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‘People are switching from branded products to the Spar brand’

CEO Graham O’Connor plans to upgrade 150 to 180 stores this year and expand regional DCs. The jury’s still out on its pharmacies.

SIKI MGABADELI: Retailer, Spar Group, announcing a rise in interim headline earnings per share of 20.3% to 419.6c following the inclusion of its Irish business for the full period. The company declared an interim dividend of 239c/share, revenue for the period up over 40% and their gross margin increased to 8.6% from 8% previously. Graham O’Connor is CEO and joins us now. Graham, thanks for your time this evening, so what was the full contribution then for the period of the Irish business?

GRAHAM O’CONNOR:  Well, in terms of the South African business that grew very strongly as well, 10.8% in the top line and 12% in the profit line, so we’re really happy with that. As far as the contribution from Ireland because there’s no base obviously pushed our growth from 10.8% up to 40.7%, so a very nice contribution at that level. Also on a profit basis they were very nice results and ahead of budget so we’re very pleased with that.

SIKI MGABADELI: For the South African business how are you managing in this climate and we’re asking everybody who has got anything to do with the normal South African consumer who is facing all sorts of pressures at the moment.

GRAHAM O’CONNOR: Well, it’s certainly very tough on the consumer out there, load shedding hasn’t helped matters, the tight economic climate, lack of growth, so it really is quite a dull place, really pedestrian, I suppose we could call it that. But despite that we still performed very strongly and that is because of the strong model that we have, our strong independent retailers supported by ourselves.

SIKI MGABADELI: You’ve also managed to gain market share in that very same environment, so would you attribute that to what you’ve just said about supporting your retailers?

GRAHAM O’CONNOR:  Well, what we like to do is upgrade 20% of our stores every year, so effectively every five years a store gets a major upgrade and we managed to do that last year we upgraded 185 stores, we’ve upgraded 56 year to date. We expect to upgrade between 150 and 180 stores this year. So that has certainly helped matters but our whole promotional campaign with our green tag sale, as well as our drive on our own label, our Spar brand products that’s been very strong.

SIKI MGABADELI: That investment of R260m during the period, did that go to adding on new stores and the upgrade of the stores?

GRAHAM O’CONNOR:  Which R260m are you talking about? The capital expenditure?

SIKI MGABADELI: Yes, the capital expenditure.

GRAHAM O’CONNOR:  No, our capital expenditure really went into the wholesale side, a property expense in the perishable warehouse in Durban, as well as a slow goods moving warehouse up in the Gauteng area, a purchase of three stores as well and then really just the replacement of our fleet, we’ve got a massive fleet, obviously replacing trucks and trailers with that.

SIKI MGABADELI: Will you be continuing to expand your regional distribution centres?

GRAHAM O’CONNOR: Well, most definitely, we are looking at the present point in time we are close to finalising a site in Lanseria to have another regional centre up in the Gauteng area because of the growth there. We’re looking in the Eastern Cape, expand the operation there, as well as in the Western Cape to add onto the facility there. So the growth has been really strong, strong organic growth as well, So we’re very pleased with that.

SIKI MGABADELI: What’s your in-store food inflation? How are you managing prices?

GRAHAM O’CONNOR:  Well, in terms of our food inflation we’re at 5.4% and so with like for like sales at 7.7% and our total store growth at 9.2%, you can see we’re showing good organic growth and that’s because that’s an area of focus for us.

SIKI MGABADELI: Yeah and the Spar branded products, are they still gaining a lot of traction, are people still liking those?

GRAHAM O’CONNOR: Very much so, Siki. We are growing there at 20.5% with our Spar brand products and obviously people are switching from the branded products to the Spar brand because of the quality of the product and the cheaper price because consumers are under pressure.

SIKI MGABADELI: They are absolutely. The pharmacies, you’ve opened a few more pharmacies in Spar stores, how is that performing?

GRAHAM O’CONNOR: Ja, it’s been okay, we’ve now allocated resources in the regions, as well as here at central office, to drive that forward. We’ve now got 49 pharmacies, it’s still early days and the jury is still out about that.

SIKI MGABADELI: Tops has clearly been a very good idea for the business, any plans to expand that and how has it performed, and what do you think the magic is around Tops?

GRAHAM O’CONNOR: Well, the magic is *** you wouldn’t have gone near a bottle store, even I was afraid to go into bottle stores…

SIKI MGABADELI: [Laughing]

GRAHAM O’CONNOR:  So with the upgraded quality of the stores certainly it’s targeted the female consumer and it’s a really nice place to shop. We’ve grown from those stores in 2002 to where we now have 641 Tops stores. So it’s grown really well, it’s been a very strong performance for us and we’ve still got headroom, bear in mind that we’ve got 879 Spar stores, so we’ve still got 240-odd Tops stores we can roll out. So the rollovers of the stores are getting much better but our existing store growth in Tops is 14.9%, so still very strong.

SIKI MGABADELI: Let’s talk about Built It, we had a chat to PPC the other day when they released their results and obviously the cement price situation in the country, demand and, of course, the imports is a big issue, how is Build It being affected by that? I understand that it’s obviously catering more to your rural consumer base?

GRAHAM O’CONNOR: Ja, very much so, it’s been a big impact, there’s been deflation on cement, as PPC would have told you, with the imports and it’s certainly impacted our stores. So we’re showing very low inflation numbers with our Build It stores but we’ve done really well this year from where we were previously.

SIKI MGABADELI: Alright, what’s your outlook then, Graham?

GRAHAM O’CONNOR:  Well, our outlook is still a pretty tough economic environment but we’re pretty positive about the balance of the year. I think we’ll still produce good sales and good profits for the balance of the six months.

SIKI MGABADELI: Alright, we’ll leave it there, thanks for your time today. Graham O’Connor is CEO of the Spar Group.

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