Years ago, when Alec Abraham of Otto1890 was a young analyst, he was enticed by Spar because its many differences made it attractive for investment.
“It was better than an ordinary wholesaler because it had a captive market in the Guild,” says Abraham, referring to the nonprofit company that brings together independent Spar retailers and the Spar Group’s distribution centres in Southern Africa.
“It was better than an ordinary logistics company because it had a captive market for its cargo, the Guild; and it was better than a pure-play retailer because the independent retailers of the Guild carried the costs of the retail network.”
The Guild is unique in South African retail. An organisation almost unknown to consumers, it has historically provided a voice for retailers, allowing them to influence marketing, support services and operational decisions.
For decades Spar and its independent retailers represented perhaps the most effective symbiotic relationship in South African business. Small entrepreneurs could access a world-class wholesale and distribution business, enabling them to compete with the largest and most powerful retailers.
For a fee to the Guild of about 1% of average monthly turnover, the independent retailers get access to national advertising, promotions and loyalty programmes. It represents individual entrepreneurial energy combined with corporate muscle.
Unlike a franchise system, Spar’s model allows retailers more freedom over stock selection and local management decisions. Certain Spar standards are enforced, with guidance provided on aspects such as store format.
The independent retailers buy their stock from Spar at wholesale prices that embed Spar’s own margin. This is the source of Spar’s revenue, and it’s why the group is so keen to keep loyalty rates as high as possible. Group CEO Reeza Isaacs says the loyalty rate is just under 80% — but doesn’t specify 80% of what. Incidental purchases, such as Lotto tickets, phone credit and fresh produce, account for about 25% of individual store sales and are generally excluded.
Rebates are used to encourage retailers to source from Spar’s own distribution centres. However, if the distribution centre price is more than 1.5% above what retailers could pay elsewhere, they are entitled to source independently.
For decades the relationship between the Spar Group — essentially a wholesaler and distributor of groceries (and more recently of building equipment, liquor and pharmaceuticals) — and 1,000-plus retailers seemed based on little more than tradition and a sense of fairness. Of course, it helps when both sides understand that such a relationship works only if each trusts the other, not just to play fair but to play efficiently.
On paper it reads like a world-class democratic system, in which success breeds success.
Until it doesn’t. Several years ago — at about the time Spar’s international acquisitions were putting serious pressure on group margins and the balance sheet — the relationship began to deteriorate. Retailer profitability started to decline as competitiveness weakened. One retailer says he noticed a pattern of less favourable pricing from Spar Group starting about seven years ago.
Decision-making became increasingly centralised and, according to some retailers, a gap emerged between the group and the independent retailers. As the gap grew, things got worse.
In December 2022, seemingly out of the blue, came a governance scandal. Chair Graham O’Connor, who had slipped effortlessly into that role from the CEO post in February 2021 (what were shareholders thinking?), was forced to step down. The scandal related to allegations of fictitious loans, racism and that Spar had sought to gain control over supermarkets belonging to the Giannacopoulos family by falsely claiming it was owed money.
The clean-out of the board precipitated by the governance crisis meant there was nobody left with experience of the Spar retail model.
The retailers’ efforts to get the Spar board to listen to their grievances came up against legal reality. The world-class democratic system they thought they were part of seemed more like China’s petitioning system, which allows citizens to lodge grievances that are invariably ignored. Technically, the Guild’s system gives retailers the right to make representations, not necessarily the right to be listened to.
Look a little closer, and it seems that the regulations and obligations imposed by the Guild are in practice intended for independent retailers and not for Spar itself. Then there’s the fact that the chair of the Guild board, which comprises 11 independent retailers and 11 representatives from Spar Group, is always appointed by Spar.
Finally, there’s the killer fact that Spar is a listed entity. This means the board has a duty to act in the best interests of the shareholders; whatever the King Code might say, as far as the Spar board is concerned, stakeholders’ interests, even crucially important ones like the independent retailers, are trumped by shareholders.
Each year in its annual report, Spar can tick off every governance box without having addressed the pressing concerns of the independent retailers. The refusal to listen could also be why retailer economics continue to deteriorate, as is evident from the interim results to end-March, which included a sharp hike in provisions for bad debt on payments owed by retailers to Spar.
Retailers say that even many of those able to service their debts are struggling. Sales are shrinking at about half the stores. Inevitably, fewer independent retailers are investing in the Spar model.
Eventually, utter frustration led early in May to the national council’s unprecedented decision to call for the resignation of Spar Group chair Mike Bosman, who succeeded O’Connor.
The council sits above the Guild and represents the group’s largest retailers at national level. It engages with the board on strategic and governance issues. Like everything else to do with the independent retailers, it operates out of the public eye. That is where it’s comfortable.
Ironic, really, when you consider just how public each of the hundreds of independent retailers is — every minute of the day engaging with shoppers, community members and local suppliers.
So it can be imagined how discomfiting it was for the council to break cover, not only challenging the most senior level of the governance structure but doing so publicly.
“Whether fairly or unfairly, Mr Bosman has become closely associated with the period of decline, reputational damage, strategic uncertainty, shareholder value destruction and breakdown in trust between the group and the retailer network,” wrote the national council, calling Bosman’s continued presence as chair “an obstacle to renewal, confidence-building and the restoration of constructive relations across the Spar system”.
Given the council’s normal reluctance to go public, this wasn’t a knee-jerk response to a few recent hiccups. It had been several years in the making, with much discussion between the council, the Guild and the group about a host of challenges — declining retailer profitability, operating cost pressures, weakening competitiveness, the pace and effectiveness of innovation and the disconnect between board-level leadership and the operational realities of the Spar independent retailer model.
In short, there was really no part of the business relationship that didn’t need some attention. After several years of discussion, almost nothing had happened. Calling for the chair’s head seemed inevitable.
Such is the extent of distrust that some retailers suspect Bosman is planning to convert the independent retailer system into a franchise model. Such a move would give Spar Group more power. “Mike [Bosman] doesn’t believe in our Guild system, he believes the system should be corporatised and we should become franchisees,” said one independent retailer.
Asked if there is any such plan, Isaacs stresses that the voluntary trading model “remains fundamental to Spar’s strategy and continues to be one of the group’s greatest competitive strengths”. He says it is the right model for the South African context, given the diversity of the communities Spar serves. “We have no plans to shift to a franchise model,” Isaacs tells the FM.
As for giving up the chair, Bosman and the board are having none of it. The board’s response, which relied heavily on company law, highlighted just how little power independent retailers have.
Lead independent director Shirley Zinn issued a statement saying the board had full confidence in the chair. To show good faith, Zinn undertook to set up an independent board committee to investigate the independent retailers’ concerns. The national council, which believes no-one on the board is independent of Bosman, was unmoved by the gesture and is calling for an inquiry led by an external party.
For his part, Bosman said he was going nowhere and indicated he was keen to remain for another two years to complete a five-year project. Much has been done, but there is more to do, he said. “Spar is a great brand, but it needs to be reinvented.”
Just the sort of message to send a chill through independent retailers who believe Bosman’s efforts at reinvention are behind much of the recent decline.