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Operational overview

The South African operations experienced a significant slowdown in the year, which exposed costs and resulted in contracted margins.

The Western and Eastern Cape distribution centres were the only areas showing growth.

Read more about South Africa’s financial performance here.

Retail turnover increases were driven by new store openings rather than like-for-like organic growth. This trend resulted in good retail space being in high demand and our retailers continuously under pressure from other retailers attempting to convert or buy them out. We experience the impact of low growth not only in sales, but in the secondary effects this is having on receivables and stock turn. Retailers have to cope with lower income, higher taxes and increasing services costs for water and electricity, for example, which often results in an increase of outstanding debt. Inventory turn tends to be slower than in vibrant retail environments and has to be managed more carefully, both at a retailer level and at the distribution centres.

Store performance summary

Overall, 148 new stores were opened during the 2017 financial year while 259 stores were refurbished and 43 stores were closed. The latter included a group of stores in Swaziland – a lowlight for the year. An emerging development is hybrid stores, where an individual store caters for all income groups. The store typically offers anything from bulk packaged commodities to a range of speciality food and home-meal offerings, with all clients benefiting from a pleasant and attractive shopping environment.

The forecourt market is an attractive new growth opportunity in fresh and frequent shopping. As fuel manufacturers and wholesalers are prohibited from holding retail licences, there is strong competition for these sites. Stores are typically between 80 and 150 m2 and serve mid- to high-income groups. SPAR concluded an agreement with Shell during the 2017 financial year to open 15 new SPAR Express forecourt stores at Shell garages in 2018.

By entering the forecourt space, SPAR is extending its brand presence in a format that is also an attractive development opportunity for black retailers.

We are also testing a further new SPAR format: SPAR Mini was piloted in the Lowveld this year. It takes the form of a small satellite or extension store in close proximity to the main retail store, offering a limited fresh food offering grocery range while relying on the main store for systems and replenishment support.

Build it

Build it experienced a tough year despite successful expansion of its national footprint into peri-urban areas. Customers are predominantly in emerging market segments, where consumers are under most pressure. While Build it aims its home building and hardware solutions mainly at small builders and first-time home owners, the market was most active in renovations and maintenance this year.

The TrenDIY concept remains under review given the current low-growth market conditions. We aim to refine this format further before rolling it out nationally.

Informal traders are becoming a significant challenge as they are able to trade at lower prices. We have responded by working with our retailers to drive an expanded offering in more stores. As this business is subject to much longer lead times than food, we have to manage a highly efficient supply chain and forecasting model.

Further challenges include the need for specialised transport – which impacts costs – and the consolidation of suppliers. In response to these, we are doing more bulk buying and are increasing logistics collaboration between smaller stores.

Purchases from the imports warehouse this year for the first time outperformed purchases on dropshipment, leading to healthy volumes trading.

SaveMor

The SaveMor group of stores continues to offer a compelling value proposition for consumers, and an equally attractive entry point for new black retailers making their first investment. These stores have lower capital investment requirements and focus on active cost management. Specific regions, such as the Lowveld and Eastern Cape, launched a strong drive during the 2017 financial year to find new sites for SaveMor as it is a format that is particularly well-suited to the area and consumer profiles.

Corporate stores

The group took ownership of seven additional stores in 2017. This is a symptom of a higher ratio of stores experiencing low margins and difficult trading conditions. SPAR acquires these stores as they constitute strategically important sites until they will be sold on to new retailers in due course. In the meantime, these stores offer the group a unique opportunity to offer practical retail training and serve as a testing group for experimental products and services.

Store format performance summary

Distribution centre performance

Steady volumes of dry goods and perishables supported growth in warehouse sales to 56.8% of revenue (2016: 56.3%). The volumes handled by SPAR’s distribution centres remained flat, with a total of 223.6 million cases (2016: 226.4 million cases) despatched during the year. SPAR continues to expand its distribution capacity to service regions with growing volume requirements, and to optimise space through more integrated logistics models.

To this end, the budgeted capital expenditure for South Africa in 2018 is expected to be R503 million. Read more about capital investments during 2017 in the financial review.

SPAR South Africa’s implementation progress, risks and related opportunities

In South Africa, SPAR effectively manages seven different supply chains as the distribution centres traditionally operated independently with limited product moving between them. On a national level, we have now partnered with a transport management service provider to enable the movement of stock through the entire network by collecting and delivering between suppliers and distribution centres on a national, integrated basis. Beverages are a good example of a product that can be managed on a centralised basis, which results in cost and resource savings.

The different supply chain profiles are further all characterised by 20% of the stock causing 80% of the product movement. The 80% of slow-moving products, such as dry goods and groceries, demand most space, which results in relatively high warehousing space investment in those particular stock items.

With the expansion of the North Rand perishable facility we have now been able to split slow and fast-moving product lines into different facilities and consolidate the slow-moving stock for South and North Rand into one warehouse. As part of the project to optimise SPAR’s inland supply chain, the South Rand distribution centre implemented an automated crane system. The new system applies a combination of mini-load and high speed cranes that use voice technology to optimise the pick and replenishment of small batches of slow moving products. The new system can handle increased volumes and ranges at lower cost, and will be paving the way for further automation.

A major IT project this year was the development of systems to support the new model: orders are now split while billings and deliveries remain consolidated to the stores. A further result of this model is the need for more centralised pricing.

There are continued efforts to optimise logistics in all aspects of our supply chain and distribution activities. In the section on our relationship with suppliers we explain our initiatives in terms of joint planning sessions and backhauling.

We use benchmarking data collected between our distribution centres to ensure consistent performance: we measure turnaround times in minutes while tracking load composition, shifts and route challenges to identify opportunities for improvement.

The group is also prioritising delivery from source where possible, which entails collection at the factory and delivery at the point of order, thereby avoiding the distance, handling cost and risk, and administration requirements of transfer into regional distribution centres. The cost-saving benefit is shared with the trade marketing team.

In cases where a supplier is situated close to a distribution centre and delivers multiple loads per day, we are accelerating and optimising the in- and outbound processes through green lanes. These lanes are kept open for quick offloads and reloads where joint planning can achieve optimised turnaround times and fleet use.

We retain our focus on excellence in Fresh as a strategic imperative. A priority this year has been the optimisation of temperature management per product line throughout the supply chain. We are, for example using thermal covers on rolltainers as a way to manage temperature. Temperature management and monitoring is sophisticated and costly, but has a significant positive impact on product quality.

The streamlining of cross-border logistics efficiencies continue.

The roll-out of the dropshipment claims system has started delivering positive results through reduced debtors days and stockholding levels in the distribution centres. Overall stocks levels increased by 6.7% (2016: +10.3%).

Our biggest challenge this year was supply constraints, especially when running promotions. This is actively being addressed with suppliers to mitigate future risk.

Margins for distribution centres and retailers were under increased pressure this year as not all price increases were passed to stressed consumers. Reduced footfall and basket sizes impacted growth prospects, which were mainly mitigated by the SPAR Rewards programme and innovation.

The SPAR Rewards programme is working well as consumers enjoy the benefit of free purchases and preferential treatment for competitions. The combination of instant rewards and accumulated benefits continue to attract new members. At store level, retailers are experiencing additional sales driven by the associated Text Me system, as these can be targeted for high impact. We are also exploring click-and-collect options for specific stores. New card activations continue with TOPS at SPAR awards launched this year.

Promotions and campaigns are important mechanisms to drive shopping patterns and footfall. The Red Friday campaign in the Eastern Cape has been particularly successful and alternative timings on newspaper placements are also gaining traction for stores.

We drive innovation through multibuy offerings that combine different product lines into attractive consumer deals.

Distribution centres provide a fully inclusive range of dry, perishables and Fresh to retail. The focus on Freshline development has resulted in an offering that now comprises about 300 bakery lines and 350 fresh produce lines distributed to about 800 stores in the country. We launched a major new campaign for Freshline this year – ‘thank goodness it’s Freshline’ – highlighting the brand’s quality, and creating a strong brand awareness to make SPAR a consumer destination of choice.

We have a tiered offering that recognises that some stores serve the full consumer income range – our range therefore includes products appropriate for multiple profiles, from basic to high-quality, specialised products. Our focus is on sourcing locally: this is an ethical decision and also reduces the risk and cost related to transport. Imports are supplementary to local produce due to seasonal variation and demand.

The fact that a significant portion of retail sales are sourced through our distribution centres is testimony to the fact that our offering remains comprehensive and competitive.

Our focus on the development of our house brands continues to deliver growth momentum as these products provide value for money for consumers under financial stress. Sales of SPAR branded products increased by 9.7% to R8 billion (2016: 12.3%), well ahead of growth in other wholesale categories.

TOPS at SPAR again outperformed other store formats this year and continued growing: 81% of SPAR stores now have a TOPS at SPAR in close proximity. Together with Pharmacy at SPAR, the diversity in formats contributes to our imperative to offer consumers a comprehensive shopping solution.

We continue to manage costs as a way to ensure retailer success. The section on our relationship with retailers sets out some of the support services and training available to retailers. This year, we also, for example, developed a comprehensive retailers’ guide on cold chain principles, which includes self-assessment tools and e-learning modules – all in support of our Fresh control initiatives in the supply chain mentioned above. Cold chain standards will be included in the design of all new store developments going forward.

Read more about the newly launched GUEST programme in the retailer section of our material relationships.

Retailers have been alerted to the fact that minimum wages will increase in May 2018 and that we expect full compliance while being available to assist with human capital benchmarking and resource allocation options. SPAR supports the right to a minimum wage.

Intense competition and the aggressive struggle for retail space limit new business growth opportunities. Organic growth is driven through store refurbishments, new formats and expanded range offerings.

The plans for the new distribution centre in the Eastern Cape experienced some delays. We purchased additional land to build a new dry warehouse in 2016, and are currently focusing on mitigating environmental impacts before we start building. The sharing arrangement between the Eastern Cape and KwaZulu-Natal distribution centres for the warehouse in Mthatha is working exceptionally well in reducing supply chain costs for both.

Strategic outcome

World-class replenishment system

SPAR South Africa’s implementation progress, risks and related opportunities

In South Africa, SPAR effectively manages seven different supply chains as the distribution centres traditionally operated independently with limited product moving between them. On a national level, we have now partnered with a transport management service provider to enable the movement of stock through the entire network by collecting and delivering between suppliers and distribution centres on a national, integrated basis. Beverages are a good example of a product that can be managed on a centralised basis, which results in cost and resource savings.

The different supply chain profiles are further all characterised by 20% of the stock causing 80% of the product movement. The 80% of slow-moving products, such as dry good and groceries, demand most space, which results in relatively high warehousing space investment in those particular stock items.

With the expansion of the North Rand perishables facility we have now been able to split slow and fast-moving product lines into different facilities and consolidate the slow-moving stock for South and North Rand into one warehouse. As part of the project to optimise SPAR’s inland supply chain, the South Rand distribution centre implemented an automated crane system. The new system applies a combination of miniload and high speed cranes that use voice technology to optimise the pick and replenishment of small batches of slow moving products. The new system can handle increased volumes and ranges at lower cost, and will be paving the way for further automation.

A major IT project this year was the development of systems to support the new model: orders are now split while billings and deliveries remain consolidated to the stores. A further result of this model is the need for more centralised pricing.

There are continued efforts to optimise logistics in all aspects of our supply chain and distribution activities. In the section on our relationship with suppliers we explain our initiatives in terms of joint planning sessions and backhauling.

We use benchmarking data collected between our distribution centres to ensure consistent performance: we measure turnaround times in minutes while tracking load composition, shifts and route challenges to identify opportunities for improvement.

The group is also prioritising delivery from source where possible, which entails collection at the factory and delivery at the point of order, thereby avoiding the distance, handling cost and risk, and administration requirements of transfer into regional distribution centres. The cost-saving benefit is shared with the trade marketing team.

In cases where a supplier is situated close to a distribution centre and delivers multiple loads per day, we are accelerating and optimising the in- and outbound processes through green lanes. These lanes are kept open for quick offloads and reloads where joint planning can achieve optimised turnaround times and fleet use.

We retain our focus on excellence in Fresh as a strategic imperative. A priority this year has been the optimisation of temperature management per product line throughout the supply chain. We are, for example using thermal covers on rolltainers as a way to manage temperature. Temperature management and monitoring is sophisticated and costly, but has a significant positive impact on product quality.

The streamlining of cross-border logistics efficiencies continue.

The roll-out of the dropshipment claims system has started delivering positive results through reduced debtors days and stockholding levels in the distribution centres. Overall stocks levels increased/decreased by XX% (2016: +10.3%).

Our biggest challenge this year was supply constraints, especially when running promotions. This is actively being addressed with suppliers to mitigate future risk.

Strategic outcome

Competitive pricing

SPAR South Africa’s implementation progress, risks and related opportunities

Margins for distribution centres and retailers were under increased pressure this year as not all price increases were passed to stressed consumers. Reduced footfall and basket sizes impacted growth prospects, which were mainly mitigated by the SPAR Rewards programme and innovation.

The SPAR Rewards programme is working well as consumers enjoy the benefit of free purchases and preferential treatment for competitions. The combination of instant rewards and accumulated benefits continue to attract new members. At store level, retailers are experiencing additional sales driven by the associated Text Me system, as these can be targeted for high impact. We are also exploring click-and-collect options for specific stores. New card activations continue with TOPS at SPAR awards launched this year [confirm].

Promotions and campaigns are important mechanisms to drive shopping patterns and footfall. The Red Friday campaign in the Eastern Cape has been particularly successful and alternative timings on newspaper placements are also gaining traction for stores.

We drive innovation through multibuy offerings that combine different product lines into attractive consumer deals.

Strategic outcome

Comprehensive range

SPAR South Africa’s implementation progress, risks and related opportunities

Distribution centres provide a fully inclusive range of dry, perishables and Fresh to retail. The focus on Freshline development has resulted in an offering that now comprises about 300 bakery lines and 350 fresh produce lines distributed to about 800 stores in the country. The SPAR Freshline offering constitutes about XX% of store turnover. We launched a major new campaign for Freshline this year – ‘thank goodness its Freshline’ – highlighting the brand’s quality, and creating a strong brand awareness to make SPAR a consumer destination of choice.

We have a tiered offering that recognises that some stores serve the full consumer income range – our range therefore includes products appropriate for multiple profiles, from basic to high-quality, specialised products. Our focus is on sourcing locally: this is an ethical decision and also reduces the risk and cost related to transport. Imports are supplementary to local produce due to seasonal variation and demand.

The fact that a significant portion of retail sales are sourced through our distribution centres is testimony to the fact that our offering remains comprehensive and competitive.

Strategic outcome

World-class brands

SPAR South Africa’s implementation progress, risks and related opportunities

Our focus on the development of our house brands continues to deliver growth momentum as these products provide value for money for consumers under financial stress. Sales of SPAR branded products increased by 9.7% to R8 billion (2016: 12.3%), well ahead of growth in other wholesale categories.

TOPS at SPAR again outperformed other store formats this year and continued growing: 81% of SPAR stores now have a TOPS at SPAR in close proximity. Together with Pharmacy at SPAR, the diversity in formats contributes to our imperative to offer consumers a comprehensive shopping solution.

Strategic outcome

Best retailers

SPAR South Africa’s implementation progress, risks and related opportunities

We continue to manage costs as a way to ensure retailer success. The section on our relationship with retailers sets out some of the support services and training available to retailers. This year, we also, for example, developed a comprehensive retailers’ guide on cold chain principles, which includes self-assessment tools and e-learning modules – all in support of our Fresh control initiatives in the supply chain mentioned above. Cold chain standards will be included in the design of all new store developments going forward.

Read more about the newly launched GUEST programme in the retailer section of our material relationships.

Retailers have been alerted to the fact that minimum wages will increase in May 2018 and that we expect full compliance while being available to assist with human capital benchmarking and resource allocation options. SPAR supports the right to a minimum wage.

Strategic outcome

New business growth

SPAR South Africa’s implementation progress, risks and related opportunities

Intense competition and the aggressive struggle for retail space limit new business growth opportunities. Organic growth is driven through store refurbishments, new formats and expanded range offerings.

The plans for the new distribution centre in the Eastern Cape experienced some delays. We purchased additional land to build a new dry warehouse in 2016, and are currently focusing on mitigating environmental impacts before we start building. The sharing arrangement between the Eastern Cape and KwaZulu-Natal distribution centres for the warehouse in Mthatha is working exceptionally well in reducing supply chain costs for both.