Anchor Capital investment analyst Stephan Erasmus tells the OFM Business Hour the group is close to its debt covenant limits and urgently needs to start delivering on operating margins and overall performance. While management has previously outlined plans to turn the business around, Erasmus believes execution has been lacking, and this is reflected in the company’s current share price. 

His commentary comes amid significant changes at board level, following the resignation of SPAR’s chair and deputy chairpersons as well as one of the group’s major investors reducing its holding in the company.

The company has been facing a number of corporate governance challenges, with tensions reaching a climax last week when board chair Mike Bosman and deputy chair Shirley Zinn resigned with immediate effect, amid ongoing concerns about the company’s performance and its relationship with independent retailers.

The tension between the board and independent retailers has been well publicised. Ultimately, the SPAR Group is the wholesaler supplying independent retailers, and the two have a symbiotic relationship. When one performs well, the other benefits too, explains Erasmus. Following the resignations of Bosman and Zinn, Lwazi Koyana took over as chairperson on 17 August.

It seems the independent retailers do buy into the new appointment. “Sometimes it’s better to start with a clean slate,” says Erasmus. However, the group’s been dealt another blow.

One of the group’s major investors has reduced its holding in the company. On 27 August, Coronation Asset Management disposed of a beneficial interest in ordinary shares in the SPAR Group. Following the transaction, Coronation now holds 9.53% of SPAR’s total shares, down from its previous holding of 10.89%.

A look at SPAR’s own goals

Apart from the corporate governance challenges, SPAR’s failed SAP system rollout in 2023 stands out as one of the company’s biggest own goals. SAP is an enterprise-wide IT system used to manage areas such as stock and supply chain operations, and SPAR rolled out the system in its Durban operation.

According to media reports, the botched rollout caused severe supply chain disruptions, resulted in empty store shelves and contributed to a falling out with some of the group’s major independent retailers.

One of its largest franchisees, the Giannacopoulos family, was reported by Business Day to have taken legal action against the group over the failed rollout.

How does SPAR compare with competitors?

With South African food inflation at a 16-year low, the broader environment remains challenging for food retailers.

The overarching theme is one of low inflation, explains Erasmus. Revenue is made up of both volumes and prices, but food retailers are currently unable to pass through significant price increases. At the same time, their costs continue to rise in line with CPI, including expenses such as salaries. 

This puts pressure on operating margins. That makes for a difficult environment for the likes of Shoprite, Boxer, Pick n Pay and SPAR. However, within this group, Erasmus says the better performers are currently Shoprite and Boxer.

Shoprite’s model, he says, is a juggernaut. It is a well-run business that continues to expand and take market share. The company has also invested significantly in artificial intelligence and data capabilities. That investment has helped put Shoprite ahead of the curve when it comes to monetising data, understanding consumers and getting the right price to the customer.

Boxer, meanwhile, has expanded even faster than Shoprite in terms of stores as a percentage of its existing store base. The retailer also has significant white space opportunities in other provinces. 

Boxer services a lower LSM consumer and is currently experiencing negative price inflation. In other words, it is putting through lower prices than a year ago. Despite this, Erasmus says there is demand for its products and the business continues to trade well.

Next six to twelve months critical 

With the SPAR Group entering a new chapter under a new board chairperson and with a recovery strategy in place, the next six to twelve months could prove critical. The Irish side of the business is performing relatively well, while the South African operation is currently struggling.

The question now is whether SPAR can execute on its plans, rebuild relationships with its independent retailers, improve margins and put the business back on a stronger footing.

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