Spar’s operating profit plunges

• The botched software rollout of its SAP system in KwaZulu-Natal hit the wholesaler hard

Wholesaler Spar’s operating profit plunged 47% as it lost sales due to its botched software rollout in KwaZulu-Natal and reported lower volumes of goods sold in SA. It said R1.4bn of the R1.6bn fall in earnings was due to nonrecurring items, suggesting that there will be better earnings in the 2024 financial year.

Wholesaler Spar’s operating profit plunged 47% as it lost sales due to its botched software rollout in KwaZulu-Natal and reported lower volumes of goods sold in SA.

The company made an operating profit of R1.8bn, down from R3.4bn in the previous year, as it sold fewer items to retailers in its biggest province due to problems with its software, resulting in store owners having to buy directly from suppliers.

It said R1.4bn of the R1.6bn fall in earnings was due to nonrecurring items, suggesting there will be better earnings in the 2024 financial year.

When impairments or writedowns for mostly foreign business divisions that are worth less than previously recorded on the books are included, its profit after tax dropped from R2.2bn to R979.2m.

The group is making losses in its wholesale business in Poland, which it wants to exit, and sales in Switzerland are declining as consumers shop across the border in cheaper neighbours.

It may also exit this business eventually as it accounts for less than 3% of the Swiss retail market, but said the team is focused on increasing shopper visits in the year ahead, adding it is cautiously optimistic about the new division.

In SA, where it delivered an operating profit of R1.2bn, a 50.3% drop year on year, it said it will not roll out software to other provinces until the SAP system in KwaZulu-Natal is stable.

In SA, prices rose 9.7% and core grocery and food sales rose just 6.1%, with local overall turnover up 5.1%. This shows it is selling fewer items than the year before, with Shoprite the only food retailer that is growing its volumes, including at its Checkers brands.

The group did improve the amount of cash it generated from just more than R5bn to R6.2bn. Improved cash generation is viewed as positive by investors.

Spar’s operating margin, after the cost of sales and business expenses, is usually between 2% and 3% but dropped to 1.2%.

By contrast, Woolworths Food’s and Shoprite’s group operating margin is closer to 6%. However, as Spar is a wholesaler selling to independent stores, it will never reach that kind of margin.

It plans to get its operating margin back to 3% by the 2025 financial year, CFO Mark Godfrey said.

Spar said while local consumers will remain constrained, its private label brand has offered value to consumers and independent retailers.

CEO Angelo Swartz told Business Day it has launched a new marketing campaign to change the perception that its prices are uncompetitive.

“I think a marketing campaign is never going to change mindsets overnight. But sending a message around price consistently is important.

“We think we are competitively priced.”

Due to its lower earnings, Spar would have breached its banking covenants had it not renegotiated them to a more generous ratio of 3 times earnings before interest, taxes, depreciation and amortisation to debt from 2.7 times. This is a ratio that bankers use to measure how well a firm’s earnings cover its debt repayments.

It is still looking at finding an appropriate buyer for its business in Poland, which accounts for less than 3% of the retail market in that country. The business has debt of about R2bn that will need to be repaid.

Swartz said there is interest Poland in the ’Polish s economy business is growing because much faster than countries in other parts of Europe and there are many independent retailers that need a home.

A MARKETING CAMPAIGN IS NEVER GOING TO CHANGE MINDSETS OVERNIGHT