Supermarket chain Spar's innovative business model keeps them ahead of the competition.

Bruce Whitfield:
One of our market commentators, Evan Walker from RMB Asset Management, describes Spar as the best business model in the world. It operates six warehouses, delivers goods to something like 850 stores, which it neither has to own or manage so it doesn't have the big business risks or operational headaches which are faced by companies like Pick n Pay and Woolies, for example. Now Spar has been probably the best unbundling success story from Tiger Brands, the share gaining on the day with a 29 percent jump in profits for the six months to the end of March, and Wayne Hook, the chief executive officer of the Spar group, joins us on the line from KZN this evening. Just briefly Wayne, just outline that relationship between Spar, the listed company, and also the stores which all of us are very familiar with.

Wayne Hook:
We call ourselves a voluntary trading group, so effectively we have members that belong to the Spar organisation, it is a voluntary relationship, it is not tied up by a 500-page franchise agreement, and they belong to the system because it works for them as opposed to, you know, because they are locked into it. So they buy from us but they are not forced to buy from us and it keeps us on our toes you know. If we don't provide the service that they are looking for then they are free to leave so I think it is a healthy relationship and it is one that there is always potential conflict in it but I think it is healthy conflict and as I say, it keeps us on our toes and it certainly works for us.

Bruce Whitfield:
Are the store owners obliged to buy a certain percentage of the product they sell from you or could they just carry the Spar brand on their shop and effectively buy from the local cash and carry if they want to?

Wayne Hook:
Theoretically they could do that but you know, then there wouldn't be much point in belonging to the Spar organisation and certainly we have ways of encouraging them and incentivising them to buy through the system but the major reason that they would support us, that it is easier to do so and that they can buy one case of an item from us from 600 different suppliers and we will deliver to them a number of times a week as opposed to directly from suppliers and having to go and pick it up from a cash and cash-and-carry so it is the system of ordering and delivering that would tie them into the group as opposed to, as I say, a contract.

Bruce Whitfield:
Which is exactly why guys like Evan Walker like the Spar business model so much.

Wayne Hook:
He makes it sound a little bit easier than it is, I must add.

Bruce Whitfield:
He doesn't actually have to do the day-to-day work on it as well but it is easy for him to analyse and possibly, that is why he likes it. Food inflation is something that is scaring the living daylights out of all of us at the moment, your margin has been consistent at 8.1 percent which implies that you are not capitalising on that theoretical advantage which can be given to wholesalers, retailers, by food inflation.

Wayne Hook:
Yes, I think for us what is important is we want to keep driving this business and theoretically inflation does provide an opportunity and to some extent we would have taken advantage of some of those opportunities but to a large degree pass them on in order to drive our business and in the end it is about making rands not percentages so that is important for us but that we continue to do that. At the same time we are also driving strongly into the emerging market and as you know when you are in that market your into basic commodities and the opportunities and the margins there are not what they are on the higher LSM products.

Bruce Whitfield:
Just how serious is the food problem in South Africa? We know globally it has been described as a crisis where basic grains like maize and rice and commodities like that have gone through the roof as well. Do we face a food crisis in South Africa in terms of pricing?

Wayne Hook:
It is reaching those proportions you know I think what is happening in the outside world is certainly something that is starting to impact the country. I mean apart from anything the shortages in some of the products that we are alluding to and the crisis is that it affects the people who can least afford to be affected so as a result of that you know when it is something that happens on an upper LSM product if I can call it that, more a luxury item, is one thing but when it affects staple foods that is the crices issue and I think really it is going to require a team effort of suppliers, producers, retailers, and the government to help resolve this issue because it is not just a case of a supplier benefiting out of something like this this is the price that they are having to pay from the world market and we are caught in the crossfire. Fortunately we have warehouses so we can delay the effect of the increases but you know ultimately one has got to pass them on; you can't swallow those on an ongoing basis.

Bruce Whitfield:
What is going to be the tipping point in terms of food prices though? At some point food price inflation is not going to be sustainable and what is going to be that catalyst which finally leads to a calming of food price inflation because we had relatively benign food price inflation in South Africa for almost half a decade.

Wayne Hook:
Well it is going to be a tricky one particularly with the supply and demand equation is out of whack that is a major issue and until that happens I think on basic commodities we have got a serious issue to face so how long is a piece of string as far as that goes and I think we have yet to feel the true impact, well it has obviously come through the system, but quite when it is going to come back into line is something that is very difficult to forecast.

Bruce Whitfield:
Because the one thing is that we are sure of that food prices never go down once they have gone up.

Wayne Hook:
Well I think it is not totally true. You know we have had for example in recent times we have had maize and wheat prices that have bounced around a little bit and they have come down believe it or not but it gets lost in everything else that goes on but generally because of the nature of the product I do get back to re-emphasising that that makes it a serious problem this staple food issue.

Bruce Whitfield:
And despite the inflation, despite the fact that the South African economy is slowing, you have been quite aggressive in the rollouts of the Build It stores, the Tops liquor stores as well as Spar stores over the next 12 months as well. I found that very interesting that you are expressing confidence in the underlying South African economy by your willingness to continue investment.

Wayne Hook:
Absolutely we are not holding back at this stage of the game, the stores that were planned are all going ahead so we have certainly with regard to retailers investing in new sites, investing in their existing stores, revamping them and upgrading them and that has provided a major impetus for our growth of our existing stores as well as the money that we are spending on our distribution centres. I mean we are talking about R1-billion over three years so the group as a whole yes we are confident that despite the fact that we are going through some tough times at the moment that in the medium to longer-term we are going to trade well.

Bruce Whitfield:
Your competitors like Pick n Pay and Woolies in particular have been very aggressive in terms of the new stores that have been rolled out and we look at suburban areas virtually every corner now has got a well-known branded store on it; are we heading to some point where we are getting convenience store overload do you think or are we still some way off from that?

Wayne Hook:
You know, I think, there are still opportunities out there but I think you are certainly right, in certain areas there is a certain element of over trading and I think we were all swept along by the economy pumping as it was so certainly it was a developer's dream that they could ask what they wanted and they had three or four guys chasing the site but I think people are a little bit more circumspect in terms of what they are rushing into however for us we continue to hunt for sites and where it makes sense for us. One has got to bear in mind that in our instance we have independent people running those stores and they have got to make some money out of those stores otherwise we are all going to have a problem so we look very closely at the market and whether it can sustain another store and also the impact that it has on existing stores. We can't afford to cannibalise our business like it might be a situation in a chain environment where they can sacrifice some turnover in one store. We have got to look carefully at those situations.

Bruce Whitfield:
Wayne Hook, nice to talk to you, thank you very much indeed, from Durban in KwaZulu Natal, the chief executive officer of the Spar group.

AFP