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Spar looks to Europe for growth: Graham O ‘Connor – CEO, Spar

FY results. ‘We’ve got good store growth in the current year…better than our competitors.’

HANNA BARRY: Food retailer Spar group reported full-year results to the end of September today. Turnover up 35% to R73bn and operating profit climbed 23% to around R2.3bn. Some strong results there.

Graham O ‘Connor is Spar CEO and joins us now on the line. Graham, thanks for your time today. Now, this was Spar’s full year of operating in a global context. Spar of course acquired a majority stake in the Irish food retailer BWG last year. Those operations contributed 13% to operating profit. Are you satisfied with that result?

GRAHAM O’CONNOR: Yes. The earnings were very good, right on target. We did have some once-off costs for the refinance firstly, the chill facility at Kilcarbery secondly, and then the ADM Londis acquisition thirdly. Those will help our earnings for the 2016 enormously.

HANNA BARRY: Let’s talk a little bit about BWG. It does operate in a competitive environment, competing with discount retailers such as Aldi and Lidl. I was reading an article earlier today published in the Moneyweb Investor, our monthly investment magazine, written about a group of students from the University of Johannesburg who are aspiring fund managers, if you will. They recently won the annual CFA Research Competition for their arguments around why they believe that Spar is a sell. They mentioned the competitive environment that they [Spar] are in in Europe, as well as the increased rand value of euro-denominated debt due to a weakening local currency. So there are a couple of reasons there, called the deflationary environment also in Europe. You sound quite bullish on your prospects there. Do any of these arguments concern you?

GRAHAM O’CONNOR: No, I think they misread the market. We don’t compete directly with Aldi and Lidl in the supermarket sector, up against the Tescos and the like. We don’t operate in that segment at all. We operate in the convenience sector. And the grocery sector in total in fact was about 2.5% for the last year and BWG grew by 2% in Ireland. So a very strong performance from that point of view. I think they are wrong. I’d be happy to engage them at some point in time. But that’s certainly my view.

HANNA BARRY: I’ll have to send them this interview. Let’s move to South Africa. We are in a low-growth environment. As you know, consumers are under pressure. It is a tough time for retailers here in South Africa. There is a perception I think among consumers that Spar is more expensive than the likes of Checkers and Pick n Pay, but then that its goods are not necessarily of the same quality as Woolworths. So that’s the perception. So is Spar trying to deal with some of those perceptions and how is it positioning itself in this challenging environment?

GRAHAM O’CONNOR: Well, that perception was the case ten years ago as far as that goes, Hanna. Secondly, at the present point in time we compete very successfully with Shoprite and Pick n Pay and the Massmart stores, the Cambridge stores. So we are very competitive in the market place. So that perception is much less than it used to be. Where our stores are up against them directly, we compete very favourably and often do much more turnover than they do.

HANNA BARRY: There we go. Let’s stay in South Africa. We are currently experiencing a drought which may worsen. We are told that of course threatens farmers and potentially fuel and food inflation and, perhaps worse, food insecurity. What does this mean for Spar, and how is Spar engaging with its producers and suppliers?

GRAHAM O’CONNOR: We’ve engaged with our suppliers already. It takes a bit longer for that process to go through. It is a horrendous drought. I come from Durban and so the sugarcane farmers on the North Coast are having a horrendous time at the present point, as are the maize farmers. So we do see inflation rising. I must tell you I’m very surprised inflation is not higher than our 5.2% which we record, because I thought by this time it would be above 6%. But it isn’t like that. Going forward I see the inflation increasing, which is not great from a consumer point of view.

HANNA BARRY: Not at all. And do you think we face potential food insecurity?

GRAHAM O’CONNOR: I don’t think it will go that far because we have been exporters of quite a bit of our food. So some of the neighbouring countries might feel some heat as far as that goes. Hopefully the rain is just around the corner, though.

HANNA BARRY: Absolutely, Graham. Lastly, your outlook for Spar’s prospects in the local market?

GRAHAM O’CONNOR: In the local market I’m pretty positive about it. We’ve got good store growth in the current year, better than inflation, better than our competitors. We think that will continue. We have some nice new store openings coming along the line as well. Then of course the cherry on top is with the Irish – we’ll have strong results in Ireland for the year going forward.

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