By Brian Thomas

Spar is a household brand in South Africa, loved by many of us on our holidays as we pop down to the local Spar in the seaside resort over December. We marvel at the stock that the Spar store holds and some of the different items available in the Spar that you just don’t seem to get at your local Spar in Cape Town or Johannesburg. While we as consumers love the special food items that we find at the holiday Spar, are they really good for Spar, the listed entity?

Spar is a distribution business that distributes stock from their distribution centres to the predominantly franchised Spar stores around the country. While Spar expects some level of loyalty from these franchisees in the form of the amount of goods that they purchase from Spar, they do of course offer some latitude so you can get that special goodie at your holiday Spar.

Loyalty challenges and the impact of SAP issues

It’s this loyalty that has plagued Spar South Africa, after a woeful SAP implementation at their KwaZulu-Natal (KZN) distribution centre (DC) where franchisees could not reliably get what they had always bought from Spar and had to improvise and find product elsewhere, it led these franchisees down the path of direct procurement and not via the Spar DC. This has driven a gap between Spar retail sales (i.e. through the tills) in the 18 weeks to end January 2025 to growth of 3.4%, while sales out of the DCs only grew at 1.6%. Although loyalty is improving slowly in KZN it is still a problem that Spar is working hard to resolve.

When sales through the DCs don’t keep up with the retail sales, it puts pressure on margins in the distribution business. Spar management is working hard to close this gap and take the South African net margin back to where it was in the past, a healthy 3%. This task is made all the more difficult because of their bifurcation, having branched out into Poland (which has now been sold), Switzerland, Ireland and Southern UK and even a joint venture in Pakistan. All of these forays were financed out of debt and Spar now sits on a considerable debt load.

The road ahead

At a recent capital markets day, Spar management addressed some of the concerns around their offshore forays and have indicated that the investment in Switzerland is under review and it may well follow the same disposal path that they followed in Poland. It’s uncertain what they would receive in consideration for this Swiss business which is structurally challenged given the cheaper supermarket alternatives across the Swiss borders.

Disposing of it would alleviate some of the debt burden on the balance sheet, with nearly R3bn of debt against the R3bn of assets that underly the Swiss business being expunged on sale. A disposal would also bring back management’s focus on the local business, which is by far the biggest part of the overall group, elevating the margins back to 3%. This may just make Spar ‘good for you’ again.

Brian Thomas is a portfolio manager at Laurium Capital and part of the PPS Stable Growth Fund.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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