Spar reports rise in turnover despite July civil unrest, Covid restrictions

Polish results disappointing, but the company aims to increase its footprint by some 30% – CEO Brett Botten.

FIFI PETERS: Spar was one of the retail shares leading losses in the retail complex, with its stock price plunging over 6% in today’s session. While the food retailer reported a 2.9% increase in revenue over the period, operating profit was lower, dragged down by heavy losses in its Polish business.

We do have the CEO of Spar, Brett Botten, on the Market Update. Brett, thanks so much for your time. Just talk to us about what the situation in Poland is like, and what is weighing on profits there.

BRETT BOTTEN: Thank you, and it’s good to talk to you this evening. Our Polish result is very disappointing. Fortunately I’ve just managed to get across there with our CFO, Mark Godfrey; we spent almost a week [together] in late October, and we were able to see first hand what’s been accomplished there since we went into Poland, and we’ve built a really good foundation under difficult circumstances.

We think about the time it took to sort out the sanitation proceedings, we had a legal battle with the previous licence holder, and we couldn’t get access to the Spar retailer. On top of that, we had the ongoing effects of the Covid pandemic and the lockdowns. We’ve done so much, but it’s obviously not reflecting in the numbers – and that’s very disappointing for us.

The main issue would be that the loyalty or the support from our Spar retailers in the south, which has moved from nothing to 27% – which is a big move – is still not enough to support the infrastructure that we’ve put in place to service them.

So while we were there we took two key strategic decisions. The one is to get our retailers and the staff to sign new contracts with us, which would then allow them to be rewarded for good behaviour in terms of their support of us as opposed to the current contract that we have. We see that being positive for us going forward. We might end up losing some of the Spar partners in the south but so be it, because we couldn’t continue with the current situation that we have there.

Having said that, we also are very bullish about bringing on new partners. So we are targeting to increase our footprint by some 30% of our current footprint, which is a significant number. But there are literally thousands of independent retailers in Poland and there is great opportunity for us. We think we’ve got our logistics right now, so we’re well positioned to bring on some additional partners. That decision we’ve taken.

The other decision we took while there was to rationalise our logistics operation. So we currently have two main warehouses, one in ……2:21, which is in Poznan, and one in Czeladz. And we also have another one outside of Warsaw, which we used to cross-stock dairy products down south, which means we transport those products 300/400 kilometres – and that’s just not working out from a cost perspective because we’re not getting the volumes. So we’ve taken the decision to close up that warehouse and move those products down to the Czaladz distribution centre, which we know will have a positive impact on our cost infrastructure. Those two decisions will set us up, we think, into 2022.

We remain optimistic and positive about the change that we are going to see coming into being in 2022, because we understand full well that we really need to turn this business around.

FIFI PETERS: Brett, you do indicate that you are looking for alternative funding solutions in the period ahead, as well as uses for the funding. You have identified the Polish business as a target. Exactly how much in monetary terms are you needing for that business to effect a successful turnaround?

BRETT BOTTEN: You are quite right about the funding. We have different funding mechanisms and schemes in place across our international geographies that we’re looking to. One of the options we’re looking at is consolidating the funding into a central point which will allow us to then have access to funds to move across the different geographies. To answer your question, Poland’s probably going to need about R200 million or so; that’s what we think.

FIFI PETERS: That’s perfect, because on the tail end of the statement you issued today regarding looking for alternative funding solutions is the possibility of making changes to your dividend. So can you just tell us a little bit more about what you’re looking to do there regarding your dividend?

BRETT BOTTEN: All we are trying to do is just flag that it was an option being considered. We made no decision in that regard. We’ve been pretty consistent in terms of our dividend cover or dividend policy – 1.45 cover – and we don’t necessarily want to deviate from that. But we’ve got an SAP investment coming. That’s about R1.8 billion because we are dong our SAP ……?4:39 between 2022 and 2023. If you think about Poland and some of the other overseas geographies – for instance, in Ireland where, because of the pandemic, there’s been no major investment in retail assets, and there is a fair amount of capex …… 4:56 in 2022 – I think for us we’ve the options we are considering.

There’s been no firm decision taken at this stage, but we just wanted to flag it in our results publication to have the market see that these were in the melting pot, so to speak, but no decision has been taken. Obviously we will keep the market updated as to where we go in this particular matter.

FIFI PETERS: And when do you think you’ll likely be in a position to make a firm decision on where you go on this particular matter?

BRETT BOTTEN: I think the target would probably be by the half-point of our financial year, so we’re talking about sort of February/March next year.

FIFI PETERS: Brett, I was just looking at your turnover performance in the food business here at home in South Africa, and things look to have dipped over the period. We have seen the likes of other retailers in your complex reporting increased food sales. Does the 0.4% decline in your food sales mean that someone is eating your lunch? And, if so, who?

BRETT BOTTEN: Fifi, I think one must be obviously aware of some of the numbers that we’ve seen – and in the short term yes, we have lost some share. We must also acknowledge that we are up against a really strong performance from Spar in the prior year, and particularly the second half of the prior year when we really benefited from the initial hard lockdown.

So certainly in the short term we think we’ve lost a bit of share. We were obviously impacted by the ongoing liquor ban and, because of the strength of our Tops liquor offering we believe that we are more impacted than some of our competitors from a liquor perspective and the knock-on effect of not being able to trade our liquor on Friday, Saturday and Sunday. When I say ‘knock-on’, I’m talking about the loss of sales in adjacent Spar stores, not only the liquor side, but the loss on the grocery side. That impacted us.

And then obviously, as I told in the presentation, from the unrest in July we still have a number of stores that haven’t reopened and some big stores. So that also affected us.

The Shoprite number which came out earlier this week was a really strong number. I think in the short term they have gained some share, but we are positioned now with our strong new-store programme for 2022, a remodelled programme, about 250 ……7:11 stores apparently remodelling, our private-label offering which is gaining a huge amount of focus, and an upgrade to promotions on the advertising calendar for the new year. So we’re positioned well to grow our top line, because obviously flat or single digit is not good enough for our size with the fixed-cost infrastructure that we have with our warehouses and trucks in the country.

And then on top of that – which is very exciting – is the launch of our online Spar to You……7:42 application on the e-commerce space, which we are piloting with our first store in late November, early December, which we intend to roll out to 100 stores over the course of next year.

FIFI PETERS: I suppose the proof will be in the pudding as to whether these initiatives will be successful in regaining your lost ground.

But I’d like to go over to Ireland and just look at the performance of the operations there. It seems that the business there has stood the test of Brexit. Would you agree that’s the case, and that the biggest risk for the business – in the short term at least – is the shortage of labour around warehousing skills and truck drivers?

BRETT BOTTEN: Yes, you’re spot on, Fifi. We’ve been delighted with the performance of our Irish business. It’s a really solid performance in 2021, but bear in mind that in 2020 they had an incredible year. So on the back of the that, a really brilliant year in 2022. It still delivered the turnover and profit. Bear in mind there is a negative exchange variance, so the rand actually strengthened in the period. There the performance in euros is actually better than the rand performance. So I agree with you, we are well positioned there.

It’s interesting that you pick up on the cost issues, particularly on the shortage of truck drivers and labourers. That is something that not only we but all businesses in the UK and Ireland are dealing with – the shortage of 100 000 lorry drivers, as they call them, and obviously having to pay increased wages, which is putting pressure on our costs. But the Irish business is well managed and well run, and the management team has gone into this and eked out efficiencies to offset and mitigate these driver costs.

FIFI PETERS: Just anything that you’d like to leave your shareholders with by way of what they can look forward to from the group in the period ahead?

BRETT BOTTEN: Fifi, I think we are banking on Switzerland and Ireland delivering another good result for us. Obviously there’s massive pressure on our management team to turn around our South Africa performance, particularly the top line, and then to make a big impact on those Polish shops as well, which are really disappointing. Our target is to get that business into a break-even position by the end of next year. When I say ‘into a break-even position’ [that’s] for a particular month. I think if we can accomplish that, that’s our target and that’s what we’re aiming for, and we should see a really strong result in the new year.

FIFI PETERS: I heard that the World Economic Forum may be back again next year, and it will be interesting to see what kind of activity you see in your stores. There is ……10:20 after the forum had been put on halt for the past two years as a result of the pandemic. But we’ll wait and see for the proof in your numbers. Brett, let’s leave it there.

That was the CEO of Spar, Brett Botten.

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