Spar: Food inflation 'a crisis'

"It's a crisis and some of it is still coming," said Hook.

"The worst part is that it affects those we can't afford it to affect."

Spar's member retailers had seen some down-trading with customers shifting to lesser brands because they were cheaper, said Hook. However, Spar had not seen customers switch to cheaper food categories.

"You would expect to see moves from categories like rice to maize because of relative price increases, but we haven't seen it yet."

The African Development Bank said this week the price of staple crops, such as rice and maize, had doubled since January. This month, the World Bank said 33 countries faced political and social disturbances owing to rising food and energy prices.

Spar, which provides goods and services to 817 member stores through its sixdistribution centres in SA, is "trying to do what it can" to curb food inflation, said Hook: "Our warehouses help, in that we buy in against price increases and thus hold prices down. Member retailers have also held more promotions in stores to try and limit the impact."

Spar had engaged in early-stage talks - through Business Unity South Africa - with trade union Cosatu about rising food costs, said Hook. In mid-April, some of the union's members, together with members of the SA Communist Party, staged a march in Johannesburg to protest against soaring food costs. They handed a memorandum to the management of Spar rival Pick n Pay in which a moratorium on food price increases was proposed.

"The problem won't go away," said Hook. "But between the unions, suppliers,government and retailers, we have to try look at what we can do. When prices for certain staples like rice are determined elsewhere in the world, this is difficult, though. There's no silver bullet."

On Tuesday morning, Spar reported a 21.1% improvement in revenue to R13.1bn, and a 24.8% rise in operating profit to R496.2m for the six months to end-march. Its operating margin rose from 3.7% to 3.8%. Headline earnings per share rose 28.7% to 201c/share. A 37.9% higher dividend of 100c/share was declared. Return on equity increased 28% from 27.3% a year ago.

Hook said average inflation for the period was 10.3% when compared with 2007, while new stores added 5% to revenue.

Emerging markets driving growth

Spar opened 15 stores during the period under review, taking the total to 817. Hook said Spar had not downgraded its expansion plans, and that it should expand retail space by between 5.5 and 6% over the full year to end-September.

Much of the growth the group was experiencing was coming from stores in emerging markets, where the company has increased its focus, he said.

Spar's building supplies brand, Build IT, grew turnover 25.8% to R1.1bn for the period, although it has seen a slowdown in activity since January, said Hook.

Given that the brand is primarily aimed at the emerging market, which is not encumbered by interest-bearing debt, the nine 50-basis point increases in interest rates are not the cause of the slowdown as most Build IT customers buy for cash.

Hook said the rise in food and other expenses had affected the amount of disposable cash available to customers.

"Until December the business was firing, with 35% revenue growth. However, in the last quarter to March, growth slowed to 20% as the discretionary spend was not there."

By 12:00, Spar shares - trading on a multiple of 18 times earnings - were up 1.8% to 5 720c.

- Fin24.com