Our investment case

Our core fundamentals

SPAR’s unique voluntary trading model meets the needs of retailers who want independence but seek the benefits of economies of scale. The model is based on two main capabilities: managing an efficient, sustainable supply chain and maintaining sound relationships with five key stakeholder groups.

Over a period of 55 years in South Africa, we have developed specialist operational expertise in managing a wholesale supply chain: from sourcing, new product development and warehousing, to distribution logistics. We can manage the variables associated with anything from long-distance deliveries, to multiple daily, fresh, and slow-moving product orders.

The SPAR distribution centres carry the inventory and distribution burden. This ensures that retailers focus on running their stores, shaping demand and generating cash. Thus, large manufacturing groups and producers, on the supply side, do not have to manage complex, small-batch deliveries to a multitude of stores nationwide.

SPAR’s position in the supply chain is therefore critical as a balancing force, as all players in the trading network must be successful for the long-term sustainability of the model.

Read more about our capability to create, maintain and build relationships in our material relationships.

Opportunities for growth

The formal food and grocery retail market in South Africa is highly competitive. There are four main players vying for the custom of cash-strapped consumers and available retail sites. The formal sector is mature and new store openings run the risk of cannibalising existing stores. However, well managed inventory and stringent operating cost controls have enabled the business to deliver continued solid results, despite the challenging environment and top-line pressures. Food inflation remains low and signs of recovery are expected to be slow. Despite inflationary pressures to food retail, our South African business continues to benefit from strong growth in both its TOPS liquor and Build it brands. Furthermore, additional opportunities now present themselves for our Pharmacy at SPAR offering, given the acquisition of S Buys pharmaceutical wholesale business in 2018.

The informal food economy in South Africa also presents an opportunity for growth, albeit a slow and experimental one. This opportunity was an important consideration in our new supermarket strategy development process. We believe there are many pockets within the food system where SPAR can have a real and positive social impact, while driving inclusive growth. Read more about this opportunity in the strategy section.

New growth opportunities are available through investments in the SPAR model in other territories. Our intrinsic knowledge of the SPAR trading model allows us to apply our expertise to optimise similar financial and operational models in other countries. We can also apply their expertise in South Africa. This adds a new and diversified income stream for the business while creating even more efficiency. By growing our footprint within SPAR International, we gain opportunities to share knowledge, technology, and product and industry best practice to the long-term advantage of our South African business.

Our investment in Ireland – a solid platform for growth

The opportunity in Ireland was straightforward: a business with good growth prospects was suffering from severe long-term property debt strain while SPAR South Africa had an ungeared balance sheet. We were attracted to the deal not only based on price, but also the opportunity to create value and drive growth in partnership with a strong management team.

Since August 2014, through the acquisition of an 80% stake in the BWG Group, who owns SPAR in Ireland and South West England, we have created value in the following ways:

The long-standing professional association between SPAR and the BWG Group created mutual trust. We had a shared commitment to grow the business over the five to eight years of the Irish shareholders’ contracted management involvement. The business is well positioned for further growth, despite Brexit uncertainties, as we prepare for the first minority shareholders’ exit in 2019.

Our investment in Switzerland – turnover on track

The early signs of success following the entry into Ireland gave us confidence to explore further opportunities for growth and currency diversification in Europe.

The Swiss opportunity to invest was attractive, as it involved one of the last remaining large family-owned businesses in the Swiss grocery retail market. It is an established business which has been operating for 30 years, with a mere 2% market share – a strong base from which to grow in a stable market. It had been running a much larger portion of company-owned stores compared to South Africa or Ireland. This turned out to be a weakness that we had to address in the period following the acquisition of 60% of the ordinary shares in SPAR Holdings AG in 2016.

We decided to appoint a South African managing director, to sell non-performing corporate stores and bring new energy to the business culture, which positioned this investment as a steady, low-risk base, with the potential for expansion and partnership in the rest of Europe. We have the option to acquire the balance of the ordinary shares in SPAR Holdings AG in 2021.

Our investment in Sri Lanka

Sri Lanka has emerged as a new retail hotspot in Southeast Asia since multinationals started rapidly entering the supermarket segment in 2015. This was driven by rising consumer disposable income, increased urbanisation, growing tourism and the concomitant shift to a more formal food retail economy.

SPAR South Africa established a joint venture with Ceylon Biscuits Ltd, and was granted the licence for SPAR to operate in Sri Lanka in 2016. The first SPAR store was opened in Thalawathugoda, Colombo in April 2018. Through the joint venture we aim to open 45 new SPAR stores by 2023, primarily by developing independent retailers.

In summary – positioned for scale

Food retail is a solid business with unwavering demand. Through responsible and strategic investments, we mitigated the growth and currency risk associated with our South African business, and established scalable options in other territories through acquisitions. We are well diversified, with an offering in a spread of categories – from food and liquor, to building materials and pharmaceutical products. We supply independent retailers that serve all income groups through a variety of store formats that are located where people live.

Our core business is managing the supply chain, which differentiates us from other corporate-orientated food retailers. Corporate retailers are, by nature, more fragmented. This is due to factors that vary from property management to wholesale and retail challenges.

SPAR South Africa has the potential to scale up in future by continuing to apply learnings in any market, to create supply chain efficiencies and to build relationships wherever we go.

A diversified group in terms of product categories and currency earnings
A broad consumer market with unwavering demand
International growth potential through a replicated and familiar trade model
A differentiated food retail brand with growing house brand loyalty
A network of quality relationships supporting a sustainable food system
Strong operational expertise and optimised distribution infrastructure