Food retailer Spar could be heading for arbitration to resolve a dispute with a franchisee and end a long standoff that has caused reputational damage for the group and the departure of its CEO and chair.
The wholesale food and building retailer, which operates in a number of countries in Africa and Europe, was accused of fraud and inflating prices of loss-making stores that were sold to unsuspecting franchisees. It was also accused of racism by black entrepreneurs.
Spar executive chair Mike Bosman said he had brokered peace with the Giannacopoulos family on a litany of complaints it had against Spar. However, there were three outstanding issues that might have to be resolved at arbitration.
The Giannacopoulos family owns more than 40 Spar stores in KwaZulu-Natal and Gauteng. They have laid a number of fraud cases against Spar executives in recent years.
“I have personally met with the family and am running a formal and informal process. There were 10 major issues that needed to be resolved with them. About six or seven have been resolved and were more operational issues that have been stewing for a long time,” Bosman said.
“On the formal side, the process is moving towards arbitration, which will be a good way to go because there will be a fair outcome for both parties. I remain optimistic that we will be able to resolve the issue.”
Bosman was appointed Spar chair in December, shortly after Graham O’Connor stepped down after criticism about his independence — he was previously group CEO.
In February, Bosman stepped into an executive role after CEO Brett Botten resigned.
Bosman said a dispute with 10 black franchisees had also been resolved. They accused Spar of discrimination and offering them fictitious and fraudulent loans.
An investigation by law firm Harris Nupen Molebatsi dismissed the racism allegations, but Spar admitted to three fictitious and fraudulent loans amounting to R11m. The group has been reported to the Independent Regulatory Board of Auditors (IRBA). It said the loans happened five years ago and were isolated.
Bosman described his past four months at the helm as “intensely busy, but exceptionally productive”. Apart from resolving complaints, Spar also reconfigured its board with the appointment of a number of non-executive directors.
He said the company was conducting an urgent review of “everything we do in the Spar business and we are making significant progress”.
Spar reported a 30.3% drop in earnings for the six months to March. The performance was negatively affected by a constrained consumer environment worsened by high levels of load-shedding, loss of turnover from SAP software, implementation challenges at its KwaZulu-Natal distribution centre and weaker trading performance from hardware division Build it.
Spar spent R700m on diesel and the cost is likely to increase to more than R1bn by the end of its financial year in September. The affect of delays in implementing new software amounted to R786m of lost wholesale turnover.
Bosman said a new software system was needed as the existing one was outdated. The rollout, however, did not go according to plan.
“The world is rapidly moving into a new digital era and into a data-centric society. We need a system that will allow us to have instant access to an incredible amount of information. This system will also lead to much greater efficiencies and much better planning,” he said.
Before the software is rolled out to other regions, Spar will review it to avoid repeating mistakes.
The retailer is also reviewing its loss-making Poland business and could sell it or rapidly grow it through partnerships or acquisitions.
Analyst Chris Gilmour said Spar should sell the Poland business as there is “no point in flogging a dead horse”.
The company's entry into Poland has been a disaster, said Mohamed Mitha, investment analyst for Camissa Asset Management. “The market is fiercely competitive, with some very strong and well-established retailers. Spar is a small player here and it would be a formidable task for them to build a business that is able to compete effectively in this market.”
Gilmour said this was the “worst performance of any food and drug retailer by far. Earnings down 30% and no dividend. This is not how defensive stocks such as food retailers are supposed to work.”
Spar also breached its debt covenant, but received waivers from banks.
“The rest of the year is expected to remain challenging for Spar ... [It] will have to manage cash flow very carefully from here, given [it is] in breach of [its] debt covenants,” said Mitha.
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