Following its takeover of the Spar business in Ireland a few years back, South Africa’s Spar Group hasn’t shied away from international expansion. As it looks forward to entering Poland, ESM editor Stephen Wynne-Jones caught up with its chief executive, Graham O’Connor. This article first appeared in ESM Issue 5, 2019.
When ESM last interviewed the chief executive of South Africa’s Spar Group, Graham O’Connor, in early 2015, he was looking forward to embracing the opportunities offered by the Irish market, with the Durban-based business having just acquired an 80% stake BWG Group, owners of the Spar brand in Ireland.
Today, O’Connor has added Spar operations in Switzerland and Sri Lanka to the group’s portfolio, and he has just completed a deal to enter Poland – not to mention the group’s presence in Namibia, Botswana, Mozambique, Swaziland and Zambia, as well as its home market.
In the first six months of the year, Spar Group saw revenues rise by 8.6%, to 54.27 billion rand (€3.2 billion), while gross profit went up by 7.7% and operating profit rose by 5.1%. Plenty of reasons to be cheerful, in other words?
“We’re very pleased,” O’Connor says of the group’s performance. “We’ve grown in a very muted market, particularly in South Africa, where we’ve held on to our gross profits and kept our costs under control. It was a strong half-year performance.”
Irish Eyes Are Smiling
Close to a third (31.2%) of Spar Group’s turnover is generated in foreign currency, and while there has been plenty to cheer about as the group has extended its reach overseas, it has also been beset with a number of challenges, some of which have been beyond its control.
First, though, the positives. The group’s Irish operation, BWG Group, posted an 8.0% increase in turnover in the first half, of which 5.5% was driven by newly acquired businesses, including the 4 Aces wholesale operation and Corrib Foods, a chilled- and frozen-food supplier. Trading under all retail formats – chiefly its Spar and Mace banners, which reported turnover gains of 3.8% and 3.7%, respectively – has also been strong.
“If you had said to me five years ago that we would have been able to make as much money as we have done in Ireland, I would have said you were mad,” O’Connor says of the BWG operation, of which it acquired control in 2014. “We’ve increased our margins there over a period of time, and we’re in a far better place than we were historically. Consumers rate the Spar, Londis, Mace and XL brands very highly. We’ve worked very hard on developing these brands, and it’s certainly borne fruit.”
He also believes, however, that the looming spectre of Brexit could derail the group’s positive progress. The group engaged in stockpiling ahead of the previously planned 29 March exit date – a process that has since been paused, but may be restarted as the new 31 October deadline draws closer.
“There’s obviously going to be a problem with deliveries and supply chain – the fresh space is certainly a concern,” O’Connor says of the challenges posed by a hard Brexit. “In a no-deal scenario, I think that there will be maybe a one-month or two-month glitch in terms of supply, but we will stock up and ensure that we are prepared, regardless of the eventuality.”
Swiss Roll
Switzerland, in which Spar Group invested in 2016, has experienced challenges, partly due to low economic growth and what O’Connor describes as an “embarrassing” misstep on the company’s part.
In the first half, Spar Switzerland reported a decline of 1.8% in local currency, with margins taking a significant hit due to a deep price reduction campaign during December and January.
“Basically, we stuffed it up,” O’Connor says of the ill-timed promotion. “It’s somewhat embarrassing for experienced operators like we are to make a basic error like that – to go and bet the house on a promotional campaign without having first calculated how successful it will be. We paid the price for that.”
A decline in tourism in Switzerland has also hit the business, particularly its wholesale arm.
“I think, last year, more than 1,000 restaurants closed across Switzerland, and for the cash-and-carry industry, that was just a disaster,” he adds. “It was something that we didn’t expect.”
Since its entry into Switzerland, Spar Group has sought to turn the business around, and O’Connor believes that both the retail and cash-and-carry (trading as TopCC) operations have improved enormously, saying, “With the right leadership in place, we’re starting to put it right.”
Since the half-year results were issued, the Swiss business has “turned a corner”, he notes.
On cross-border shopping, however – the bane of many a Swiss retailer’s life – O’Connor believes that the convenience sector isn’t as exposed as mainstream retail, offering the business some solace.
“As you’re aware, you can do your shopping in Germany and Austria for anywhere between 20% and 50% cheaper than you can in Switzerland,” he says, “but when you’re selling someone a can of Coke and a sandwich, as opposed to a big shop, it doesn’t have the same impact.”
Polish Ambition
In Poland, too, the group’s ambitions hit a setback, following a protracted court battle over the rights to use the Spar name in the country.
Following its successful acquisition of a controlling interest in the Piotr i Paweł group, which operates 77 stores in Poland, as well as a wholesale distribution network, Spar Group was awarded the licence to operate the Spar brand in Poland. However, the previous operator of the banner, Bać-Pol Group, took Spar International, the ultimate parent of the Spar brand, to court over the matter, resulting in a months-long feud.
With the case now close to completion, O’Connor and his team are looking forward to maximising the opportunities that the Polish market offers.
“It’s taken a bit longer than we expected, but we are in the process of taking over the Piotr i Paweł stores and are going to operate out of its warehouse in Poznań,” he says. “In time, we are going to phase out the Piotr i Paweł brand and grow both our footprint and the Spar brand in Poland.”
While it is not lacking in opportunities, Poland, is, however, a fiercely contested marketplace, with many major operators (Carrefour, Auchan, Tesco, Intermarché and, of course, Jerónimo Martins, with its Biedronka brand) all staking a claim. A challenging proposition?
“If you look at the Polish retail landscape, it’s about 50% formal and 50% informal retail, so we’re very excited about the opportunity there,” he says. “We believe we can bring something different to the market, because our model is all about retail entrepreneurs driving the business forward. We’re very strong at that.”
Home Market
As the old saying goes, charity begins at home, and Spar Group has exceeded expectations in its Southern African business, which saw turnover increase by 7.7% in the first half, despite weak consumer sentiment, high unemployment and low inflation.
“It’s been really tough,” O’Connor says of the group’s performance in its home market. “As well as high unemployment and low GDP growth, we have really strong competitors, and that has made the marketplace challenging, but, having said that, we’re still making inroads, thanks to the entrepreneurial nature of our retailers.”
The group’s Spar banner reported a 4.8% increase in sales in its home market in the first half of its financial year, with like-for-like growth of 3.8% boosted by improved private-label sales – own-brand sales were up 10%, to 5.8 billion rand (€340 million) in the period.
“Am I happy with 10% growth?” O’Connor asks. “No, I wanted 15%! That’s where we need to be, and we’re engaging in promotions and merchandising to improve that.”
Growth at its Tops off-licence format, meanwhile, has been particularly high, with liquor sales rising by 19.3% in the first half of the year, benefitting from the company’s decision to allow retail entrepreneurs to operate more than one Tops store.
“Our Tops offering is top class, if you can excuse the pun,” says O’Connor. “We rebranded it two years ago. Before that, bottle stores weren’t a nice place to go, but now Tops is considered an upmarket brand and an enjoyable customer experience. That’s helping to change consumer behaviour.”
Another aspect that has helped boost Spar Group’s performance, particularly in its home market, has been the election of Cyril Ramaphosa as South Africa’s president, following the resignation of Jacob Zuma, which has helped lift consumer confidence.
“We’re looking forward to an optimistic future,” O’Connor explains. “When Zuma was in charge, it was a bit of a disaster, but Ramaphosa is adopting a different approach to business in this country. […] Things have moved slower than we wanted in terms of the eradication of corruption and things like that, but there are positive signs.”
In its other African operations, performance has been mixed: Botswana is “doing OK”, Mozambique has been “hot and cold”, Zambia has been “very tough” and Namibia has “struggled” this year, despite a good performance in previous years.
“It’s a case of consolidation in those markets,” says O’Connor. “We much prefer the European set-up because we know what we are dealing with. The risk factor is much less.”
As for future international target markets?
“We have had another couple of opportunities in Europe, which we turned down, one of which turned out to be quite a good opportunity,” says O’Connor. “We won’t be expanding any further in the short term, but, after that, who knows?”
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine
