CEO’S REPORT

case

“I am a strong believer and driver of the behaviours associated with SPAR’s values of passion, entrepreneurship and family. Our family value is about creating a sense of belonging to the SPAR family – particularly with our people and our retailers.”

 

“A key highlight for 2014 was our acquisition of BWG. We are confident that we concluded an attractive deal for our shareholders which will deliver significant value going forward.”

 

INTRODUCTION

It is a pleasure for me to present the SPAR Group’s results for the year ended 30 September 2014, as incoming CEO. Having spent the last 16 years in retail, this move represents a return to my roots in the distribution side of the business. As a retailer, the SPAR family’s ability to move the business forward has stood out for me, reflected in this year’s excellent set of results produced in a tough trading environment.

A key highlight for 2014 is the acquisition of BWG, announced in August 2014. We are confident that we concluded an attractive deal for our shareholders, which will deliver significant value going forward, and which already made a meaningful contribution in the year under review, despite only being included for the last two months.

On a more personal level, I am a strong believer and driver of the behaviours associated with SPAR’s values of passion, entrepreneurship and family. This has been reflected in the way in which our executive team has come together after the management changes and the collective focus on taking the business forward. Our family value is about creating a sense of belonging to the SPAR family – particularly with our people and our retailers – working together for the greater good of the SPAR brand through true teamwork and extending into the communities we serve.

Trading overview

Trading conditions during the year remained tough with ongoing pressure on consumer spending due to rising unemployment, increasing household debt and interest rates. Widespread industrial action has affected trading in certain rural regions through reduced disposable income.

Despite cost pressures and a weakening rand, internally measured food inflation remained relatively low at 5.7%. The retail environment was increasingly competitive across all segments of our business. The search for growth has led to an aggressive, almost indiscriminate, chase for retail sites. We have had to protect some of our existing sites from the competition, and going forward we will need to be more innovative in securing greenfield sites. Despite these factors, there are still opportunities for our group, particularly in the informal market.

Group turnover increased 15% to R55 billion (2013: R47.4 billion) of which R2.75 billion flowed from the operations in Ireland and South West England from 1 August 2014. Local performance was supported by solid like-for-like growth and strong performance especially in liquor and SPAR brand sales. Tops at SPAR delivered double digit growth bolstered by the opening of 51 stores.

Profit before taxation increased 11.2% to R1.8 billion (2013: R1.7 billion). Gross margins increased to 8.3% from the prior year, underpinned by stronger growth in ex-warehouse sales. SPAR successfully mitigated the impact of substantial fuel price increases, with its core expenses growing in line with revenue.

Distribution and warehousing

The group dispatched 210.8 million cases from its seven distribution centres during the year, an increase of 3.6% on the volumes handled in the prior year. Our aim is to provide our retailers with a world-class replenishment service. To this end, we focus on in-stock levels, on-time delivery, fleet capacity utilisation and delivery costs.

The land purchase option agreement for a planned new distribution centre in Lanseria, west of Johannesburg, remains challenging due to land zoning complications and has yet to be finalised. However, we remain confident that this site will go ahead and be operational in 2019. We are nevertheless pursuing an alternative site, which will allow us to make a final decision in 2015.

Guild membership and relationship with SPAR International

Our relationship with SPAR International remains a key value driver for the group – especially in our newly expanded form. We shall continue to access the international information sharing network which shares brand, marketing, logistics and operational expertise and best practice.

RETAIL PERFORMANCE

The performance of our retailers is the primary driver of our growth and, as such, we have included a brief review of the different formats’ performance.

spar   spar   spar

New stores

+19

 

New stores

+51

 

New stores

+18

         

SPAR

Retail turnover for SPAR stores increased by 7.8% during the year to R63.1 billion. Retail trading space increased by 1.7% this year (2013: 2.2%) to 993 030 m². We expected to open 23 new SPAR stores during the 2014 financial year and report that we opened 19. We closed 17 stores where they either failed to meet standards or for financial reasons. Our focus on store upgrades resulted in 185 stores undergoing extensive renovations, which had a positive effect on turnover growth. We plan to open 35 new stores and renovate 180 stores during the next financial year.

 

TOPS at SPAR

TOPS has revolutionised liquor retail in South Africa and continues to extend market leadership. Retail sales increased by 13.8% to R6.6 billion. We anticipated opening a further 35 TOPS stores in 2014 and actually opened 51 stores, increasing the total to 622 stores operating under the TOPS banner. TOPS remains the number one retail liquor brand in the country. The main challenge for the TOPS brand is administrative delays in liquor licensing and the new liquor regulation, especially in KwaZulu-Natal. We work closely with our retailers to assist them to comply with the regulation. We plan to open 45 new stores during 2015.

 

BUILD it

Build it experienced a difficult year despite implementing further restructuring initiatives. Labour unrest, imported cement and an increasing number of small foreignowned stores in outlying areas disrupted this market and caused increased pressure on our retailers. While rand weakness partly negates the benefits of low-priced cement imports, increased import volumes have continued to influence the coastal retail markets.

Build it showed wholesale turnover growth of 8.8% to R5.5 billion against muted market demand. House brand imports increased 21.5%, with 18 new stores added during the period, bringing total store numbers to 294.

         
spar   spar    

Other format contributions to turnover

2%

 

Pharmacy at SPAR new stores

+9

   
         

OTHER FORMATS

       

The group’s other retail formats, namely SaveMor, Pharmacy at SPAR and SPAR Express, represent about 2% of total turnover. Their performance was impacted by the tight consumer trading environment, however losses were not material to the overall performance of SPAR.

During the year, we sold one corporate store and closed one. Despite the ongoing trading challenges of the locations in which our retail division operates, we remain steadfast that our decision to defend these sites was appropriate and believe that these stores offer a unique opportunity to remain close to the challenges and experiences our retailers face. Furthermore, the net profitability position of this business remains positive for the group.

Looking forward, the primary focus is retailer profitability, underpinning the long-term economic sustainability of the SPAR Group’s business. Our strategy will continue to reflect the SPAR imperatives of freshness, choice, value and service.

   

The BWG acquisition

Shortly after my return to SPAR, the BWG acquisition opportunity arose and the board and management quickly realised its potential, given that SPAR had international expansion aspirations and was challenged by the tight retail operating environment in South Africa. While our African expansion into Botswana, Namibia and Swaziland has been successful, and we continue to make progress in Mozambique and Angola, business in Zimbabwe has been challenging.

Like SPAR South Africa, the founding partners of BWG have a 50-year track record in food retail and we have both been partners of SPAR International for more than 50 years. Furthermore, we have always had a good rapport with them and during our evaluation of the opportunity we recognised that we were likeminded and that both parties were committed to concluding a value creating transaction for all our stakeholders. From our perspective, the expansion of our business internationally was an important strategic move for SPAR, providing an attractive entry point into food retail and the wholesale industry in Ireland, at a time when several sectors of the economy are already showing strong signs of recovery and consumer spending is improving.

BWG has already made a meaningful contribution to our 2014 financial performance, despite being included for only the last two months of the year. Furthermore, we see good potential in Ireland and South West England going forward. Since concluding the deal, we have already realised synergies with our distribution experts from South Africa sharing their knowledge with our new partners, while advertising material from SPAR Ireland has been used in the domestic market. This is just the beginning. We are excited about driving a business forward that is founded on similar values. In addition, having addressed the challenges that faced them during the Irish economic downturn, BWG’s management team will work with us to grow the business, improve efficiencies and optimise its financial performance.

Future outlook

As competition in the retail sector intensifies, we continue to focus on aggressively driving new business opportunities, organic growth, stringent cost control and securing operating and supply chain efficiencies. We remain confident that the resilience of our people, our retailers and our business model will allow us to produce a strong trading performance in 2015. We expect to see an improvement in the profitability of the Irish operations in the short term, which should have a positive impact on the group’s bottom line.

Through the new business development focus that has been created in the past year under the expert leadership of Wayne Hook, we will continue to expand our retailing support and investment in sub- Saharan Africa, facilitated by our SPAR licences for selected African countries.

Appreciation

Our sincere thanks to the most important people in our business: our retailers. Without their hard work and dedication, none of the successes we have seen during 2014 would have been possible.

I would like to extend a special word of thanks to the board for their guidance and support as I have taken on the challenge of this new role. Our chairman, Mike Hankinson, has been particularly committed to ensuring a smooth handover.

I would like to express my sincere appreciation to our competent and dedicated management team and employees for their commitment and tireless efforts at making SPAR the incredible organisation that it is. At the end of this year, we said farewell to Bill Brown, a long-standing member of our executive management team who retired. Our thoughts are with our past CEO Wayne Hook as he and his family grieve the death of his wife, Liz.

As for the BWG transaction – this would not have been possible without the team that worked so hard to bring this to fruition, especially Mark Godfrey. We welcome our new partners under the strong leadership of the CEO of BWG Leo Crawford and have been overwhelmed by their enthusiasm and commitment to make a success of our combined business.

A further word of thanks to the management and employees at the distribution centres and central office for their support during my first year. Lastly, I would like to thank our suppliers for their support and willingness to work collaboratively with us.

Graham

Graham O’Connor
Chief Executive Officer

11 November 2014