Spar profits boosted by liquor sales

‘There certainly is growth potential in Switzerland still. We know it’s a mature business. We don’t expect that we will continue to slide there’: CEO Brett Botten.

FIFI PETERS: Spar recorded bumper sales in its liquor business in the first half of its financial year. That is according to results that the company released a little earlier today. Turnover in the liquor business surged a whopping 41% as the group benefitted from the lifting of the lockdown restrictions on alcohol bans here in South Africa. But not all lockdown restrictions that were lifted were good for Spar; take in point the business in Switzerland where sales dropped following the easing of restrictions there.

We’ve got the CEO of Spar, Brett Botten, on the Market Update for more on the numbers. Brett, thanks so much for your time. I see that alcohol sales were up really strongly in the period, and I’d like to know if this is all pent-up demand coming from that time when we couldn’t buy alcohol because of the bans. And what does more normalised growth in the liquor business look like going forward?

BRET BOTTEN: Fifi, I think alcohol sales for the period were up 41.6%, but really the base is distorted. There were 70-odd trading days that we lacked in the base, so it’s a distorted number. There was a bit of pent-up demand, but alcohol has always been a strong growth category or segment for us. Going forward, I think normalised growth would probably be low double-digits. I think that would be kind of a number from a normal perspective.

FIFI PETERS: A different picture when it comes to Switzerland, in terms of what ‘no lockdowns’ over in that part of the world have meant. It actually hurt your business this time around, and I’m quite interested in what this means for growth going forward [in] this environment of no lockdowns in Switzerland.

BRET BOTTEN: In Switzerland, you’re quite right. But let’s remember that, before Covid, if we look at what our numbers looked like there, we’re really very happy with the performance over an extended period of time. Our growth in the last two years in Switzerland is high single digits, just under 10%. So still a strong performance. We expected things to unwind to a certain degree with restrictions being lifted and people travelling across the border. We were able to offset that to a certain degree with the acquisition of those 60 petrol forecourt Avia stores.

And then remember we’ve got the other channel in Switzerland, the Cash and Carry or Foodservice Channel. So things normalise from a gastronomy perspective and restaurants and hotels and the like. Our Cash and Carry business, Tops CC, has shown really good growth.

So, as we lose a bit on the retail side in neighbourhood supermarkets, we are gaining share through the Cash and Carry business. That, together with the fact that we’ve become a partner of choice on the fuel forecourts, our Spar Express model, we are really driving that out and we expect to be able to open some new stores in Switzerland on petrol forecourts, which is obviously exciting for us.

And we also have a Euro Spar initiative, where we’ve opened one Euro Spar and we have another three coming this year which are bigger-box supermarkets.

So there certainly is growth potential in Switzerland still. We know it’s a mature business. We don’t expect that we will continue to slide there. We are very happy with where we were versus our target. So we’re not miles away from that. Going forward, we’re pretty confident we can hold on to our margins there, even though there are some cost pressures coming through – but that’s across all of Europe, with rising fuel prices, rising utilities, gas and the like. So there are challenges in the short term, but we’re pretty confident our business will succeed.

FIFI PETERS: Just those cost prices and the increases that you’re seeing, particularly on the fuel front, how much higher is your fuel bill now compared to the same period a year ago?

BRET BOTTEN: I’d like to talk to that particular subject in South Africa alone, because of the distances we travel and the relative size of the fuel.

So our fuel number in the half-year result is 40% up on the same period in the prior year – four-zero. So it’s a significant number.

But a lot of that actually is through diesel usage in generators because of load shedding, which obviously is very disappointing; but it is what it is.

And then we’ve also seen volume growth in South Africa of 4%, so we’re obviously doing additional mileage. So there’s a combination of the fuel-price increase as well as the increased kilometres. So that’s driving – or leading to – that 40% increase, which is a significant number, although it’s only 9% or so of our total expense base, with the majority of our expenses being people.

So that’s sort of a fair indication of what we are working with.

FIFI PETERS: And what does a fuel bill that’s now 40% higher compared to the same period a year ago mean for the price of the goods on your shelves? Have they stayed the same, or ultimately have you had to pass some of these cost pressures on to your customers, and how much?

BRET BOTTEN: Fifi, we don’t move our pricing to our retailers and then on to consumers as a result of fuel-price increases. Our retailers pay a delivery charge based on the value of the goods that we sell to them. So fuel-price increases will find their way into the price, into inflation, food inflation. Obviously we are seeing that in the period that we reported on, 5% in inflation, but picking up post the end of March significantly. We’re talking now about in the 7% to 8% range. So eventually we would see some of the fuel finding its way into an increase in pricing on the shelf.

But we have got the strategy in place to try and mitigate [the effects] and shield the customer from some of those increases, like we’ve stocked up in our DCs [distribution centres] to try and buy in and hold some stock, and then pass on some of that pricing at a lower level to consumers, to shield them.

Then we’ve upweighted our promotional calendar. We said we would do this late last year when we presented our results for last year. We did it in the first half of this financial year, and we’ll continue into H2. And then also our strong focus on our private label, our Spar brand, which is a value offering for consumers, a cheaper product than the brand leader, for instance, but offering good quality.

So those three strategies will help us, as far as possible, to shield particularly those consumers in the lower market segments, the ones that are really feeling the pressure from the rising costs all around them.

FIFI PETERS: Sure. The increase in your promotional calendar, however, Brett – what does that mean? What has it increased from, where is it being increased to?

BRET BOTTEN: What I’m saying is what we end up doing there, we broaden the promotional calendar, add additional promotions and in instances, where we can obviously, we will be more aggressive on the pricing of certain products. That’s from a Spar group perspective.

But then, because of our independent retailer model, especially in the big stores that are servicing the middle to lower markets, we see our retailers bolstering the promotional programme with their own promotions, because they know so well what their consumers need. So we are seeing a lot more activity in that space. That’s what I mean.

FIFI PETERS: Oh, okay. So essentially putting a lot more goods than previously was the case on discount. Okay, got you.

The online shopping business? If you talk to a whole number of analysts that look at retail stocks like yours, and everyone talks about Checkers and how it’s winning the race in the online space with its Sixty60 app. Pick n Pay announced some moves to try and catch up with its partnership with Mr D. What’s your online strategy?.

BRET BOTTEN: Fifi, we’ve been in online for a number of years, but we’ve always said our solution was fragmented, disparate. We had some very primitive solutions in our stores that are all run by their owners themselves, and some are actually quite sophisticated. But we realised that we weren’t able to market and scale the solution until we drove that centrally.

So last year we embarked on the journey to build an on-demand shopping application, which is Spar2U.

It was a bit more complex for us because of the independent retailer arm. If it’s a corporate, it’s pretty easy to do that. Obviously for us we wanted to build what we call a shared-value ecosystem, where we involve the retailer. So the picking, packing and staging happens at store, and then we outsource the delivery to a third party.

We’ve done the design and build of the solution and provided the support, and we are paying now for the scale out. We’ve tested the solution in one store; we are in two, three stores now, and then we’re starting to scale out rapidly now, so that we can reach our ambitious target; and we’re on track to do that by the end of the year.

The difference between us and the other solutions out there is that we plan to use our community presence, and ‘My favourites are now online’ is the tagline.

So for each store that opts in on our solution – because it’s not compulsory – we are going to invite retailers to be part of it with a strict list of criteria. The idea is that if you shop in brick-and-mortar at your favourite Spar, when you go online and you live in that suburb, you can select your favourite Spar and you’ll see the store visuals or the store owner, and you’ll be able to buy your favourite products online as opposed to a generic range which some of our competitors are offering.

So we think it’s a nuance. It brings personalisation of the solution into play and again continues with the My Spar, the community focus.

FIFI PETERS: Talking about bricks and mortar, maybe more bricks, the Build it business, just looking at the muted growth being registered by the group this time around, does this confirm that the renovations boom which took place during the lockdowns – when most of us didn’t have much else to do – is over?

BRET BOTTEN: Yes, it has certainly slowed down. If you look, the growth was 1.4%, but when I look over two years we’re talking 25% upwards. So it’s still a strong performance from our Build it brand.

We are the number one building materials brand in South Africa now – we judge it on total revenue, the image of our stores, [we try to get our] retailers to open new stores and to upgrade their stores; that is still there.

So certainly we won’t see those high double-digit growth numbers, but we are going ahead of the market, ahead of our competitors. And we are in a good space in Build it. There’s a lot of excitement, a lot of passion for the brand and we believe strongly in that model. We will still see people renovating and building. So slower growth, yes, but certainly not falling off a cliff.

FIFI PETERS: All right. Circling back to the international operations, however, one last question – the business in Poland. You’re still making losses, although you do indicate that things are improving. But I’d like to understand whether that business is feeling the heat from the Ukraine war – now in its third month – and in what way, if it is.

BRET BOTTEN: Yes Fifi, we have improved the losses, certainly. We’ve reduced losses by some 20% but, being brutally honest, it’s not where we want to be. We would like to have been in a much better position, but we have struggled with the contracts of the retailers in the south, which we are in the process of renegotiating now. By the end of June we’ll have a firm idea as to where we are with our retailers signing new contracts with us, which will reward them for improved behaviour from a support perspective. The more they buy from us, the more they’ll be rewarded in terms of the rebates.

Returning to the conflict in Ukraine. I was there in Poland a couple of months ago and obviously we’ve seen the number of refugees come across. We’ve seen an uptick in retail turnover within Poland itself, but it’s not big in our business, because most of that retail turnover has gone to the discounts and the big-box retailers. But from an emotional perspective and anxiety perspective it’s tense. People in Poland say they are feeling anxious, obviously, with what’s going on next door.

It hasn’t affected our business in rands and cents, but certainly from an emotional perspective it’s not pleasant for any of those people. It’s terrible, what’s going on, and you can feel it on the ground.

FIFI PETERS: Certainly. We have seen the pictures over on this end, and it’s not a pretty sight.

Brett, we’ll leave it there for now, sir. Thanks so much for your time. Brett Botten is the CEO of Spar.




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