In a recent update from The SPAR Group Ltd, the company revealed the intricate challenges faced during the implementation of its new SAP software system. The Group commenced the launch at its South African central office in October 2022, with the distribution centre in KwaZulu-Natal (KZN) taking the lead. However, the transition to SAP resulted in significant go-live and integration issues, leading to a negative impact on distribution operations in KZN.
The KZN distribution center, being the first to adopt SAP, faced hurdles that resulted in an estimated loss of turnover of R1.6 billion and an estimated R720.0 million loss of profits for the period ending September 30, 2023. The SAP implementation challenges prompted the management to take immediate actions to ensure supply to retailers’ stores. These actions included servicing stores from other distribution centers in the Eastern Cape, South Rand, and North Rand, as well as implementing direct-to-store deliveries and increasing the use of supplier dropshipment channels.
The KZN DC resumed servicing all stores in the region as of August 2023. While the SAP solution is now stable and performing consistently at the KZN DC, the rollout of SAP has been delayed in other Southern African regions. The delay is to allow for the optimization of the system based on the lessons learned during the challenging transition phase.
The financial repercussions of the SAP implementation challenges are notable. The overall impact included a loss of turnover, a loss of profits, and a write-off of R94.1 million in respect of the SAP ‘asset under construction.’ Management believes they have identified the key issues that resulted in the KZN DC’s shortcomings and have the right team and resources in place for future implementations in Southern African regions.
The impact on the Group’s operating profit was significant, with a decline from R3.4 billion in the previous year to R1.8 billion for the year ending September 30, 2023. Diluted headline earnings per share also declined by 47.7% to 606.3 cents. The Board, considering the challenges faced, decided not to declare a final dividend for the year, marking a departure from the 400.0 cents per share declared in 2022.
Despite challenging market conditions with consumers under persistent financial pressure, SPAR Southern Africa reported a commendable 5.1% increase in turnover. The challenges were attributed to ongoing food price inflation, higher interest rates, and rising fuel and energy costs. The region experienced trading challenges due to a general consumer environment and continued electricity load shedding. Core grocery and liquor turnover increased by 6.1%, reflecting the ERP system challenges faced during the reporting period.
Build it, SPAR’s building materials business, reported a decline in turnover of 4.3%, reflecting a shift in consumer spending towards basic living costs. On the positive side, the pharmaceutical business delivered an impressive 19.2% turnover growth.
BWG Group, representing Ireland and South West England, reported strong trading performances across both markets. Turnover increased by 8.1% in EUR terms and by 21.9% in ZAR terms. Despite difficult trading conditions, including increased regulatory environment, staff shortages, rising operating costs, and intense competition, all retail brands delivered strong performances throughout the year. The food services channel performed exceptionally well, benefiting from a full recovery of the hospitality sector and market consolidation.
SPAR Switzerland faced a 3.3% decline in turnover in CHF terms (13.6% increase in ZAR terms) due to dynamics in the post-pandemic marketplace. Consumers sought better pricing either cross-border or locally with discounters. The transfer of corporate stores to independent retailers negatively impacted retail sales. Turnover from the TopCC cash and carry business declined by 3.6% in CHF terms, affected by the contraction in the restaurant industry and reduced consumer dining out.
SPAR Poland continued to experience a tough consumer environment, with consumers seeking the best deals despite a slight easing of food inflation in the second half of the financial year. Turnover growth was reported at 5.0% in PLN terms (19.9% in ZAR terms) compared to the prior year. The Board announced its decision to engage in a process to sell its interests in Poland, leading to impairments of goodwill and other intangible assets for the year ending September 30, 2023.
| Metric | Year Ended 30 Sep 2023 | Year Ended 30 Sep 2022 | % Change |
|---|---|---|---|
| Turnover | R149.3 billion | R135.6 billion | +10.1% |
| Operating Profit | R1.8 billion | R3.4 billion | -47.0% |
| Diluted Headline Earnings/Share | 606.3 cents | 1,159.1 cents | -47.7% |
The challenges faced during the SAP implementation, coupled with other market challenges, resulted in a decline in operating profit and diluted headline earnings per share.
Despite the challenges, SPAR remains optimistic about the future. In Southern Africa, positive momentum is building, supported by deliberate changes and progress within strategic focus areas. The consumer environment is expected to remain constrained, but SPAR’s private label strategy is positioned to offer better value.
In Ireland and South West England, increasing costs are anticipated to challenge profitability for retail and hospitality operators. However, the local management teams express confidence in the strong position of all businesses and brands, backed by wholesale acquisitions made in 2023.
SPAR Switzerland is cautiously confident about the future, focusing on strategic enablers to drive growth in the market. The management team emphasizes a revised fresh strategy to increase footfall to neighborhood stores.
Regarding SPAR Poland, the focus is on achieving the best possible outcome for all stakeholders. The Board has announced its decision to sell its interests in Poland.
In conclusion, the past year has been marked by significant challenges for The SPAR Group, including a complex SAP implementation and various market challenges. Despite these hurdles, the company remains resilient and forward-looking. The strategic changes at the executive and Board level are seen as necessary for modernization and upholding the highest standards of corporate governance.
The recovery is underway, and SPAR is confident about its future. While financial results reflect the impact of challenges, the company’s response and strategic focus areas position it for future growth. The commitment to returning capital to shareholders in the form of dividends remains a priority for the Board, which will consider future dividend payments based on prevailing macro and operating conditions.
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