday campaign doesn’t quite gel with the success story they recounted to analysts some months ago. Similarly, management has tended to talk about its very constructive relationship with independent retailers. “Recent events suggest that’s not really the case,” says Abraham.  

As for the SAP-blighted KZN distribution centre, it was hit by badly executed efforts to boost sales back to pre-SAP-rollout levels. Pity the poor independent retailers who rely on this to receive their goods.  The group was also hit by above-inflation cost increases and higher debtor impairments. 

Abraham tells Currency that, looking beyond the immediate challenges, the reality is that Spar’s failure to quickly and effectively respond to the Sixty60 challenge from Checkers has created a near-existential crisis for the group.

Is it any wonder the independent retailers have called for heads to roll? For almost four years, these 1,300 independent store owners, who make up the Spar retail network, have watched patiently as Spar management made one misstep after another – while their faster-moving peers moved on without them. By early May, they’d had enough. They called on the board to request the resignation of chair Mike Bosman. The board has said it’s fully behind Bosman, but the independent retailers want to negotiate. 

Right now, allowing independent retailers an organised and constructive input into Spar’s strategy may be the group’s best hope. 

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_{Top image: Rawpixel; Currency.}