NOMPU SIZIBA: Grocery retailer Spar has released half-year results. For the six months ended March, 2021, the company reported that group turnover came in at R64.2 billion, a 7.5% improvement on the year prior. Operating profit jumped by 28.1% to R1.7 billion, while normalised diluted headline earnings per share came in at 608.3 cents. Shareholders are set to get an interim dividend of 280 cents a share; that’s up 40% on the year prior.
Well, to take us through the company’s performance I’m joined on the line by the new CEO at Spar, Mr Brett Botten. Thanks very much Brett, for joining us. These look like fairly robust numbers in what has remained a tough economic context, and you indicate that you’ve seen positive performances in your offshore businesses. Please expand on this.
BRETT BOTTEN: Nompu, we are very happy with those numbers. There’s so much uncertainty in the marketplace, so to grow our top line at 7.5% and our operating profit at 28% is a good performance. To us it talks to the benefit of having the Spar business model across the various geographies and serving different channels of business. We’ve got business in Europe, we’ve got business in southern Africa, we’ve got liquor, we’ve got Spar. So it’s really a nice mix, and it helps us, obviously. If you’re not firing on all cylinders and all aspects of every business, there’s a bit of a swings-and-roundabouts sort of balancing act taking place.
So in this particular period our Irish and Swiss business did exceptionally well, both in top line and in operating profit. And I’m so delighted for the Swiss team, because you will know that for a while we struggled there and took a lot of heat from investors and other people around the Swiss business. But last year was outstanding for us, and we continue with that trend. That’s obviously very exciting and rewarding for us.
NOMPU SIZIBA: It may be a bit of a funny question, but these are mature markets. How is it that you’re seeing such great performances in mature markets?
BRETT BOTTEN: That’s very good. If we start with Ireland, you will know that they had some really harsh lockdown restrictions in Ireland in the [Covid] third wave in their peak winter months. That kind of fell right into where a lot of our stores are located, so Irish people were not able to travel. I think that they were not able to travel further than five kilometres. A lot of them were working from home, schooling from home, so they were shopping locally in their local Spar and Eurospar and other brand stores.
We have a number of stores in the Dublin city centre, where the city was devastated. There were very few people visiting, so those stores took big pressure. We also have quite a strong food-services channel, where we service restaurants and pubs and Irish culture – that’s a big part of their lives. But they were all closed so those businesses came under big pressure. But because of this strong neighbourhood convenience retail element we were able to really benefit from those harsh lockdowns. It will unwind as we look forward but, having said that, we will then gain the business back in the channels of the food services and the city-centre stores.
It was very similar in Switzerland. We’ve spent a lot of money and time and effort over the last few years upgrading the image of our stores, which are also convenience retail outlets. A lot of those people didn’t really shop with us. As I say, we’ve introduced concepts; we’ve got some South African guys on the ground in Switzerland who have driven store-upgrading programmes and the introduction of some of our fresh-food concepts, coffee bars, and meat and sandwich offerings, that kind of thing. So we’ve enjoyed support from the local communities, and we think that will stick as things unwind. We’ve also got a strong cash-and-carry arm of services, restaurants, guest houses and the like. They’ve been under pressure because of restaurants and guest houses being closed. That’s been offset by the convenience retail element in the neighbourhoods.
Fortunately for us, too, we’ve brought on board Store Service AG, 16 petrol convenience stores, which has added to our growth prospects. That’s in the period. So that’s good for us. As we ramp up our sales through that channel we’ll see the benefits of that if we look forward a couple of years. So moving parts in both Swiss and Irish markets. But again, a nice mix of business, the one offsetting the other. When things normalise we’ll see a drop in our Spar wholesale retail business, but an uptick in in the food-service box.
NOMPU SIZIBA: Now Brett, prior to Covid hitting, Poland’s economy was growing quite nicely. You have operations there, but it seems as though you’re still working towards getting to a point of breaking even in that market. What are the dynamics there, and ultimately do you see some sort of stabilisation and growth coming through?
BRETT BOTTEN: You’re right. That’s one of the reasons why we went to Poland. It’s the fifth or sixth biggest economy in the EU. They’ve had steady growth for a number of years now, low unemployment, and thousands, literally thousands of independent retailers. So it’s really ideal for a Spar model to work. We went in there and then Covid struck. We had some challenges initially with the sanitation or business-rescue proceedings of the business, which have been resolved now in the north of the country where we have a number of larger stores. Many of them are located in shopping malls and they’ve had very high infection rates, one of the highest in Europe. So they’ve had very harsh lockdowns. The malls weren’t closed, but were for all intents and purposes closed because only the Spar stores could operate and people didn’t go to them.
We lost some traction there as we were gaining momentum, turning to the south of Poland where the original 150/160-odd Spar retailers were based. When we took over that business we onboarded them. But at that stage, the wholesaler had collapsed in a heap and they could not source any products from their wholesaler. They were sourcing products from wherever they could.
When we took that business over their loyalty or the measure of support of the wholesaler was literally zero. In a year we’ve grown 25%. So it’s progressing in the right direction, but is a little slow. Obviously Covid has impacted that. We need to get that number to around the 35 to 40% mark to make our break-even number. Again, we’ve made progress this half year; we lost R83 million, less than in the same period prior. So it’s moving in the right direction, but too slow for us. We had originally anticipated we would break even come end of calendar year 2021. We now think that will be probably in the first quarter of 2022 for us to reach that break-even point, because we are driving that. Loyalty is increasing.
We’ve a distribution centre in the south of the country, a place called Czeladz, and we’ve put in about 5 500 SKUs, which are unique to that group of stores down south – a different market from the one we service in the north. So we’ve invested in price. We think that we’ll be able to grow that loyalty as we move forward. We also have two South Africans on the ground in Poland, two experienced Spar South African people in the merchandise and retail operation space who are making their presence felt.
Yes, it has been challenging, more challenging than we anticipated because of the ongoing Covid lockdown restrictions. But we are still positive. There’s a big opportunity for us in Poland and we know we can leverage that and realise that opportunity.
NOMPU SIZIBA: Super. Here at home you saw fairly tepid turnover growth, but you saw different performances in your different businesses. Perhaps you can give us a sense of performance in your key businesses in the South African market.
BRETT BOTTEN: Sure. Let’s start with the a big one, with Spar. A little softer, we have to admit; 0.8% growth of the core Spar business in the six-month period. However, there are a couple of issues that we need to consider there. The first one is that the March month falls in the reporting period. And you remember March last year when, in advance of that initial lockdown shock, we had the surge in demand.
NOMPU SIZIBA: The panic buying.
BRETT BOTTEN: Toilet paper and everything. They went to supermarkets and there was nothing to buy. So we are up against that base and quarter three – April, May, June for us –will be quite challenging because we really did very well last year this time with consumers shopping, I think quite anxiously and scared. They shopped close to home; just went out to get groceries and came home. They didn’t venture anywhere else. They couldn’t; but even when they could, they were a bit hesitant to do that. So we saw a real strong performance from ourselves.
We are up against that base now, and we under-indexed as things normalised last year with consumers going back to malls. We see that in the mall data, we see that in the apparel retailers’ results. So we certainly lost a bit of share over the last half of last calendar year, the last quarter and the early part of this year. The liquor impact was significant. We lost 72 trading days in liquor. That’s about 40% of the available days this year versus last year.
NOMPU SIZIBA: What is that in monetary terms, the loss?
BRETT BOTTEN: I don’t have that number off the top of my head, Nompu. Sorry. But it’s a significant number. Our growth for six months was ‑8%. But prior to the last month we had a real surge in March. Part of last month we were backwards by 18% on the prior year. So it’s a significant number. That’s going to normalise now, so we will see a positive trend coming out of liquor going forward.
And then the Build it business, our building materials business, has been the standout performer. We’ve grown that at 26% for the year under review. It was under lockdown for five weeks in April/early May last year. As we came out of that lockdown, we started to see an uptick in sales, and then it really surged towards July, August, September last year. It has continued growing at between 25 and 30% month on month, which talks to a real positive change and an investment by consumers in their homes. This is not DIY. It’s cement, it’s timber, it’s roof sheeting, doorframes. So it’s really positive and exciting for us that people are spending their money on upgrading.
I suppose they’re spending more time at home and they’re seeing what needs to be done, and they’re spending some money on their homes, which has been good for us. We’d love it to continue on the current trajectory, but logic tells me that it must slow down at some stage. However, the stores are in good condition, our retailers have been profitable, they’ve achieved top-line growth, they’ve invested in their businesses. So we believe we’re well poised to take advantage of new opportunities, albeit that I don’t think that the growth pattern is going to be the same as it has been.
NOMPU SIZIBA: One of the things that you’ve expressed concern about is the limited recovery that you’ve seen in cigarette sales since the restrictions were lifted, you’ve seen turnover there down by about 13%. Do you have any theories as to what may be going on there, why there hasn’t been the resurgence?
BRETT BOTTEN: Yes. To me it’s actually quite a sad story – not so much for us, but just for South Africa in general. Obviously the cigarettes were part of that initial lockdown last year, and consumers then found other avenues and other ways to get cigarettes. They might’ve switched brands as we emerged from lockdown, so they went to cheaper brands and the illicit tobacco trade flourished during that period. We believe now that somewhere between six and seven sticks in 10 are an illicit brand, which is devastating for South Africa from a fiscus perspective. As you rightly say, we haven’t seen the recovery of cigarettes. We are down 13% on the prior year. I don’t know if that’s ever going to get back to the levels we saw prior to Covid.
NOMPU SIZIBA: Brett, before I let you go, because we’ve been talking quite extensively, give us your outlook going forward.
BRETT BOTTEN: Again, a lot of uncertainty and it’s so difficult to call it because of all these moving parts. South Africa is now watching the infection count; there is talk of some additional restrictions possibly being put in place. Hopefully we don’t have another liquor lockdown. So that’s quite difficult to call.
I think in South Africa the consumer will remain under pressure. And no doubt pricing and promotions, private label, will be big for all of us in the space going forward, because consumers will be looking for value. We need to continue to invest in pricing in terms of promotions and some innovative stuff there. Private label has always been good for us. Our private label in the period under review was growing well ahead of the rest of our business. We will continue to drive that because, again, it presents a good opportunity for consumers to really get some value in our stores. So we’ll do that. We’ve got a very progressive store-upgrade programme to make sure that our stores up their images and look and feel there is upgrading to take advantage of opportunities that come our way.
So it’s going to be tough, no question; a lot of uncertainty. But we are convinced that our model is robust. It has stood up well, our retailers are positive, they are investing in our brand, and we feel we fall cautiously optimistic. That’s the term I like to use.
NOMPU SIZIBA: That was Brett Botten. He’s the CEO at Spar.