SPP’s problematic implementation of its ERP system had a significant impact on the business, causing lost sales of R1.6bn and foregone trading profit of R720m. We are concerned that there may be longer-term consequences from this episode. Our channel checks with the owners of 13 Spar stores affected by the KZN distribution disruption revealed that many stores now have accounts with other suppliers and may continue to trade with them even after the resolution of SPP’s ERP issues. Dealing with outside suppliers is, however, often a manual process and the pricing differential must be substantial to make the switch worthwhile. Also, SPP’s value to franchisees is the consolidated delivery of low-volume lines, which stores cannot efficiently substitute with outside suppliers. Regardless, we think SPP will be under increased pressure to sharpen its pricing to maintain loyalty levels, which could impact its margins.
While Spar Ireland performed better, its growth continued to be driven by acquisitions. Given the breach of group covenants during the period, we believe a pause in acquisitions may be prudent. It is also worrying that a recent acquisition was impaired, nullifying some of the initial justification for that purchase.
We are concerned that governance issues could linger. With six directors having retired or resigned over the past year, the Board has only one non-executive director with a tenure longer than one year. Our concern that this could impact the quality of Board decisions is supported by the remuneration awarded to the executive chairman, comprising a basic salary that is three times higher than the former CEO’s, and 23% higher than the CEO of the much larger and better-performing retailer Shoprite (SHP).