Fortune favours Spar’s brave European move
It's softly-softly approach to overseas expansion has paid off with robust sales in Ireland and Switzerland
Retailer Spar is a quite unlike Pick n Pay and Shoprite in a couple of ways.
First, it does not own most of the stores carrying the Spar banner, and instead distributes products to them from its network of warehouses around the country. In comparison, Pick n Pay and Shoprite own most of their stores and those that aren’t owned are franchised.
Second, Spar has not done much to go north into the rest of Africa, preferring to find growth in northern Europe. Research analysts initially criticised that brave move in Europe, but the strategy is proving increasingly successful. Ireland, especially, has provided Spar with robust sales and profit growth, and the more recent Swiss acquisition is turning around slowly but surely.
For the year ended September 30 2018, Spar supplied 2,236 stores in SA, 1,371 stores in Ireland and 315 stores in Switzerland. There is now a growing foreign currency stream, with 32% of turnover offshore, comprising 22% from Ireland and 10% from Switzerland.
Group turnover grew 6% to R101bn, which compares with R81.6bn for Pick n Pay for the year to end February and Shoprite’s R145.3bn for the year ended June. House brands as a percentage of turnover rose 4.3% to R10.7bn in SA, or about 16% of turnover. This is largely in line with most SA retailers.
Tops, Spar’s chain of liquor outlets, grew turnover growth 13% to R6.5bn. DIY chain BuildIt's turnover rose a surprisingly large 7.5% to R7.6bn, explained in part by homeowners electing to upgrade properties rather than selling in an extremely subdued residential property market.
Expenses as a percentage of sales moved up marginally from 6.8% to 7%. SA expenses were remarkably well contained, considering that wage settlements were generally above the consumer inflation rate and hefty fuel price increases came through during the year.
Operating profit rose 8% to R2.8bn, with 25.1% now from Europe. Headline earnings per share rose 1.4% to 966c and the dividend 8% to 729c.
With effect from October 2017, Spar acquired S Buys. This wholesale pharmaceutical business supplies pharmacies within Spar outlets and the intention is to extend the pharmacy rollout well into the future.
At R198, the Spar share price is fairly close to its record all-time high of R221 set in February this year. The price-earnings ratio of 20.5 times is fairly rarefied and compares with a similar 20.5 for Shoprite and 27.1 for Pick n Pay. Spar’s dividend yield is 3.7%, compared with 2.5% for both Shoprite and Pick n Pay. It can afford this generous payout ratio because its capital-spending needs are not as great and it does not have any big acquisitions on the horizon.
To an extent, Spar has immortalised its assets through its clever offshore expansion strategy. Precious few SA companies have managed to successfully expand internationally in recent years, but Spar has applied a softly-softly approach, first establishing a beachhead in Ireland and then acquiring the Swiss business, and it has worked well.
Ireland is moving towards being a full-employment economy and its citizens are becoming progressively wealthier after the torrid time the economy went through during the global financial crisis.
Switzerland has been a tougher nut to crack as its residents can cross the border and shop in cheaper neighbouring countries. But Spar has persevered and appears to be reaping rewards. This is a very stable country with a traditionally stable currency. Over time it should confer a distinct advantage to Spar compared with its competitors operating predominantly in the SA and Southern African space.
Spar intends to consolidate its presence in Ireland and Switzerland, and has no plans to extend its geographic footprint in the foreseeable future.