Spar looks to delivery as profits decline

The grocery retailer grew online volumes by 463%, albeit from a low base

Spar chief executive Angelo Swartz was candid about the retailer’s sudden surge in online volumes — which grew 463% for the six months ended in March 2024 — attributing this to its belated digital entry.

“The growth is spectacular but it is off a low base, if I am honest. It is an area where we have had a late entrance to the market and because of that I see us having that elevated growth for some time until we can grow some market share,” Swartz said during an interview after the release of the group’s interim results earlier in the week.

Spar was the last of its grocery competitors to launch an on-demand delivery service called SPAR2U in 2022. Checkers Sixty60 pioneered the model in 2019. Spar did not report on how its on-demand delivery service fared in its first year. 

Through SPAR2U, the retailer joined an already crowded market, dominated by Shoprite Holdings’ Checkers Sixty60. Pick n Pay asap! and Woolies Dash are also fighting for market share.

Spar is determined to steal some of its competitor’s lunch, Swartz said.

“The rate at which we have been able to scale that operation from zero to now over 400 stores across the country makes us very proud. We still have inroads to make before we are satisfied and get our share of that market,” Swartz said.

“It’s an area of focus for us and we’ll continue investing in that business and I think it will remain a feature in South African retail.”

SPAR2U was available in 420 sites at the end of March 2024, up from 356 sites at September 2023. 

Swatz noted that SPAR2U has been able to scale beyond the metros, also moving into some smaller towns. “The nature of our model has given us that advantage,”  Swartz said. 

Unlike its competitors, which have a presence in big malls and central locations, Spar is located in neighbourhood strip malls — allowing the grocer to be closer to homes, presumably making it more efficient at on-demand delivery. But it is not so simple.

Makwe Masilela, of Makwe Fund Managers, said there is a misconception that digital buyers represent an additional market. In reality, these are just the normal shoppers who have become online converts. 

“What usually happens is that, if there is a captured market, that is the very same market that will buy online. It’s not like you are going to get someone who used to shop with Woolworths to start shopping online at Spar,” Masilela said. 

The captured market is critical, because those consumers are already happy with the product and the pricing, Masilela noted. “You first have to convert your walk-in clients into your online clients. It is not two sets of clients.”

For the six months ended in March 2024, Checkers Sixty60 increased sales by 63.1%. 

“Notwithstanding a base of considerable growth built up over a number of years,” Shoprite chief executive Pieter Engelbrecht said in the group’s results booklet. 

Woolies Dash’s online sales increased by 46.6% for the six months ended in December 2023. 

“Only when you are a big player can you start taking on competitors and convert their clients from their platform. But for now Spar has to first grow its captured market and convert it for it to be able to grow market share,” Masilela said. 

Despite a 7.9% increase in group turnover to R77.2 billion, Spar reported a 7.6% decline in headline earnings per share.

The grocery and building materials group said its earnings were affected by a tough operating environment, with consumers squeezed by high inflation, prolonged high interest rates, muted GDP growth and high unemployment. 

“These factors continue to place consumers under pressure. So far as it has been possible, we have really taken the view that it is best to shield consumers from inflation as far as possible,” Swartz said. 

Spar said its internal inflation was 7%. Its competitor, Shoprite, said its internal selling price inflation measured 7.7% for the six months. Woolworths had the highest inflation at 9.1%, for the six months. Annual food price inflation was 4.7% in April.

“Our internal inflation is lower than the average food price inflation. It shows our ability to shield consumers,” Swartz said. 

“We have also been focusing on driving our private label business, which allows customers to access quality products at much lower prices. This will further shield consumers from the impact of a very difficult inflation environment.” 

Masilela said Spar is not shielding consumers from high prices. The retailer does not have an option to increase prices because doing so could see it losing market share. 

“Spar is not doing us a favour and being considerate by not passing on prices to consumers,” Masilela said. 

“If it received a headwind to be able to shield consumers, then I would accept it. But they have not got that. It’s been a tough trading environment and increasing prices might have a negative impact on the business. It simply cannot afford it.”