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SPAR GROUP LTD

RETAILERS SOUTH AFRICA

Turnover: R 95461.100bnTrading Profit: R 2582.500bnTrading Margin: 2.71%
Stores: 2,138Employees: 350,000
Listed: YesHEPS: 952.50 cents
 
Spar Group Ltd

INTRODUCTION

SPAR is a warehousing and distribution business headquartered in Durban, South Africa. We have been operating in Southern Africa for over five decades. Since 2011, we have expanded into Ireland (including South West England) and Switzerland.

The SPAR Group Ltd (SPAR or the group) is a warehousing and distribution business listed on the Johannesburg Stock Exchange (JSE) in the Food and Drug Retailers sector. The group owns the SPAR retail brand, but, essentially, supports a network of independent retailers who trade under our brand through our distribution centres.

We form part of SPAR International, which is present in 44 countries and has 240 distribution centres that serve 13 million customers every day. The SPAR Group Ltd, headquartered in Durban, South Africa, is present in nine countries, has 10 distribution centres and serves 3 768 retail members through 14 store formats every day.

SPAR international granted the South African licence to SPAR in 1963. Today, we have similar SPAR operations in Ireland (including South West England) and Switzerland. We also have a greenfield operation in Sri Lanka, and own SPAR licences for Namibia, Botswana, Mozambique, Swaziland and Zambia, which are all serviced through the South African distribution centres.

Our most significant income is from South Africa where we operate six distribution centres and one Build it distribution centre. These supply and service 903 independently owned SPAR stores locally, as well as five countries on the African continent. We distribute goods to stores with a fleet of trucks and trailers owned by the group.

 

STRATEGY

Vision
First-choice brands in the communities we serve.

Purpose
To provide expert leadership and support to retailers to enable them to run sustainably profitable and professional businesses.

Strategic imperatives
Excellence in Fresh
Supply chain optimisation
Retail relationships, leadership and support
Centre of community
Competitive pricing
New business opportunities
Transformation
Retailer profitability
Motivated and competent people

Strategic enablers
Collaborative relationships
Lean organisation
Effective systems (distribution centres and retail)
Social and environmental commitment
Skills to run profitable retail stores

Our strategic enablers consider our internal and external interactions with stakeholders and the environment and support our commitment to being a responsible corporate citizen.

One minor change to our strategy this year was the decision to elevate one of the enablers to a strategic imperative: motivated and competent people.

With our growing international footprint, it has also become evident that SPAR’s strategy has to adapt to be relevant to all territories while being fully integrated into risk, sustainability and performance management. This will be a focus area for 2018.



 

SUSTAINABILITY

We remain committed to improving emissions as part of our carbon footprint management approach.

Adopting science-based emission targets
SPAR International made a commitment to responsible retailing as part of its Better Together strategy. This includes a set of tailored initiatives aimed at reducing CO2 emissions and energy consumption. The SPAR Group Ltd has been participating in the CDP (formerly known as the Carbon Disclosure Project) since 2009.

We remain committed to improving emissions as part of our carbon footprint management approach. This year, we decided to adopt science-based targets (SBTs) for emission reduction. This means that our targets have to be in line with the level of decarbonisation required to keep the global temperature increase below 2°C compared to pre-industrial temperatures, as described in the 5th Assessment Report of the Intergovernmental Panel on Climate Change (IPCC).

We have selected an appropriate SBT methodology, a Sectoral Decarbonisation Approach (SDA), which separates SPAR’s business into three sector categories

warehouse;
distribution; and
retail.

This means that we are aligning SPAR’s emissions with the sectors’ carbon budget, and will be developing action plans to achieve the required milestones.

The alignment includes, for example, changing intensity measuring from m2 to cases moved as a more accurate and appropriate indicator for our business.

Supporting SBT is evidence of SPAR’s long-term vision and commitment to sustainable and shared value creation. Together with other leading companies, we adopt SBTs with the understanding – and consensus – that such a pathway is the only way to preserve safe planetary conditions for humanity.

 

CEO REPORT

Macroeconomic overview
SPAR’s distribution centres are serving retailers in a range of territories that are all experiencing different levels of challenge.

In South Africa, we have flat GDP growth prospects and low consumer confidence – the latter persisting despite a downward trend in food inflation and declining interest rates. Political turmoil and policy uncertainty continue dampening the overall spirits of a country battling with ethical dilemmas and unemployment in major sectors such as manufacturing, while mining companies continue with retrenchments.

In Ireland, the economic landscape is dominated by encouraging GDP growth against continued uncertainty about the impact of Brexit.

Financial results
The SPAR Group’s 2017 financial results are evidence of our ability to weather economic and trading storms of all kinds due to strong retail relationships, value-added buying power and efficiencies gained in all aspects of our operations.

We remain committed to offering our communities world-class stores, with excellence in fresh foods, and leadership through innovation and the entrepreneurial spirit of the SPAR family in all territories.

New business opportunities and growth drivers
In 2016, we entered into a joint venture with Ceylon Biscuits Limited in Sri Lanka to establish SPAR SL. SPAR is a 50% shareholder in this joint venture company, with Ceylon Biscuits Limited holding the remaining 50%. We expect to open our first store in Sri Lanka in March 2018.

We also acquired a 47.87% share in SPAR Zambia, effective from 1 December 2016. The Zambian operation has 18 stores serviced by one distribution centre and has also been supported by our distribution centre in North Rand, South Africa. The market shows excellent growth opportunities, with the potential to grow to more than 100 stores.

In South Africa, we acquired pharmacy wholesaler, S Buys Group effective 1 October 2017. No results for this business have been included in the current financial year.

SPAR Express has proved to be an attractive new growth prospect: following a test phase with four sites, we opened eight new stores this year and plan to open a further 25 stores in the new year, having concluded a Memorandum of Agreement with Shell.

Retailers have been operating the SPAR Express format successfully in countries such as Austria, Belgium, Ireland, Switzerland and the United Kingdom. It offers a distinct convenience retail format ideally suited to high-footfall locations such as forecourts, airports, railway stations and university campus locations.

Retail performance in three territories
Retailer success remains at the top of our agendas.

A significant slowdown in sales, particularly in South Africa, exposed cost pressures that resulted in margin contraction for retailers. TOPS at SPAR, SaveMor and Pharmacy at SPAR showed good growth, while maintaining margins.

Positive retail results drivers for 2017 included:

Increased uptake of 9.7% in SPAR house brands by consumers seeking value. This confirms the trust that consumers have in the quality and price of these products.

Continued strong growth of 12.4% by TOPS at SPAR with the opening of 42 new stores.

Expansion in and focus on Pharmacy at SPAR.

A deliberate increase in category management support to stores, with immediate benefits in terms of maintaining range, flow and forward share. Retailers are guided on store layout, product lines, and optimised quantity and receive support in turnaround options for underperforming categories. For many retailers, this resulted in good growth despite difficult local economic conditions.

Despite remaining under financial pressure, Build it experienced a solid year in volume growth through its imports warehouse. This was encouraging, especially given that price competition from blended cement and imports negatively affected retailer loyalty.

We implemented a leadership change in the Build it division to create more retail support capacity, driving sustainable turnaround in the business. Wayne Hook was appointed as the new Managing Director. 27 new Build it stores were opened during the 2017 financial year.

Our business in Ireland experienced a strong financial performance. The Gilletts acquisition in South West England strengthened our credibility with both retailers and suppliers. Retailer retention has been good and the transfer of supply chain and logistics expertise to the BWG national distribution centre was completed successfully.

We have made strategic changes, including the appointment of Rob Philipson as the new Chief Executive Officer at SPAR Switzerland. We are set to sell a number of corporate stores to independent retailers and will continue to drive successful initiatives such as Beantree – the coffee offering – and the development of Backstube – an in-store bakery concept. The first SPAR Express store was opened in the Italian region of Switzerland.

Supply chain optimisation within our growing distribution network
Given current low levels of growth, we have proactively tightened our cost control and margin management measures while increasing our marketing drive.

We continue to enhance distribution capacity, efficiency and efforts to reduce our resource impact throughout our supply chains.

The most significant progress for the 2017 reporting year is the positive long-term impact of the introduction of a new slow-moving product model between our North and South Rand facilities. This followed the completion of the new facility at the North Rand distribution centre in November 2016.

The extension of the Western Cape distribution centre was completed in October 2016, while our plans for new facilities in the Eastern Cape and West Rand have been delayed due to the need for an environmental assessment and slower medium- to long-term demand projections.

This year we managed to acquire land adjacent to the KwaZulu-Natal distribution centre as well as property adjacent to the head office in Pinetown.

We are also initiating a long-term solar energy project with the first panels already installed at the South Rand distribution centre.

Supply chain and logistics expertise from South Africa contributed to improvements at the facilities for Appleby Westward, BWG and Switzerland.

Our interaction with the Competition Commission
The past year saw increased engagement with the Competition Commission in South Africa in the following matters:

The Commission believes there are features in the grocery retail sector that may be preventing, distorting or restricting competition, thereby adversely affecting consumers and households. The inquiry is looking inter alia at the impact of the dominance of the big four retailers, which includes SPAR. Public enquiries into the activities of the grocery retail sector were held during July 2017 and SPAR participated in these. A senior management team attended the session held in Durban. Further public enquiries are scheduled for December 2017.

The Competition Tribunal matter launched by Massmart against Shoprite/Checkers, Pick n Pay and SPAR continues. A second round of exception hearings were held in September 2017 and the outcome is still awaited from the Tribunal.

Future pipelines: retailers, suppliers and leadership
Our efforts to attract and support new black retailers in South Africa continue.

We engaged, inter alia, with the Public Investment Corporation this year to assist with the funding of black retailers. A similar engagement with the Masisizane Fund – an Old Mutual initiative in the form of a non-profit funding company that provides loan financing and support to small, medium and micro enterprises (SMMEs) – is also showing great promise. These funds can provide much needed assistance to new black retailers as well as our emerging farmer partners. We have funded a number of black retailers at prime minus 4% when acquiring stores.

Our flagship emerging farmer development business is delivering much-needed income, employment and other opportunities for individuals, communities and our supply chain. We are encouraged by the progress, uptake and positive response to these efforts, and believe that businesses such as this offer a positive and sustainable solution to some of South Africa’s most pressing challenges.

Given the challenges in SPAR’s operating environments, it is important that our employees can deliver on the value proposition for our retailers. To this end, we strive to develop leaders and a workforce that can deliver excellent service. Ours is a lean business model – we empower employees to ensure that the decision-making process happens at the right level to free up senior management to deal with strategic issues.

The outlook for the group
Retailer success will remain our top priority considering the tough trading environment.

Although we expect political and economic uncertainties to continue dominating the external influences on our operations, we remain positive and committed to improving the factors that are under our control. This will include a stringent focus on both cost control and margin management across the group.

We look forward to the positive impact of the new GUEST customer service programme – on both retailers and consumers. We also plan to explore growth opportunities in the virtual space through online transactions and services.

We want to maintain our culture as one of the key ingredients of our past successes: our SPAR values should be alive and visible from our distribution centre’s backdoor up to the retailer, on the shelf and into society.

Our Swiss operations have the potential to double in the next four years, with 15–20 store openings in the pipeline.

In Ireland, we will be investigating further potential acquisition opportunities while monitoring and mitigating the risk of Brexit for the business.

There are great opportunities for our employees in the years ahead. We have made two important leadership appointments in Switzerland and Build it, and between our South African distribution centres, we are also looking forward to the contribution from our new Lowveld managing director, Alison Zweers and our new KwaZulu-Natal managing director, Max Oliva.

The 2017 reporting year has been one of difficulties and disappointments, combined with solid improvements and great teamwork. Such successes bode well for SPAR in the years ahead as we grow together with passion, entrepreneurship and family values.






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CHAIRMAN'S REPORT

The 2017 reporting year will be remembered as a period of consolidation for the SPAR Group.

Over the past three years, we have expanded through investments in Ireland, Switzerland and Sri Lanka, while continuing our support of retailers in cross-border territories such as Botswana, Malawi, Mozambique, Namibia, the Seychelles, Swaziland and Zambia. While faced with difficult trading conditions, low economic growth and a range of emerging wholesale and distribution risks and opportunities in these different territories, the profitability and success of our retailers remain our most significant strategic imperative.

Our 2017 retailer convention, which is an annual event, encouraged retailers from South Africa, and visiting retailers from Ireland and Switzerland, to ‘seize the moment’ by remaining focused on their businesses, and not to be paralyzed by external conditions beyond their control. The board and executive management engage with stakeholders such as government and regulators for positive change, while also managing our strategic risks in such a way that our distribution centres and retailers have the best possible support for success.

The group’s financial results for 2017 were modest, with revenue increasing by 5.4% and profit after tax by 0.3%. These results reflect the bleak state of consumer buying power and confidence, which has been exacerbated by retrenchments, political uncertainty and climatic challenges in South Africa. Difficulties such as drought and avian flu have had a significant impact on supply security and led to additional pressure on retailer margins.

Despite these challenges, we are encouraged by the strong performance from our business in Ireland and the recent turnaround in Switzerland.

Other highlights for the year include the momentum created for our pharmacy business through the advanced negotiations for the acquisition of S Buys Group and the acquisition of a 47.87% shareholding in SPAR Zambia, the expansion of the emerging farmer programme as well as leadership changes that will ensure that we develop a strong pool of succession candidates over the medium term.

Our governance approach
We have a small but highly effective board with members who actively participate in leading the group. The transition from the King Report on Governance for South Africa 2009 (King III) to the King IV Report on Corporate GovernanceTM for South Africa 2016 (King IVTM) was a smooth process, due to our mature structures and unwavering commitment to ethics.

The fact that SPAR forms part of an international network of members using the same trademark under licence, demands high standards of trading principles, reputation and performance. The fact that our Chief Executive Officer was elected as the Chairman of SPAR International stands testament to the highly positive perception of the South African group within the broader SPAR community.

The board’s ethical leadership is guided by the SPAR Code of Ethics, which was relaunched this year throughout the South African operations. We continue to expose our board members to operations through board meetings at distribution centres and training where requested. The board and committee charters were reviewed during the 2017 financial year to ensure compliance with King IVTM. All policies are assessed every three years.

Evaluations of our performance and member independence were completed and the Chairman is satisfied with the attendance, preparation and participation of all board members in meetings.

Our material relationships
A significant portion of this report explains our relationships with material stakeholders – our material stakeholders being those individuals and groups that have a potentially high impact on our ability to create value.
The voluntary trading model relies on relationships of trust and support, and has therefore entrenched these relationships at SPAR from its adoption.

Our board has always taken the stakeholder-inclusive approach, with specific focus placed on those relationships that are material for SPAR: our relationships with suppliers, employees, retailers, consumers and communities.

Our risk management approach
We recognise that risk management is integral to the achievement of SPAR’s strategic imperatives, and to the way we make decisions. SPAR performs an annual comprehensive enterprise risk management (ERM) analysis to ensure our sustainability risks are integrated with group risks and strategy, with appropriate action plans in place.

During the past year, we focused on maturing the risk assessment process by identifying the controls and mitigating actions that must be in place. During the next year, work will be done on improving and integrating the risk processes in Ireland and Switzerland into the South African operations framework. We continuously assess whether our mitigating actions and controls are sufficient – especially when considering emerging risks such as food security and cyber risk – while we continue to focus on prioritising initiatives such as broad-based black economic empowerment.

Priorities for 2018
As a board, we continue to focus on retailer success as our top imperative to ensure sustainable value creation.

Our ability to cope with the economic downturn and adjust to a world of technological change will be some of the board’s strategic priorities for the next year, in addition to succession planning and the continuous development and motivation of our employees.

The further integration and optimisation of our recent acquisitions will demand attention as we align our purpose, vision and values in all areas of the business. We remain excited about the ways in which our geographic diversification mitigates risk, provides growth opportunities and enables us to expand our contribution to global food and convenience retail.

Appreciation
The hard work and commitment of our employees – our most valuable asset – must once again be acknowledged.

Similarly, the board acknowledges the invaluable role played by the Divisional Managing Directors of our distribution centres in overseeing the group’s daily operations, while remaining committed to supporting social and environmental sustainability at a regional and national level.

We also extend our appreciation to the CEO, executive management and all board members for their ongoing service. Our sincere condolences go out to employees and retailers who lost family members and friends this year.



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SUMMARY

Our banners / stores

Build It

Build It


Hardware
368 Stores
Kwikspar

Kwikspar


Convenience Stores
903 Stores
Pharmacy at Spar

Pharmacy at Spar


Pharmacies
90 Stores
Savemor

Savemor


Convenience Stores
44 Stores
Spar

Spar


General Supermarkets
903 Stores
Spar Express

Spar Express


Convenience Stores
5 Stores
SuperSpar

SuperSpar


General Supermarkets
903 Stores
Tops

Tops


Liquor
733 Stores

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