More problems loom as Spar crashes back to 2008 levels
· Citizen
The Spar Group’s disastrous trading update on Friday, which saw its shares sink almost 15% on the day, sent the group back to as low as R47 – levels last seen in the depths of the 2008 global financial crisis (and before that, early 2007).
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This means nearly two decades of capital appreciation has evaporated as the group battles with problems on many fronts.
It says headline earnings will be between 50% and 60% lower for the first six months of this financial year (to 27 March), versus the same period in 2025.
Its performance in the 26 weeks was impacted chiefly by two factors:
- Margin erosion during the peak Black Friday trading period (it sacrificed profits to grow the top line); and
- Gross margin levels in its KwaZulu-Natal region being below historical levels.
Spar is not a retailer. To understand this group, you need to appreciate that it is, essentially, a wholesale business.
Its botched SAP enterprise resource planning (ERP) implementation in the KZN region has seen its customers – the retailers – abandon much of their ordering from the group’s distribution centre (DC).
In February it said that in the 18 weeks to the end of January, ‘loyalty’ in KZN was nearly 10 percentage points behind the rest of its regions in South Africa (excluding neighbouring markets). At that point, loyalty (the proportion of stock retailers buy from the group) in KZN was 71.5% versus 80.9% for all of SA.
Pressure … and a plan
In FY2025, the group reported an operating margin of just 1.75% in South Africa. A decade ago, this figure was above 3% for the group and had been at that level since at least 2011.
Between 2016 and 2020, it oscillated between 2.7% and 2.8%. And since 2023, it has languished below 2% (in 2025, the group’s margin was dragged down by its UK and Swiss operations to just 1.5%).
In December, then CEO Angelo Swartz articulated a plan to ‘restore’ the margin in SA to above 3% by 2028.
There would be three main drivers here, each delivering between 40 and 45 basis points: DC improvements – chiefly fixing the issues in KZN (44 basis points), centralisation and efficiency (45 basis points), with gross profit expansion (increasing private label, for example) and other income delivering another 40 basis points.
Two months later, Swartz was out.
New CEO Reeza Isaacs reiterated this plan, but after an initial trading update in late February, cautioned investors that the timeline of the ‘recovery’ to 3% would effectively be pushed out.
“We recognise that the progress towards the 3% Ebit [earnings before interest and taxes] margin has been slower than planned, and we need to get our margin back to healthy sustainable levels,” he said.
“Just to be clear, we communicated here in terms of what those levers are. There is absolute alignment internally about those levers and the quantum at hand and what we need to do to get there, but the dials need to be turned up more and faster. We are 100% focused on improving margins going forward.”
The core problem, however, runs far deeper than just a poor Black Friday and one (albeit major) distribution centre.
Wholesalers are under extreme pressure. Because of the ultra-competitive retail environment, nowadays they need to effectively share the trading margin with retailers, making for a very delicate arrangement for both parties.
This is compounded in a period of deflation, where major categories and commodities (including rice, maize, cooking oil, sugar, fruit and vegetables, soap powder) have seen price declines in the last 12 to 24 months.
Margins in these products are compressed to nearly nothing.
Franchise operators ‘under extraordinary pressure’
CEO of rival Pick n Pay Sean Summers, who knows a thing or two about wholesaling, given that about half of its South African business comprises franchises, is frank.
He says there is a lot of “conjecture about the whole world of franchise at the moment, and we can see some of the major franchise operators are under extraordinary pressure as well in this marketplace”.
“That as margins are being compacted and it’s happening across all industries, it doesn’t matter what industry you’re in today, margins are getting compacted today and the same thing has happened in the split between the franchisee and the franchisor in terms of the margin compaction that’s taking place and a lot of the talk about this huge growth in the wholesale sector as opposed to the retail sector.
“What you’re seeing happen quite a lot today is a lot of distribution from the major manufacturers that would traditionally have gone through either ourselves or the other major franchise operators is in fact now going into the wholesale sector and then finding its way back into the retail sector again.
“So we’re finding even in our own franchise network that they are buying out of us [not with us] and into wholesalers where they can find on large job lots, greater [better] prices for themselves and this is a phenomenon that has been growing within the franchise sector and we have spent an enormous amount of time rebuilding our relationships with our franchisees.
“I’m pleased to say that it’s better than it’s ever been and in fact we’re seeing that our percentage of purchases is in fact now going back the other way again as we’ve dealt with the margin issues.”
This is the core structural problem being faced by Spar at present.
And it is leading to increased debtors impairments (its retailers), with the group saying “debtor risk remains a key area of focus, with continued disciplined and active management”.
Importantly, it cautions that this continued debtor risk may see “potential for further provisioning”.
Headwinds
In Friday’s update, the group adds that it “remains cautious of several headwinds that may affect H2 FY2026 performance, including rising fuel costs driving increased logistics and distribution costs”.
This is the elephant in the room.
Already, there are two months of extremely elevated diesel costs in Spar’s reality (following the end of its first half). The third month will kick in this week. Due to the fact that it is a wholesaler, it will struggle to pass these costs on to its customers (Spar stores).
By comparison, Pick n Pay spent R625 million on diesel last year (with a very, very small amount for generators in stores). In Pick n Pay’s reality, the current increase equates to R28 million a month.
Never mind a 3% margin, at this point, Spar will be lucky to achieve 1.5% for its SA business.
This article was republished from Moneyweb. Read the original here.