The 2018 SPAR strategy development process started with the … · 2018-12-21 · The SPAR board believes there is an inextricable link between strategy, risk, sustainability, and

SPAR - all rights reserved. 2018 | 1

OUR NEW SUPERMARKET STRATEGY FOR SOUTHAFRICA

The 2018 SPAR strategy development processstarted with the recognition that we neededto develop a strategy that focuses on SPARsupermarkets in South Africa.Since our previous in-depth strategy development process in 2012, SPAR has transformed in thefollowing manner:

We acquired new businesses in different territoriesWe entered new categories, such as pharmaceuticalsWe had leadership changesOur markets evolved through heightened competition, economic and political challenges as well asconsumer shifts – driven to a large extent by technological advancements.

Although the board reviewed the strategy annually since 2012, there was a need for a morecomprehensive reflection, focusing on driving the retail and wholesale aspects of our business inSouth Africa. It was also key to involve retailers, particularly the national guild, in the strategydevelopment process.

The strategy review process was underpinned by extensive background research that helped identifykey trends, opportunities and challenges, and gave insight into where SPAR could make a realdifference in the country.

Key retail trends that we considered:

Buy local Global expansion War on packaging

Convenience Integrated digitalsolutions ‘Shrink-flation’

Health and well-being Deep discounting Increased security

War on food waste


These trends are amplified by growth in the informal food economy, the consolidation of formal foodsystem players and the pressure on primary producers – the latter at risk to scale effectively for futuredemand while complying with increasing legal and audit requirements.

The strategy process was further guided by the Sustainable Development Goals (SDGs) which assistedin defining primary themes for SPAR around equality, poverty reduction, human settlement, food andnutrition, sustainable growth and quality education. Read more about how we align the SPAR valueswith the SDGs here.

As input into the strategy process, we initiated a stakeholder engagement project that encompassedfocused interviews, workshops and team discussion, as well as trade intelligence. Our maininteractions were with retailers, the guilds, employees, suppliers and consumers.

https://investor-relations.spar.co.za/ir2018/our-strategy-and-business-model/our-value-creation-contribution/


THE SUPERMARKET STRATEGY AT A GLANCE


First choice brand in the communities we serveThere was collective agreement that the SPAR vision should remain the same: it continues to highlightour focus on understanding our consumer and recognises that different communities need differentthings. It also implies a sense of belonging. The vision further confirms that we have a bigger role toplay in communities than just selling and making money – it emphasises our culture of caring.

The strategy development process culminated in a board-approved supermarket strategy for SouthAfrica – not a radical change from our previous strategy, but a refinement with a shift in emphasistowards our consumers.

The focus areas detail the key aspects we need to prioritise to deliver our outcomes. They are thefoundation stones of the strategy and are closely linked to the vision and outcomes. By developingaction plans and indicators according to the focus areas, we create structure around how to achieveour outcomes.

OUR SHORT TERM STRATEGIC PRIORITIESThrough the strategy development process, we identified the following key priorities for the next 12months:

Understand and segment our consumers and retailers based on their various needsReview our offerings to both consumers and retailers by segmentCapture informal market opportunitiesUpdate voluntary trading model standards and rules to address key challenges that threatenthe long-term sustainability of the modelActively drive our desired cultureDesign the organisation of the future and commence implementationDrive supply chain optimisation and efficienciesDrive cold chain management at distribution centre and retail level

Detailed action plans are being developed for each strategic focus area with appropriate keyperformance indicators and phasing.

OUR STRATEGIES IN OTHER TERRITORIESAn overarching group strategy will be developed as a next phase, serving to align the strategies in thedifferent territories. Strategies for each format, such as Build it, Pharmacy at SPAR and TOPS at SPAR,will also be developed.


SIX STRATEGIC PLANS FOR IRELANDCurrently, BWG works according to a strategic plan 2016 to 2021 aimed at shareholder value creationthrough six specific plans:

1. Distribution Specific imperatives up to now included a strategic review of theBWG supply chain for all channels to stress test distribution andminimise costs. This was followed by optimisation plans for thedistribution centres to assess capacity, productivity, and servicelevels to improve capacity management and reduce working capital.In 2018, a transport optimisation plan was developed to refine assetuse and reduce costs.

2. Information technology(IT)

The IT plan focuses on more efficient and lower-cost infrastructureupgrades, standardisation and redesign. We developed an e-commerce strategy to address online, mobile and integratedsolutions. Further imperatives include software consolidation, socialmedia, and business intelligence capabilities.

3. Acquisitions The acquisition plan is based on growth aspirations, shareholdersupport and management expertise. Targets were identified andexplored while ensuring retention of strategic retail business. Afurther imperative is the retention and development of strategiccategories.

4. People The top imperative for the people plan is to refine the managementstructure based on the need for succession planning and talentrequirements. Further focus areas include the e-learning academy,strengthening the company culture through feedback programmesand training, while ensuring greater productivity and efficiency.

5. Property The property plan is a long-term imperative aimed at enhancingprofitability and reducing liabilities. It considers asset valuations,disposals, and the development of an intellectual propertymanagement mandate for the business.

6. Retail Our focus is on developing a multi-brand strategy for the differentstore formats and to drive SPAR as the leader in the conveniencemarket over the long term. The plan also addresses the EUROSPARbrand strategy imperative and considers innovation to grow margins.

Read about activities supporting these plans for 2018 in the operational report: Focus on Ireland.

https://investor-relations.spar.co.za/ir2018/focus-on-ireland/operational-overview/


STRATEGIC OUTCOMES FOR SWITZERLANDSPAR Switzerland adopted a new strategy in February 2017 with the following elements:

Purpose: Enable retailers to profitably meet the individual needs of theircustomers

Vision: Convenience brand of choice for the customers we serve

Values: Trust, passion and entrepreneurship

The following actions plans shape SPAR Switzerland’s operations toward six outcomes:

1. The best employees We aim to motivate and empower employees through our culture,values and processes. We focus on improving communication,providing competitive remuneration, talent management, trainingand apprenticeships.

2. World-class supply chain We focus on supply chain optimisation through supplier engagementand relationships to reduce costs and increase quality. This includeslogistics efficiencies and productivity improvements.

3. Customised range We focus on category management through an assortment gearedtoward customers. This also informs new product development.

4. Competitive pricing We balance pricing with retailer profitability through marketing andpromotions, and by optimising our store portfolio.

5. Loved/trusted/believablebrand

We focus on targeted sales and marketing activities, including ourrewards programme.

6. New business growth We focus on expanding our footprint through new sites and stores,and by using technology.

Read about activities supporting these plans for 2018 in the operational report: Focus on Switzerland.

THE LINK BETWEEN STRATEGY, GOVERNANCE AND RISKThe SPAR board believes there is an inextricable link between strategy, risk, sustainability, andperformance management, which is effectively measured and controlled through the enterprise andrisk management (ERM) process. The successful implementation of the strategy therefore relies oneffective mitigation of strategic risks.

The board, supported by the Risk Committee, implements effective policies and plans to mitigatethese risks and to support the company in being ethical and a good corporate citizen.

In developing the strategy and overseeing risk management, the board provides overall guidance anddirection, including the relevant approvals and monitoring. The South African executive team andmanagement provide structure for both processes and input into the discussions by considering pastperformance and a changing operating landscape. Progress against the strategic focus areas and anupdated risk register forms part of the quarterly reporting to the board and the relevant committees.

The board’s role in considering and approving strategy includes ethical leadership, which evaluates,

https://investor-relations.spar.co.za/ir2018/focus-on-switzerland/operational-overview/


for example, the trade-offs between different stakeholders which ensures progress is measured andmonitored. To enable the latter, the board approves policies, frameworks and the plans that drivebudget allocation.

The risks outlined below have been identified and ranked as the top 12 risks most likely to impact thebusiness. The risk register links key risks to strategic imperatives and identifies key risk indicatorsthat are tracked to determine likelihood and impact. These risks are monitored and managed at boardlevel. To strengthen accountability and mitigate the key risks identified, detailed action plans havebeen developed, with clearly defined roles and timelines.

The summary below tracks strategic risks, identifies mitigation plans and show the trend movementagainst a 2016 baseline:


High inherent risk

Medium inherent risk

Unchanged movement in rank compared to 2016

RISK TITLE DESCRIPTION MITIGATING PLANS

Macroeconomic factors maycause a decline in business

Factors include global andmacro-economic conditionssuch as inflation, currencydepreciation andunemployment.

Medium- to long-termmitigation strategies includeforward cover and stockpilingfuel. We track and report trendsaccording to indicators and setthresholds, for example, for theRand exchange rate and the oilprice.

Political instability in SPARmarkets may hinder business

National or internationalpolitical events can causefundamental shifts in theeconomic system of thecountry.

We receive regular politicalinsights from knowledgeablecommentators that assist increating scenarios to determinethe potential impact on ourfuture business.

Poor individual retailerperformance may negativelyimpact the group

This can have a wide spectrumof impacts, includingreputational and financialthrough subpar stores, priceperceptions, store viability,group profitability andefficiency. Further drivers areincreasing working capitalconstraints at retail because ofpoor financial management byindividual retailers. Poorperformance includes retailersnot involved in thecommunities they serve in ameaningful and sustainableway, thereby not living theSPAR vision.

We drive increased financialdisclosure and benchmarkingfor retailers while offeringtraining and support.We actively manage the list ofpoor-performing retailers perregion and identify appropriateand specific action plans toaddress performance. We havealso increased the audit of coreretailer (business) processes.

New and existing competitionmay take market share

This takes the form ofaggressive competitionincluding foreign or local newentrants, with expandeddomestic competition bycurrent retailers – for example,competing on range, price, andhygiene factors.

We developed plans for allstrategic stores and identifiedmarket share gaps.We have also developed a clearemerging market strategy foreach region.


Loss of retailers and retailstores to competitors

Competitors target SPARretailers to buy stores, evenwith unrealistic or extravagantoffers.

We identified unique actions toimprove our relationship witheach retailer, based on ananalysis of each retailer’sspecialist support needs.Vulnerable stores are indexedand tracked.

Poor adherence to andimplementation of groupinitiatives by retailers

Resistance and lack of buy-inand discipline by some retailersmay result in an inability tomarket our offerings on anational basis, resulting infinancial and reputationaldamage.

We conduct and documentrobust pilots for all newconcepts to act as reference inthe rollout to retailers. Regionalcommittees list mandatoryinitiatives, conduct audits, andreport on retail compliance withdocumented remedial actionsfor non-compliant retailers.

The inability to develop newsites may stunt growth

Acquiring new sites isfundamental to our growthstrategy. Barriers include guildapprovals, objections by otherretailers, and othermajors/competitors owningproperty.

To drive new business, weidentified new businesschampions per region withaction plans. We developed agroup developer engagementand funding strategy. We alsoidentified retailers per regionwho have the desire andcapacity to own multiple stores.

Major customer groups maynegatively influence thesustainability of the business

Large groups may have aproportionally large influenceon the profitability, reputation,relationships, and standards ofspecific distribution centres.This might lead to the potentialloss of a significant percentageof business.

We identified key risks permajor customer group anddocumented an action plan toaddress these.

Disruption of operations mayoccur due to labour disputesand/or industrial and massaction

Labour unrest may be causedby a spill over from relatedindustries such as transport, orthe unsatisfactory resolution ofcentral bargaining andoutsourcing issues or retailstrikes with empathy fromSPAR employees.

We have identified uniqueactions to improve relationshipswith unions and employees,including improving thecapacity of shop stewards. Wehave strike contingency plansdetailing responsibilities andexpectations. We conduct anannual comprehensive climatesurvey at all sites.


Poor data quality and analysiscapabilities may preventeffective business intelligence

The lack of quality data acrossthe group may limitopportunities to optimisebusiness processes, the supplychain and forecasting. It mayresult in an inability toaccommodate businessrequirements. This isdetrimental to performancemanagement.

We conducted an informationneeds analysis for each functionand the development ofbusiness intelligencecomponents was prioritised. Wecontinue to drive, throughtraining and other means, theproper use of systems at retailand corporate systems. Weimplemented of a groupwidedata governance programmethat introduces governedmaster data and data qualitymanagement.

The financial model may fail toensure retailer profitability,thereby jeopardising SPAR’ssustainability

Retailers may not able to makesustainable and acceptableprofits, which threatens thewholesale model. Retailmargins are under pressure.

We identified key actions toreduce cost or enhance revenuewithin retail in the regions. Wedetermine the true cost andprofitability for SPAR andretailers across the value chainfor a selected basket of goods.We identified key driversimpacting the wholesale/retailmodel, including the impact ofcross-subsidisation and sharedcosting for retailers and SPAR.

Transformation issues across allareas may impact the businessnegatively

Multiple issues aroundtransformation regardingemployees, management,ownership, supply chain,enterprise development andretailers, and training anddevelopment must bemonitored. There arechallenges in hiring for skill vsimmediate BBBEErequirements.

We updated our transformationplan based on the new BBBEECodes and are executingaccordingly. We educateretailers on new requirements,such as liquor licensing.


OUR VALUE CREATION CONTRIBUTION

SPAR creates value on a global scale throughour voluntary trading model and convenientdelivery of fresh food and groceries to storeslocated where people live.The group creates significant value for our independent retailers, who benefit from the economies of scalegained by our buying efficiencies, and the cost savings through operational efficiency and a wide scope ofproducts offered and distributed through our distribution centres.

Our business model relies on relationships in all aspects of value creation. We explain our materialrelationships here, as these provide input into our business activities and help us mitigate the risks,including wastage and resource depletion, associated with distribution and wholesale businesses.

Retailers further benefit from the value created by the merchandising expertise, support services andbenchmarking offered by SPAR, which enable them to offer a range of products at competitive prices.Voluntary trading further equips retailers with the ability to customise their product and service offering tobe responsive to their local, niche consumer segment’s needs and expectations. This unlocks value forretailers and consumers.

We strive to manage our use of resources and the six capitals of value creation through environmentallyand socially sustainable business practices. Read more about these commitments and our progressagainst targets in the operational reports.

Our sustainability pledge is to create authentic shared value, though the following outcomes:

Our commitment to creating authentic shared value is inherently linked to our values and our support ofthe 17 SDGs in the following ways:

https://investor-relations.spar.co.za/ir2018/who-we-are/spar-international-guilds-voluntary-trading/

https://investor-relations.spar.co.za/ir2018/who-we-are/our-distribution-centres/

https://investor-relations.spar.co.za/ir2018/our-material-relationships/why-are-relationships-important/

https://investor-relations.spar.co.za/ir2018/focus-south-africa/


INPUTS REQUIRED TO CREATE VALUEWe source products according to the requirements of our retailers who, in turn, shape their offeringaccording to each store format and their consumer community needs. These products are sourced locallyor imported, and consist of fresh and packaged foods, beverages, groceries, building materials, andpharmaceuticals. These products rely on natural resources, and are then converted, processed, packagedand transported to our distribution centres. We rely in manufactured capital in the form of factories, plants,and road infrastructure for these business inputs. Once products enter our distribution centres, they arehandled according to SPAR’s inventory, quality control and order processes – which are further essentialmanufactured capital resources.

Our range of SPAR branded products are developed and packaged for SPAR according to our specificrequirements. These products rely on our intellectual capital in addition to the manufactured capitaloffered by the suppliers selected to produce these.

Other products are branded by their producers and sold under third-party brands in our stores. We follow astringent supplier selection process to ensure the quality, safety, and secure supply of products – acapability that requires intellectual capital.

Social and relationship capital enable us to form partnerships that endeavour to change manufacturing,packaging and consumption behaviour related to the use of plastics, other packaging and water. Initiativesrelated to our new carbon reduction framework use intellectual capital in defining indicators, measuringperformance, and developing action plans to minimise our detrimental effect on natural capital.

The people working in our distribution centres handle, sort and move inventory according to orders anddeliveries. They constitute the human capital required to run the operational side of the business. Theiractivities are supported by employees dedicated to the financial, marketing, retailer services, informationtechnology and human resources aspects of the business.

Our fleet of trucks – and those in our network of suppliers – form a pool of manufactured capital which isapplied to optimised delivery through drop shipments, shared loads, and backhauling, thereby minimisingour natural capital impact.


We depend on financial capital in almost all business activities as we require funds to procure goods andservices, to pay salaries, to develop new products, to invest in facilities, equipment and to executiverepairs. Financial capital is used to make acquisitions, expand out footprint and deliver long-term growth.

SPAR’ INTERACTION WITH THE SIX CAPITALS

CAPITAL OF VALUECREATION

CAPITAL INPUT REQUIRED TOEXECUTE OUR BUSINESSACTIVITIES

CAPITAL INCREASED,DECREASED ORTRANSFORMED THROUGHOUR BUSINESS ACTIVITIES

FIND MOREINFORMATION ANDEXAMPLES OFVALUE CREATEDTHROUGH THECAPITALS

Financial capital We use this capital to procuregoods and services, to paysalaries and tax, to developnew products, to invest infacilities or operations,equipment and repairs, and topay our funders andshareholders. We also providefinancial capital to ourretailers as credit facilitiesand to assist with storeacquisitions orrefurbishments.

Changes in the availabilityand quality of the capital isevident from increasedturnover, margins andoperating profit. Financialcapital is at risk throughremuneration increases andwage negotiations, storeclosures, provisions andpenalties. Positive impactsare delivered throughefficiencies and costsavings.

Reports from ourleadersWhy invest in SPAR

Manufacturedcapital

We use this capital toestablish, maintain andoperate distribution centres(with cooling facilities,recycling and reclamationplants), warehouses, trucks,forklifts, road and portinfrastructures.

We measure our impactthrough increaseddistribution centre space,trucks and volumeshandled, stores opened,refurbished or closed. Newmarkets, routes and productofferings impactmanufactured capital. Wereduce our reliance on thiscapital through efficiency,optimisation andconsolidation efforts.

Operational reports

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https://investor-relations.spar.co.za/ir2018/#slide4

https://investor-relations.spar.co.za/ir2018/why-invest-in-spar/our-investment-case/



Intellectual capital We use this capital to developthe SPAR strategy, SPARbrand, the guild structure,promotions and marketingcampaigns, pricing strategies,‘learning journeys’ andretailer conferences. Itinforms our values andculture, board andgovernance structures,category managementcapability and joint businessplanning with suppliers.

We measure our impactthrough increased sales ofhouse brands, our deliveryon strategic outcomes(through the ethics riskassessment), our ability toimprove integrationbetween functions, andcollaboration betweendistribution centres andcountries. Intellectualcapital informs our auditprogrammes andcertifications achieved, aswell as the effectiveness ofour enterprise riskmanagement rollout.

Strategy andbusiness modelGovernance

Human capital We use the skills, capabilitiesand passion of employees, ourmanagement teams andboard to execute businessactivities and formrelationships.

We measure our impactthrough theincrease/decrease in totalemployees, our trainingspend and access toincreased skills. The qualityof human capital input isinformed by our health andsafety measures, thenumber of injuriessustained, visits to ourclinics, and employeeturnover.

Operational reportsOur materialrelationships

Social andrelationship capital

We use our ability to createand sustain materialrelationships with keystakeholders (suppliers,retailers, employees,consumers and communities)to create an environment inwhich to perform our businessactivities, to partner forfurther value creation and toensure a sustainable foodnetwork.

We measure our impactthrough awards, salesvolumes, retailers lost,customer satisfaction andmarket share, CSIcontributions, food safetyincidents and GUESTprogramme successes.One of the key measures ofsuccess is the sustainabilityof the emerging farmerhubs.

Our materialrelationshipsOperational reports

https://investor-relations.spar.co.za/ir2018/our-strategy-and-business-model/


https://investor-relations.spar.co.za/ir2018/governance-approach/


https://investor-relations.spar.co.za/ir2018/our-material-relationships/






Natural capital We use this capital as input ofthe products we distribute andsell, our properties and thewater and energy we use inour operations (includingelectricity, diesel, fuel andgas).

We mainly decrease thiscapital through themanufacturing, distributionand consumption of goods.We mitigate this throughreclamation and recycling,solar power, reducing theuse of plastic, and throughthe targets set by ourcarbon reductionframework.

Strategy andbusiness modelOperational reports

CREATING VALUE THROUGH OUR BUSINESS ACTIVITIESOur business activities are similar to other companies managing wholesale and distribution businesses.What differentiates SPAR is the dynamics of the voluntary trading model, which extends our scope in termsof retail support and marketing activities. Our business activities ensure that we fulfil our purpose.

Our business activities are interdependent in the three main territories in which we operate. As a system,these business activities collectively ensure good supply chain management which streamlines processesand result in resource savings.

Read more about these activities and outputs in the operational reports. Our business activities aresummarised below, with the emphasis on our South African operations:

PROCUREMENT

> 5 000

suppliers and service providers

> 1 300

SPAR-branded products

We buy goods from suppliers and sell them to retailers at a margin.

Our bulk procurement creates economies of scale. Fixed costs are spread over vast volumes, therebyreducing cost per unit.

Joint business planning with key suppliers targets supply chain efficiencies, including the responsibleuse of resources.





https://investor-relations.spar.co.za/ir2018/who-we-are/our-values-and-culture/


https://investor-relations.spar.co.za/ir2018/our-material-relationships/our-relationship-with/#Collaborating


Our support of local suppliers benefits small businesses, for example through the rural hubs.

WAREHOUSING

286 935 m2

total floor area

39 676 m2

satellite warehouse space

4 296 811

cases despatched per week

We operate warehouses across our distribution centres and satellite facilities, and across varioustemperature disciplines.

We apply advanced technology to optimise the complex process of storing vast quantities of goods fordelivery.

Goods are received from suppliers and unpacked into pick slots.

Retailers’ orders are processed electronically and sorted for transportation.

https://investor-relations.spar.co.za/ir2018/our-material-relationships/our-relationship-with/#food


DISTRIBUTION

351 trucks

in South Africa

403 trailers

in South Africa

231.7 million

cases despatched groupwide

Increasing fuel prices emphasise the importance of route management systems, truck specifications,turnaround times and driver efficiency.

There is a dual strategic drive to increase our bottom line and decrease our carbon footprint.

We are increasing the use of biodiesel as fuel, which we collect from South African retailers and whichwe recycle.

Our joint business planning streamlines processes, including backhauling and packing techniques.

RETAILER SUPPORT AND MARKETING

903

independent retail owned stores in South Africa

We share the benefits inherent in the voluntary trading model with retailers.

We encourage entrepreneurial flair, within SPAR guidelines, to ensure consistency.

We provide a range of retail support services:



Store refurbishment and design assistanceMerchandising best practicePublic relations assistanceThe SPAR development fund for retailers


OUR STRATEGIC OUTCOMES AND TRADE-OFFSWe identified three main outcomes as part of the strategy development process. These outcomes considerimpacts that are internal or external to SPAR and its material stakeholders throughout the value chain.

The outcomes are also subject to deliberate trade-offs where the interests of one stakeholder are weighedagainst another over a given period. The voluntary trading model, for example, allows retailers to procureproducts from alternative suppliers or to compare supplier prices against those offered by the SPARdistribution centres. For SPAR there is then a trade-off in margin to be weighed against the risk to thebrand associated with products not necessarily subject to the same safety and compliance requirementsas those offered by SPAR. Reputational risk is often carried to a greater extent by SPAR than by anindividual store owner. The need for consistency in terms of the SPAR brand and stores vs the free choiceof an independent owner remains a core conflict to be managed in the value creation process.

https://investor-relations.spar.co.za/ir2018/our-strategy-and-business-model/our-new-supermarket-strategy-for-south-africa/#Glance


OUR PROFILE IN SOUTH AFRICA

We serve licensed SPAR retailers in South Africaand neighbouring countries through our eightdistribution centres, which contract with morethan 5 000 suppliers and service providers tooffer more than 1 300 SPAR branded productsto consumers.

South African retailers trade through nine different branded store formats offering groceries, freshproduce, liquor, pharmaceuticals, and building material.

The focus on Freshline development resulted in an offering that now comprises about 300 bakery lines and350 fresh produce lines distributed to about 800 stores in the country.

The range of SPAR store formats allows us to serve the entire range of consumer income groups in allregions of South Africa and select neighbouring countries. We have a tiered offering that recognises thatsome stores serve the full consumer income range – our range therefore includes products appropriate formultiple profiles, from basic to high-quality, specialised products. Our focus is on sourcing locally: this is anethical decision and reduces the risk and cost related to transport. Imports are supplementary to localproduce due to seasonal variation and demand.

A significant portion of retail sales are sourced through our distribution centres. This is testimony to thefact that our offering remains comprehensive and competitive.


Build it is emerging market focussed with a brand that is stronger in rural, country areas than in the urbanmarket. Most clients are small builders or contractors.

Our SPAR and Build it distribution centres constitute a total of 286 935 m2 warehousing space anddistributed a total of 231.7 million cases this year. Our distribution network handles 57.3% of SPAR’sturnover whereas 42.7% is sourced directly from third-party suppliers. Our distribution activities resulted ina total distance of 30 889 633 km travelled for the year.

Most of the distribution centres own some retail stores or run stores temporarily under managementcontracts. South Rand owns and operates the highest number at 20 retail outlets.

AWARDS FOR 2018The Western Cape distribution centre achieved first place in the March National First AidCompetition 2018Built it sponsored the Isolomzi school foundation in Transkei with materials and renovation support– a project that won the regional Lead SA award for the Western CapeCornel Zaayman, a North Rand retailer, was selected as the National Mr SPAR

Find our store profiles here and read more about the distribution centres here.

https://investor-relations.spar.co.za/ir2018/who-we-are/our-ownership-profile/

https://investor-relations.spar.co.za/ir2018/who-we-are/our-distribution-centres/


UNDERSTANDING OUR OPERATING ENVIRONMENT

In the 2018 financial year, South Africanconsumers experienced a 1% increase in VAT, anew levy on beverages containing sugar,dramatic increases in fuel prices and foodsafety concerns following the Listeriosisoutbreak. The deflation in maize and flourprices offered little respite.

The group operates in a defensive sector as people need to eat and drink. Reduced confidence anddisposable income therefore has a lower impact than on other forms of retail. However, positiveconsumers traditionally spend more, which means lower levels of consumer confidence will affect ourbusiness.

Consumers are cash strapped and uncertain about their prospects. Fuel increases mean that the cost ofpublic transport increased, resulting in consumers buying local, thereby stimulating more informal trade intownship areas.

Consequently, mid-month peak shopping flatlined in most areas, with bulk purchases happening at monthend. We further experienced a shortening in the month-end period: where retailers previously enjoyed upto an eight-day month-end peak, this decreased to an average of three days. This is compounded byconsumers cherry-picking among specials and promotions at month end.

Promotional activity is prevalent in retail stores and drives ever-more aggressive advertising campaigns.Loyalty programmes abound to gain a bigger share of consumers’ wallets.

When consumers are under pressure, this has a knock-on effect on retailers, who in turn postponeinvesting into their stores. Retailer loyalty is declining slightly as they search for better deals and supplierdiscounts.

These trends are compounded by macro aspects such as climate risk and political change. The drought inthe Western Cape highlighted a range of vulnerabilities in the supply chain. We are experiencingincreasing levels of community activism around services, which are expected to increase in the build-up toelections in 2019. Some stores experienced strike action which resulted in temporary closures. Theseincidents disrupt delivery and transport, affecting consumer and retailers’ safety. 125 SPAR storesexperienced robberies during the year.

Where neighbouring territories provided healthy and growing demand in the past, most of these countries


are under pressure as they fight their own battles with liquidity, commodity cycles, political uncertaintyand low-growth scenarios.

DEVELOPING A NATIONAL SPAR PLAN FOR WATER

The drought in the Western Cape that began in 2015 was declared a natural disaster in February2018. Fears that municipal water supplies might be cut off on ‘Day Zero’ had a significant impact onthe economy of the province, including commercial farming and tourism. Through water-savingmeasures and water supply augmentation, Cape Town managed to reduce its daily water usage bymore than half. Although the crisis was averted, it had a lasting impact on communities and trade.Farmers experienced significant losses and seasonal workers received lower income.

The water crisis had a direct detrimental effect on sales in the northern and central Karoo areas of theprovince, as well as coastal or holiday areas – the latter due to lower tourism numbers.

At the Western Cape distribution centre, the drought required us to rethink our approach tosustainability. We sunk three boreholes and added an adiabatic cooler to reduce our waterconsumption and any pressure on municipal supply. We launched an internal awareness campaign byproviding employees with regular tips on how to save water and informing them of alternative waterwise options. We also assisted our retailers in mitigating water risk and ensured the responsiblepricing of bottled water.

We launched a water security assessment in June 2018 at all distribution centres to obtain a holisticview on how much and how SPAR uses water. This information will be used to implement groupwideplans and education around the use of water.


OPERATIONAL OVERVIEWRead about South Africa’s financial performance in the financial review.

MITIGATING FUEL COST INCREASESSouth Africa experienced some of its highest fuel price hikes this year. This has resulted in increasingcalls for government to urgently address the policy and structural issues which have put fuel usersunder severe pressure.

Fuel costs comprises 3.9% of SPAR’s overall expenses and constituted approximately R184.4 millionfor the year (2017: R156.2 million). For consumers, the inflationary fuel pressures counteracted thedeflationary trend seen in the price of food.

Continuous improvement of the SPAR vehicle fleet is therefore a core focus over the long term. Ourlogistics team continues to find alternative ways to get products to markets and ensure loadoptimisation, as well as driver management and effective routing solutions.

The national integrated transport system is fully operational and aims to enable the movement ofstock through the entire network. Where the different supply chains at the distribution centrestraditionally operated independently with limited product moving between them, these now form partof an integrated system. Our logistics partner has contracted with several key suppliers securingdeliveries into the respective distribution centres. Further deliveries from the distribution centres arethen executed to stores. Due to this initiative, several third-party transporters were onboarded, whichassisted in job creation. Positive impacts include the sharing of savings achieved and a reduction incarbon emissions due to the number of empty return transports trips being drastically reduced.

Driver productivity schemes continue to drive further efficiencies.

A QUICK RESPONSE TO LISTERIOSISIn October 2017, there was a national outbreak of Listeriosis, with 180 deaths reported. SPARdistribution centres and retailers responded quickly by pulling lines that could possibly have beencontaminated.

Consumers became more conscious of deli and cold meat products due to this outbreak and the localperishables business was severely impacted.

Since the outbreak, SPAR increased the number and frequency of food audits and implementedheightened protocols in terms of cleaning. More diligence and a greater emphasis on food safety willremain, with the emphasis on upholding SPAR standards and to comply in a more consistent manner.Read more about food audits at supplier and store level in our material relationships.

https://investor-relations.spar.co.za/ir2018/reports-from-our-leaders/financial-review/

https://investor-relations.spar.co.za/ir2018/our-material-relationships/our-relationship-with/#audit


COST-SAVING INITIATIVES WITH IMPACTSeveral initiatives have been implemented to save costs by realigning these to lower volumes.Specific initiatives at the distribution centres included the review of cube utilisation per section, moreefficient pallet builds to maximise payloads and reduce vehicle running costs. We have implementedbigger delivery windows by executing night drops to several stores on both dry goods and freshproduce to improve service levels, while gaining efficiencies delivering outside peak periods.

We continue prioritising delivery from source where possible, which entails collection at the factoryand delivery at the point of order, thereby avoiding the distance, handling cost and risk, andadministration requirements of transfer into regional distribution centres.

The positive long-term impact of the introduction of a new slow-moving product model between ourNorth and South Rand facilities have not yet been fully realised following delays in the IT rollout forthe project. Consolidation has been completed for the South Rand distribution facility and will berolled out to North Rand in January 2019.

STORE PERFORMANCESPAR, SUPERSPAR, KWIKSPAR AND SPAR EXPRESS

TOPS AT SPAR


BUILD IT

PHARMACY AT SPAR

SAVEMOR

Overall, 145 new stores were opened during the 2018 financial year, 276 stores were refurbished, and39 stores were closed.

The SPAR branded stores remain at the core of our offering: a format that is well-suited to urban andnon-urban markets in South Africa, while being the driving format for countries such as Botswana andZambia. Refurbished stores added to positive consumer experiences and supported turnover growthdespite very challenging trading conditions.

KWIKSPAR is experiencing challenges in some areas where it has been contested by a growingnumber of forecourts, while higher pricing means that it is no longer the first choice for month-endshoppers.

The SPAR Express format is still being embedded and is showing promising volume growth andmarket uptake. Great looking stores with expanded offerings are becoming competitive and areattracting new business.

SPAR Mini was piloted in the Lowveld last year, and is still in a testing phase. It takes the form of asmall satellite or extension store near the main retail store, offering a limited fresh food offeringgrocery range while relying on the main store for systems and replenishment support.

Our North Rand distribution area now has the highest concentration of Pharmacy at SPAR stores and adedicated focus on developing black retailers for this format. Pharmacy at SPAR introduced its firstincentive competition in 2018, based on S Buys loyalty, own brand support, and participation invarious initiatives. There is a significant opportunity to promote this store format to independent


pharmacists and expand the dedicated supply to SPAR pharmacies through S Buys. Read more in thecase study on S Buys.

TOPS at SPAR continues to be a star performer. Sales numbers confirm that consumers identify withthis brand and remain loyal. Craft beverages continue driving growth especially in the gin category.

Build it arranged its first retail convention with over 800 attendees. At the convention new storeformats (Build it PLUS and DIY) were launched in addition to a full brand refresh. This will provideimpetus for improving the Build it store offering, enable clearer segmentation of the offer by storeformat type and introduce a new modern look and feel. The intention is to offer consumers a morediverse range of products and service options. Build it completed its loyalty card pilot and will startrolling out the programme to all stores. Although the broader rollout of the TrenDIY format wasdiscontinued, it remains successful in specific locations.

Sales of cement experienced further volume declines due to independent cement blenders enteringthe market. The Build it house brand showed pleasant growth. Overall, there has not been anoticeable change in consumer behaviour other than an increase in credit sales during the year. Therehas been a slowdown in project sales through our contractor client base, with reports from smallercontractors that construction decisions are delayed due to uncertainty regarding land expropriation.

The SaveMor group of stores continues to offer a compelling value proposition for consumers, and anequally attractive entry point for new black retailers making their first investment. These stores havelower capital investment requirements and focus on active cost management. Although new storegrowth was muted this year, there is consistent support for this format.

The group took ownership of 7 additional corporate stores in 2018 and disposed of 4 stores. SPARacquires these stores as they constitute strategically important sites. These stores are oftenrefurbished and then sold to new retailers. In the meantime, they offer the group a unique opportunityto offer practical retail training and serve as a testing group for experimental products and services.

RETAIL SUPPORT PRIORITIESRetailers were under pressure this year in terms of growth and profitability, but were also challengedby crime, labour and community unrest. Cash flow management was a specific concern for manyretailers.

We launched numerous retail support projects involving specialised and store-specific marketinginitiatives, refinancing options, strategic partnerships, and developments of new businesses such asthe secondary TOPS initiative. There has also been a lot of work done around redeveloping stores tokeep these relevant and attractive.

We continue supporting retailers in terms of recruitment, training, and IT systems, with new models orprogrammes being launched throughout the year. A highlight was Build it’s launch of a leadershipdevelopment programme with 12 senior managers from Build it stores.

Specific focus by the retail teams on developing and implementing a growth plan per store broughtfresh perspectives in terms of key opportunities and threats, a better understanding of financialindicators and the setting of meaningful action plans.

https://investor-relations.spar.co.za/ir2018/focus-south-africa/case-study-s-buys-and-spar-align-for-pharmacy-success/


NEW PRODUCT DEVELOPMENT AND HOUSE BRANDSOur focus on the development of SPAR house brands continues to grow momentum as these productsprovide value for money for consumers under financial stress. Sales of SPAR branded productsincreased by 5.8% to R8.5 billion (2017: R8.0 billion), well ahead of growth in other wholesalecategories.

The new Country Value private label brand offers affordable value in the bakery and producedepartments.

SPAR Steak CO., with its range of the finest Class-A beef cuts, and SPAR Smart Butcher, consisting ofspices, casings and marinades, were launched. These have been well supported by retailers anddelivered solid new business income. Smart Baker was launched late in the financial year with goodgrowth expected in the next financial year.

Our home-meal replacement lines, Chicka Chicken and Smart Chef, delivered consistent growth.McCoy Pie, launched in 2017, made excellent progress.

Given the consumer demand for gin and vodka we have listed several craft variants, including vodkaflavour lines.

MOMENTUM FOR SPAR REWARDSThe SPAR Rewards programme is working well, as consumers enjoy the benefit of free purchases andpreferential treatment in competitions. We have been able to promote baskets of goods catering to allmarket segments with substantial saving for consumers. The combination of instant rewards andaccumulated benefits also continue to attract new members. At store level, retailers are experiencingadditional sales driven by the Text Me system, as these can be targeted for high impact.

The TOPS at SPAR awards launched last year showed monthly growth and will gain further momentumwith increased visibility through neck tags and stickers.


2017 FOCUS AREA EXAMPLES OF PROGRESS AND CHALLENGES DURING 2018

Organic growth throughrefurbishments and storeformat optimisation

Organic growth was dependent on whether investments were cost-saving or retail-sales driven. Many retailers delayed investment dueto uncertainty and low confidence in growth prospects. Stores thatinvested to gain retail sales experienced growth compared to theirsales history prior to the investments. On the cost savings side, weachieved energy consumption savings.Refurbishments included upgrades to the look and feel of stores,improved offerings and a dedicated focus on service areas. We aimto provide consumers with a competitive shopping experience.Refurbishments of Build it stores were well received by consumerswith more impact expected in the next financial year. The launch ofthe new store formats and a loyalty programme will further driveorganic growth.

Success of retailers anddistribution centres throughdriving promotions,collaborating with suppliers,and building loyalty throughpromotions

SPAR’s 55th birthday celebration delivered good promotional salesgrowth nationally.The success of Super Saturday and deep cut one-day promotions inJanuary, June and September involved supplier products withsignificant SPAR rewards redemption values.At Build it, the focus was on price and quality engagements withsuppliers with the intent to change consumer perceptions andimprove retail buying patterns. Promotions are a secondary driver forloyalty.

Focus on increased localsourcing through the rolloutof the emerging farmer hubs

To date, two farmer hubs have been rolled out with Mopani servicingstores in Lowveld and North Rand and Malelane servicing Lowveldstores. A third hub is expected to be opened in the KwaZulu-Nataldistribution centre area, with more in development. Read more in thecase study on emerging farmers.



FOCUS AREAS IN SOUTH AFRICA

SPAR PRIORITIES FOR 2019Rollout and communication of the new supermarket strategy

Organic growth through refurbishments and store format optimisation

Driving increased purchases from Pharmacy at SPAR through S Buys and convertingmore independent pharmacies to our format

Growing Fresh and SPAR house brands as a differentiator

Develop management and leadership capabilities at distribution centres to supportsuccession planning and growth ambitions

SOUTH AFRICAN RETAILER PRIORITIES FOR 2019Growth1.Profitability2.Stock management3.


CASE STUDY: S BUYS AND SPAR ALIGN FOR PHARMACYSUCCESS

S BUYS AND SPAR ALIGN FOR PHARMACY SUCCESS

SPAR acquired pharmacy wholesaler, S Buys Group, effective 1 October 2017, seven years afteropening the first Pharmacy at SPAR store in South Africa. The acquisition signalled a commitment togrow this format for SPAR through an investment in a wholesaler with a diversified customer base,stable and dependable supplier relationships and the ability to service 95% of medical schemes.

S Buys evolved from a pharmacy that was opened for the mines in Carletonville 25 years ago. Thewholesaler was eventually followed by a specialist training academy. Today, S Buys consist of threelines of business:

A licensed wholesaler, located in Carletonville, with a national reachThe ScriptWise specialised pharmacy that delivers high-value medication for high-risk, high-costpatients (a courier pharmacy)An accredited academy offering specialised training in pharmaceutical services, with about 2 000pharmacist assistants trained annually

S Buys is an existing supplier to most Pharmacies at SPAR (none of the current distribution centres arelicensed to sell scheduled medicines) – a relationship that will now be expanded with a mutualcommitment to increase the product range, footfall, number of stores and quality of the experience.

A Pharmacy at SPAR is independently owned and managed by a qualified, independent pharmacist.Stores typically consist of a dispensary, a clinic and a personal care, front-end section. SPAR’s biggestcontribution to the success of an independent pharmacist is in retail: we offer front-shop categorymanagement systems, store design, reward/loyalty programmes, house brand products andpromotions that consumers have come to expect, but which are often lacking in independentpharmacies.

The S Buys product range complements SPAR’s retail expertise to create comprehensive andspecialised support offering to community pharmacists. S Buys supplies scheduled medicines, surgicaland medical devices, with an expanding range of front-shop house brand, healthcare and beautyproducts.

The S Buys acquisition mitigated the most significant risks for SPAR associated with this store formatthrough a deep understanding of the industry and associated regulations, combined with the ability tomanage and control distribution complexities.

The pharmacy business model is subject to fixed government directed annual price increases (whichfor 2018 was limited to 1.26%), however, individual pharmacies can set their own service feestructure, and control front-end pricing, which somewhat mitigate the risk of shrinking margins.

SPAR provides S Buys with an anchor customer base and logistics expertise whereas the wholesaleropens access to an additional portion of the retail value chain for SPAR: S Buys will continue supplyingand growing its existing footprint in the pharmaceutical sector in South Africa.


Through the S Buys acquisition, SPAR has now created a solid position in a market with resilient andgrowing demand where it has low current penetration and the ability to scale up quickly.


BUSINESS LINE KEY CAPABILITIES FOR S BUYS

Wholesale • Stockholding (forecasting and availability)• Electronic ordering efficiencies, on time deliveries and responsetime to queries• Accuracy and reliability are key factors

ScriptWise • Working with and across a large healthcare delivery team ofspecialist doctors, nurses, clinics, case and disease managers• Securing funding/authorisation for high cost medicines• Working with pharmaceutical suppliers and patient supportprogrammes• Ensuring accuracy and reliability in delivery and repeats

Academy • Managing course content and learning experiences• Monitoring on-the-job training• Delivering assessments of individual candidates


S BUYS AND SPAR ALIGN

SPAR commits to growing its presence in thepharmacy value chain in South Africa.


OUR FOCUS ON HUMAN, SOCIAL AND RELATIONSHIPCAPITAL

We provide details about our communities andemployees in our material relationships.Due to the material size and contribution of our South African workforce, this section contains detail abouttheir demographics, key performance indicators and development. This supports the transformationimperative: building an employee base that reflects South Africa’s demographic diversity is a crucial partof our social mandate and contributes to the success of SPAR.

OUR APPROACH TO HUMAN CAPITAL AND CULTURECulture is a key enabler of the new SPAR supermarket strategy. We identified the need to shift our cultureto enable and support the following focus areas in wholesale and retail:

Distribution centre and retail relationshipsHigh-performance teams, teamwork and empowermentSpeed and agilityCommunicationCustomer service

To achieve this shift, we must implement a robust change management process with HR functions as keydrivers of the process. They work according to workstreams and are responsible for defining and shapingthe desired culture through stakeholder analysis, identifying and addressing obstacles and resistance tothe required culture shift, including interventions, role changes, and the use of technology as an enabler.

https://investor-relations.spar.co.za/ir2018/our-material-relationships/our-relationship-with/#COMMUNITIES

https://investor-relations.spar.co.za/ir2018/our-material-relationships/our-relationship-with/#EMPLOYEES


EMPLOYEE DEMOGRAPHICSAchieving greater transformation is a major aspect of our strategy, and our employee demographics are acore measurement of progress. We are committed to building a culture that embraces diversity andpromotes equal opportunity, as these contribute to our strength as a group. We rely on our ability toaccess a wide range of skills, talents and ideas. This is an ongoing challenge for SPAR, and we haveallocated responsibility at executive level.

SPAR employs 3 743 people across our corporate offices, distribution centres and warehouses inSouth Africa (2017: 3 602) and adheres to all the relevant South African labour legislation and standards.The following table provides data regarding SPAR’s black employees as a percentage of our total numberof employees and the split between male and female across all race groups, as at 30 September 2018:

Occupationallevels SPAR categories 2018 %* 2017 %*

Maleemployees

2018 %**

Femaleemployees

2018 %**Board ofdirectors

Executives andnon-executivesPatersonGrades EU andF 40.0 40.0 82.0 18.0

Seniormanagement

Group Exco(excludingexecutivedirectors),divisionalexecutives andspecialisedgroup functionsE band 17.0 16.6 88.2 11.8

Professionallyqualified andexperiencedspecialists andmid-management

MiddlemanagementPatersonGrades DL andDU 55.0 44.2 68.7 31.3

Skilled technicaland academicallyqualified workers,juniormanagement,supervisors,foremen andsuperintendents

Supervisory andtechnicalpositionsPatersonGrades CL andCU

80.6 79.0 51.4 48.6


Semi-skilled anddiscretionarydecision-makingUnskilled anddefined decision-making

Operators andclerical staffDefineddecision-makingpositions

96.8 96.1 78.2 21.8Paterson Grade1 96.2 100 93.1 6.9

Total permanentblack employeesas apercentage oftotal employees 84.8 85.0 63.5 21.3

* Black employees as defined in the BBBEE Act.

** All employees split between male and female.

NEW EMPLOYEE HIRES AND TURNOVER RATEWhile we endeavour to retain our talented human capital, we recognise that an appropriate level ofturnover is healthy and creates opportunities for growth. SPAR’s ability to attract diverse, qualifiedemployees further reflects the strength of our brand as an employer of choice. The following table reflectsnew employee hires and employee turnover according to age group, gender, and percentage of blackemployees:

2018 2017

Maleemployees

2018 %

Femaleemployees

2018 %

Blackemployees

2018 %New employees 91 58 72.9 27.1 47.1Employee exits 242 142 65.0 35.0 80Group employeeturnover rate

6.93.9 4.5 2.4 5.5


BROAD-BASED BLACK ECONOMIC EMPOWERMENT (BBBEE)We measure our BBBEE score as a group in South Africa, which includes the central office and the eightdistribution centres. Our rating in the respective elements is provided in the table below. According to thelatest verification conducted in December 2018, the group is a level 6 contributor (2017: level 8), with a60% recognition level.

Scorecard element Weighting 2018 2017Ownership 25 17.00 2.90Management control 19 9.16 8.84Skills development 20 24.95 23.59Enterprise and supplier development 40 20.43 17.52Socio-economic development 5 5.00 5.00The number of black retailers owning SPAR stores increased from 292 to 339.

Find our latest BBBEE scorecard here.

EMPLOYEE DEVELOPMENTThe group’s internal employee development programmes, which are run through The SPAR Academy ofLearning, are crucial to attracting, retaining, and developing a diverse talent pool. The followingdevelopment programmes are in place:

Find our latest BBBEE certificate here.

Programme for Management Development (UCT)SPAR Leadership Development ProgrammeManagement Growth ProgrammeSupervisory Development Programme (various)Graduate Training Programme

During the 2018 financial year, training covering a range of other areas also took place. This includes,among others:

First-aid and firefighting trainingDriver trainingMy SPAR Picker ProgrammeSPAR Values ProgrammeOperating a lift truck and other vehicle combinationsMentoring and coachingAdult Basic Education and Training (ABET)

https://investor-relations.spar.co.za/ir2018/pdf/SPAR_B-BBEE_Scorecard_Analysis_2018.pdf

https://investor-relations.spar.co.za/ir2018/pdf/SPAR_B-BBEE_Certificate_2018.pdf


In line with the group’s transformation imperative, our skills development programmes, such as ABET,Sector Education and Training Authority (SETA) and management training, are focused primarily onupskilling previously disadvantaged candidates.

The following table reflects the average number of hours of training received by SPAR’s employeesaccording to gender and employee category:

SPAR categories 2018 2017

Maleemployees

2018

Femaleemployees

2018Executives and non-executives 111 360 1 880 30 762 3 704Group divisional executives andspecialised group functions 3 504 1 936 7 600 2 264Middle management 24 512 21 960 23 072 1 440Supervisory and technicalpositions 42 256 42 672 34 352 7 904Operators and clerical staff 167 216 222 240 128 376 38 840Defined decision-making positions 28 016 5 504 30 672 3 704SPAR participates in national efforts to address unemployment including the YES initiative and Jumpstart.Read more about these contributions in the Chairman’s report.

During the year there was a specific focus on sourcing funds to create learnerships aimed at specific toscarce skills. These funds are aimed at the following:

Professional driversFreight handlingDiesel mechanic apprenticeshipElectrician apprenticeship

We continue to support employees who aim to obtain formal qualifications with reputable institutions andwe have a specific commitment to upskilling female employees.

https://investor-relations.spar.co.za/ir2018/reports-from-our-leaders/chairmans-report/


HEALTH AND SAFETYA comprehensive risk management programme is in place to protect the health and safety of ouremployees. It is audited on a regular basis by an external risk management service provider. The fivecomponents of the programme are emergency planning, health and safety, transport, fire and security.

Implementation is monitored and reviewed on an ongoing basis, with the understanding that legislativecompliance is the minimum standard, and that excellence should be pursued. Each distribution centre hasits own Health and Safety Committee, which oversees regular training and emergency drills, and isresponsible for resolving or escalating issues that arise. During the 2018 financial year, 688 employeesreceived health and safety training (2017: 792 employees).

The bulk of our health and safety incidents occur at the distribution centres, where employees handle bulkgoods and operate heavy machinery. Strict health and safety compliance is a daily discipline for ourdistribution centres.

The table below indicates our health and safety performance for the year:

Incident 2018 2017Disabling injuries 13 8Non-disabling injuries 172 151Deaths on duty 0 1Number of employee visits to on-site clinic 10 865 10 732


OUR FOCUS ON MANUFACTURING AND NATURALCAPITAL IN THE SUPPLY CHAIN

As a provider of food, we recognise ourresponsibility to deliver quality products to ourconsumers through a sustainable network offirst-choice suppliers.Read more about our supplier development initiatives in the section on material relationships. Ouremerging farmer development programme remains our flagship initiative in this regard.

With the growing participation of emerging farmers in the SPAR supply chain, we adopted localg.a.p. as anentry-level food safety standard with the aim of achieving full compliance with GLOBALG.A.P. Large-scalecommercial farmers are expected to comply fully with GLOBALG.A.P. All suppliers are expected to complywith the Global Food Safety Initiative (GFSI).

Suppliers and retailers must comply with SPAR’s food safety standards – read more about this in oursection on material relationships. All SPAR stores are furthermore subject to hygiene and safety audits. Thegroup has a SPAR-appointed central resource to ensure food safety, compliance, and audits forall suppliers.

OUR COMMITMENT FOR A NEW FUTURESPAR’s fundamental environmental aim is to reduce its use of various natural resources. This extends toour supply chain, where emphasis is placed on supplier and retailer practices that SPAR can influence forthe better. Read more about our role in the food system in the section on strategy and our emergingfarmer development programme.

Our environmental initiatives are developed to yield commercial gains and foster environmental welfare,as the long-term reductions in input costs will positively impact the business. In support of this, SPARadjusted its business’s technology strategy and specifications, particularly for large-scale infrastructureinvestments. This includes, for example, vehicles, buildings and equipment, as well as incorporating greentechnology wherever possible. By implementing socially and environmentally sustainable businesspractices, SPAR seeks to guarantee its own long-term viability.

https://investor-relations.spar.co.za/ir2018/our-material-relationships/our-relationship-with/


https://investor-relations.spar.co.za/ir2018/our-material-relationships/our-relationship-with/

https://investor-relations.spar.co.za/ir2018/our-strategy-and-business-model/our-new-supermarket-strategy-for-south-africa/




Supply chain optimisation and innovative energy management are critical to achieving cost and reducingour carbon footprint. SPAR engages directly with smallholder farmers in our value chain to encouragesustainable farming practices. Due to the large role that packaging materials play in SPAR brandedproducts, we engage with packaging material suppliers to reduce our environmental impact and waste.Read more about our initiatives in the case study below.

SPAR engages with our independent retailers to assist them in reducing their carbon footprint. This is doneby making recommendations on green building practices and assisting them with purchases of energy-efficient technologies.

REDUCING OUR PLASTIC FOOTPRINT

The challenge of single-use plastics and their impact on human health, life on land and life under thesea became a prominent issue in South Africa in 2018. SPAR joined efforts to reduce single-useplastics and address the longer-term challenge to collect and recycle all plastic.

In South Africa, environmental legislation came into effect in 2003 prohibiting the use of thin plasticbags and encouraging retailers to use thicker, durable, recyclable bags to reduce plastic waste.

Last year, it emerged that plastic manufacturers were using increased volumes of chalk filler (from7% to 25% – 30%), resulting in a heavier albeit cheaper plastic. Recyclers, on the other hand, rejectedthe heavier bags as they sink during the recycling process and therefore discard these to landfill aswaste. This effectively made plastic carrier bags unrecyclable at the time.

Several SPAR distribution centres, spearheaded by the Eastern Cape, launched campaigns andprojects to address the plastic shopping bag problem.

We started to encourage SPAR customers to take ownership of the problem and to stop usingconventional plastic shopping bag altogether. In store communication encouraged shoppers to:

Bring your own shopping bagBuy a SPAR brown paper bagBuy a SPAR canvas bag

Carry your groceries to your car and pack into your bootOnly as a last option, buy a plastic bag – but please recycle responsibly

A further example was the SPAR Eastern Cape offer to give members of the public a paper bag free ofcharge for every 10 plastic shopping bags brought into an outlet, irrespective of the retailer or thebrand – for a limited period.


Several SPAR group actions and commitments followed these initiatives:

SPAR is now selling only 100% recyclable plastics bags with an 8% calcium carbonate filler. Plansto only sell plastic bags made from 100% recycled plastic are underway for the 2019 financialyear.We are taking periodic samples from the market to ensure compliance across all SPAR carrier bagmanufacturers.We are in the process of approving a SPAR bag philosophy as a formal declaration of our intent torecycle and reduce the use of plastic.

In December 2017 we initiated a SPAR paper bag customer feedback campaign to support retailerswishing to move away from plastic carrier bags, to engage with our customers on the topic andunderstand their views.

Consequently, we launched alternative paper carrier bags made by a local manufacturer from wet-strength paper and not wax-lined – making them easy to recycle. The paper is Forest StewardshipCouncil certified and we have encouraged our supplier to apply for certification of its site.

The uptake of these bags has exceeded expectations: we are now sourcing additional wet strengthpaper and are exploring ways to integrate our cardboard recycling at the distribution centres with thepaper bag supply chain.

We also started a strategic collaboration with Tetra Pak to find more holistic solutions to the plasticchallenge. These consider the environment, product safety, affordability, health and nutritionrequirements. Our ultimate objective is to offer products that are made from renewable sources, arefully recyclable and are made locally, while being scalable and available to all players in the industry.

All distribution centres have comprehensive recycling programmes in place for plastic and cardboard.This includes waste generated at the distribution centres and by certain participating retail stores.This waste is backhauled when deliveries are made.

As a leading retailer, SPAR is committed to contribute towards changing the culture around the use ofplastics.


OUR ENVIRONMENTAL COMMITMENT

SPAR’s fundamental environmental aim is toreduce its use of various natural resources. Thisextends to our supply chain, where emphasis isplaced on supplier and retailer practices thatSPAR can influence for the better.Our environmental initiatives are developed to yield commercial gains and foster environmental welfare,as the long-term reductions in input costs will have a positive impact on the business. In support of this,SPAR adjusted our business’s technology strategy and specifications, particularly for large-scaleinfrastructure investments. This includes, for example, vehicles, buildings and equipment, as well asincorporating green technology wherever possible. By implementing socially and environmentallysustainable business practices, SPAR seeks to guarantee its own long-term viability.

Supply chain optimisation and innovative energy management are critical to achieving cost and carbonfootprint reduction. SPAR engages directly with smallholder farmers in our value chain to encouragesustainable farming practices. Due to the large role that packaging materials play in SPAR-brandedproducts, we engage with packaging material suppliers to reduce our environmental impact and waste.

SPAR engages with our independent retailers to assist them in reducing their carbon footprint. This is doneby making recommendations on green building practices and assisting them with purchases of energy-efficient technologies.

CLIMATE CHANGE IMPACTSWe are conscious of the challenges climate change poses to our business and society. Our riskmanagement and sustainability approach are premised on the understanding that this will effectsignificant changes in the way economies use and value natural resources in the future. We identified thekey risks and opportunities posed by climate change that could have a substantive impact on SPAR. Theseare classified according to regulatory, physical, and other risks and monitored by the Social and Ethics andRisk committees. Mitigation plans and the cost of mitigation have been determined in our latest CDP(formerly the Carbon Disclosure Project) carbon and water submission.

SPAR has participated in the CDP since 2009. SPAR’s carbon footprint is calculated according to theInternational Greenhouse Gas (GHG) Protocol’s Corporate Accounting and Reporting Standard, and thedata provided pertains to the period from 1 October 2016 to 30 September 2017. Scope 1 and 2 emissionswere independently verified.

The scope of the submission comprises the central office and the seven distribution centres with theirassociated distribution fleets. SPAR is committed to reducing our carbon emissions, specifically aroundScope 1 (Mobile Combustion, Stationary Combustion and Fugitive Emissions) and Scope 2 (Electricity).

https://investor-relations.spar.co.za/ir2018/pdf/2018_CDP_Carbon_Submission.pdf

https://investor-relations.spar.co.za/ir2018/pdf/2018_CDP_Water_Submission.pdf


To achieve meaningful GHG reduction we have set science-based targets (SBTs). This is a joint initiative ofCDP, the UN Global Compact, the World Resources Initiative and WWF and is in line with the level ofdecarbonisation required to keep global temperatures’ increase below 2 °C.

We have selected an appropriate SBT methodology, a Sectoral Decarbonisation Approach (SDA), whichseparates SPAR’s business into three sector categories:

warehouse;distribution; andretail.

Based on the SBT research, we developed a carbon reduction framework which was approved at the end of2017. The framework provides an outline of the optimal pathways to achieving sustainable minimisation ofSPAR’s carbon footprint in South Africa. It further provides a framework for meeting SBTs and considersparallel imperatives which will impact on GHG management going forward:

Carbon tax liabilityEnergy and GHG reporting regulationsEnergy management systems integration

A baseline was measured in 2016 with action plans set for 2017 to 2025 and then key actions for 2025 to2035 followed by 2035 to 2050. We mapped projects with potential savings to prioritise the key actions.

Based on the framework, we designed an internal carbon pricing methodology aimed at the followingoutcomes:

reaching our proposed GHG emission reduction targets;protecting SPAR Group against risks relating to compliance with future carbon pricing systems suchas a Carbon Tax;encouraging investments in low-carbon technologies; andmaking sound investment decisions in terms of energy efficiency projects and future operationalchanges


SPAR CARBON REDUCTION FRAMEWORK: OUR PERFORMANCE AGAINSTTHE 2016 BASELINE

During the 2016/2017 financial year, reported in the CDP data submitted in 2018, SPAR’s activities emitteda total of 79 101 tonnes of carbon dioxide equivalent (CO2e) for Scope 1 and Scope 2 emissions(2015/2016: 82 984 tonnes). This decrease was due to the reductions achieved in the better managementof the fuel used by our fleet and forklifts along with the reduction in fugitive emissions. Significantreductions in Scope 2 emissions were due to further installation of air curtains in the freezer sections ofsome distribution centres, the installation of timers on air conditioning units, lighting and better energymanagement.

Electricity consumption contributes toward our Scope 1 and 2 emissions. We consumed a total of 45 620MWh of electricity for the stated period compared to 43 974 MWh in the previous period and well withinour target of 42 673 MWh (from a 2013 base year of 51 500 MWh). The reduction is the result of ourheating, ventilation, and air conditioning (HVAC), refrigeration and machine replacement programme,which reduced consumption at our distribution centres and warehouses through the introduction of newerand more energy-efficient technologies. Solar panels were installed at the South Rand distribution centrein October 2017. The impact of the solar panels will be seen in our 2017/2018 CDP submission in 2019.Internal monitoring of municipal electricity usage at the South Rand distribution centre shows thatmunicipal electricity consumption has decreased from 9 642 MWh in 2016/2017 financial year to 7 542MWh in the 2017/2018 financial year.


Plans are in place for solar panels to be rolled out to North Rand and the Western Cape distribution centresduring 2018/2019. We also run behavioural change campaigns to raise employee awareness around thebenefits of reducing electricity consumption. The group neither purchased nor consumed heat, steam orcooling energy during the stated period.

The breakdown of the Scope 1 and 2 emissions below are tracked from a 2013 base year:

Scope per GHGprotocol 2014 2015 2016 2017 2018Total footprintScope 1 and 2(CO2e)

78 758

77 882 82 984 79 101 81 271Scope 1: directGHG emissionsfrom vehicles,warehousingcooling and air-conditioningfacilities (CO2e) 37 644 37 203 39 010 34 081 39 201Scope 2: indirectGHG emissionsfrom electricityconsumed (CO2e)

41 114

40 800 43 974 45 020 42 070* The figures in this table have been restated after external verification of our Scope 1 and 2 data. The

figures in the 2018 column are not verified and will only be verified once the 2019 submission of theCDP is completed.


TRANSPORT AND LOGISTICS IMPROVEMENTSSPAR’s logistics model and strategy is focused on route planning and fuel efficiency to reduce ourenvironmental impact and transport expenses, particularly on the back of rapidly rising fuel prices. Fuelcosts for SPAR’s day-to-day operations were approximately R184.4 million for the year (2017: R156.2million). Continuous improvement of the SPAR vehicle fleet is a core focus over the long term.

Initiatives include:

Monitoring of fuel consumption, excessive idling, route determination and optimisation, routeadherence, and speeding via an on-board computer systemFitting of aerokits on long-distance vehicles to reduce dragIncreasing the use of 95:5 (diesel:biodiesel) fuel mixDriver training, with associated assessments and remuneration incentives, to improve fuelefficiencyThe implementation of a national integrated transport system across regional boundariesFleet optimisation, also to meet the increasing need for night deliveriesRoute optimisation in all territories, with improved analysis of cross-border costsIncreased demand for recycling space at distribution centres with a concomitant need to optimiserecycling initiatives

The North Rand distribution centre implemented solar systems on refrigerated and dry trailer boxes, whichaid the operation of tail lifts and auxiliary equipment used to power up CCTV cameras. Asset lifeimprovements follow as a secondary benefit. New vehicle fleet technology improvements as well as designchanges on trailer boxes substantially improved vehicle performance and fuel consumption.

RECYCLING FOR A BETTER WORLDAll distribution centres have comprehensive recycling programmes in place for plastic and cardboard. Thisincludes waste generated at the distribution centres and by certain participating retail stores. This waste isbackhauled when deliveries are made.

Recycling is targeted at SPAR branded packaging. We have successfully partnered with third-party serviceproviders to achieve major improvements in this area. Our approved SPAR packaging suppliers haveundertaken to channel their waste into our recycling programme, and to use the recycled cardboard fromour distribution centres (and participating retail stores) in our SPAR branded packaging. In this way, weclose the loop in our cardboard waste cycle and contribute to our overarching goal of reducing our wasteto landfill. Recycling includes the recycling of vehicle lubricants and refrigeration oils.

Organic waste is converted into compost, which is used by local community farmers. This initiative iscurrently piloted at one of SPAR’s distribution centres. We anticipate that other facilities will implement theprocess going forward. Glass and metal recycling is not in place at all distribution centres, but isanticipated to become more of a focus going forward.


Recycling of electronic waste is becoming a further imperative. A permanent container has, for example,been placed at the South Rand distribution centre to collect electronic waste. Typical waste includes olddesktop computers, laptops, monitors, keyboards, telephone handset and cables. This ensures we do notdispose electronic waste into our landfills, which in turn prevents toxins, metals and ashes being releasedinto air, water and soil.

TAKING ACTION FOR A NEW FUTURE

The South Rand distribution centre launched the SPAR VUCA project this year to address three wastemanagement challenges:

Food security and waste: the aim of this initiative is to reduce food waste at canteens (about 9 kgdaily) by involving stores and consumers. The focus is on food waste management education,particularly during October, which is food waste month and 16 October, which is world food day. Acompetition served to motivate employees and departments to take a pledge on how to combat foodwaste.

Retail water security: this project aims to improve water management in stores and communities. Westarted by approaching selected stores and requesting them to buy 5 litre water bottles. R1 of everybottle bought was used towards buying a Jojo tank. The project is set for a wider rollout in October.

Food sustainability: this project aims to increase rain harvesting by providing Jojo tanks tocommunities and schools, and working with suppliers to revamp learners’ toilets. We partnered withSharpeville Spar, Build it and the Department of Agriculture to better the serve the community aroundSharpeville. Tsoelopele Primary School was selected as the first beneficiary and had its kitchen andtoilet facilities upgraded. A Jojo tank was installed for gardening which has resulted in reducedmunicipality bills for the school.


CLOSING THE RECYCLE LOOP FOR PACKAGING

We are committed to recycling for a new future. Two partnerships illustrate how we are making this areality.

We partnered with Tetra Pak, a long-standing supplier, to work towards fully renewable packaging forSPAR juice and milk. In terms of cartons, we have been able to preserve the product through seven-layered packaging, which means we do not have to use preservatives in the juice or milk.

Tetra Pak launched the world’s first bio-based cap which we are implementing for SPAR UHT milk as afirst step. The caps are made from a high-density polyethylene (HDPE) derived from sugar cane. Byusing the new bio-based cap we are increasing our material used from renewable resources from 67%to 83%.

In October 2017, we started procuring corrugated cartons that are environmentally friendly andresponsibly managed for all SPAR branded products. Corruseal Group was identified as our partner.They created a fully integrated national corrugated business: they manufacture, collect waste andfeed this back into their paper mill. The mill, which is Forest Stewardship Council accredited, suppliesthe bulk of the Corruseal Group’s recycled paper requirements.

With the help of Corruseal we collect waste cartons from most SPAR distribution centres and supplythese back into the paper-making process. Paper is then distributed to the Corruseal Corrugatemanufacturing plants for the manufacture of new boxes according to the SPAR brand requirements.

By creating a sustainable loop and recycling, we reduce our reliance on natural capital and save coststhroughout the value chain, thereby creating a new future.

RECYCLING INNOVATION THROUGH VENDING MACHINES

To recycle for a better world, SPAR is exploring the use of innovative new reverse vending machines.Consumers can use these to return packaging at stores. Once deposited, the reverse vendingmachine can sort used packaging according to weight, volume and classification. It is further able tosupply real time information on all these indicators, including identifying the parent company of thewaste and region. These collection reports can be used to determine trends and averages over time,helping us to increase recycling.

Through the reverse vending machine we can educate consumers about packaging while potentiallyincentivising this through our rewards programme. It will support our efforts to reduce packagingwaste and track progress.

We are piloting 10 units in Johannesburg to understand consumer behaviour and to identify the bestsites for these machines.


USING WATER FOR THE FUTUREThe use of water is imperative in SPAR’s stores and distribution centres to maintain a hygienicenvironment for the storage and sale of food products. Access to a constant, good-quality water supply isalso critical in terms of the group’s agricultural activities, with limited availability posing a risk to theavailability of food sources. Recycled water is used for activities such as washing trucks, ablution facilitiesand watering on-site.

In accordance with the group’s sustainability strategy, water risks are identified and evaluated byanalysing and prioritising those relevant to SPAR’s operations. SPAR participates in the CDP’s waterprogramme.

In terms of our target of a 30% reduction in the use of municipal water we have achieved a 17% reduction.To ensure that the group’s retailers, suppliers, consumers and communities are protected against waterrisks, we undertake enhanced due diligence in assessing water risks and opportunities as part of ourprocurement process.

We also consider water risks when investing in new opportunities, expanding to new retailers and in ourengagement with potential suppliers. All distribution centres have water recycling systems installed, andwater recycling/collection schemes are being explored on existing sites, as well as in the development ofnew sites and expansions.

Water targets and goals (along with energy, waste and fuel) have been included as part of the group’s aimto improve its sustainability performance.

Our North Rand distribution centre has, for example, invested and implemented two water harvestingtechniques using a closed loop system. Defrost cycle water from ammonia condensers is diverted from aneffluent drain into a softener plant and used in cooling towers. Approximately 5 m3 of water is saved perday in this way. The distribution centre is also doing a feasibility study on a rain water harvest system aswell as a greywater plant.

Read more about water risk mitigation in the Western Cape in 2018 here.

A SUSTAINABLE FOOD SYSTEMA sustainable food system is a collaborative network that integrates all aspects of the value chain toensure the environmental, social and economic value for communities and regions. One of SPAR’scommitments in terms of a sustainable system is to innovate through our house brands. We have madesignificant progress in working with our suppliers towards sourcing responsibly, reducing waste andimplementing biological farming. Our Freshline team, for example, assists local farmers in the Freshlinesupply chain to adopt more sustainable farming methods.

On the other side of the value chain, we engage with consumers in terms of nutrition, water use andreducing the use of plastic. Read more about the ways in which we reduce plastic use here.

https://investor-relations.spar.co.za/ir2018/focus-south-africa/understanding-operating-environment/#water

https://investor-relations.spar.co.za/ir2018/focus-south-africa/focus-manufacturing-natural-capital-supply-chain/#plastic


SPAR’S COMMITMENT TO SUSTAINABLE SEAFOOD

SPAR is a co-signatory to industry and government bodies on issues relating to fishery improvementsand is aligning all SPAR seafood procurement to be within the parameters of the World Wide Fund forNature (WWF) Southern African Sustainable Seafood Initiative (SASSI) guidelines on how seafoodshould be caught and sold.

SPAR offers an extensive house and supplier branded seafood range. However, the Southern Africanseafood industry faces several sustainability-related issues that go well beyond competition in themarketplace.

These concerns include illegal harvesting or poaching and the over-exploitation of marine resources.SPAR is committed to collaborating with WWF-SASSI to overcome these challenges and guard thesustainability of seafood resources.

SPAR joined the WWF-SASSI Retailer/Supplier Participation Scheme in December 2010. Since then, wehave completed an assessment of the SPAR house brand seafood range demonstrating that all SPARhouse brand seafood procurement is taking place according to our formal sustainable sourcing policy.

We created internal awareness of the WWF-SASSI and SPAR commitments, and generated externalawareness through the guilds. We provided real-time access to seafood data by linking WWF-SASSIand suppliers to SPAR’s online portals. Through working closely with suppliers, we have been able toestablish full traceability of SPAR branded seafood products. This included random DNA testing onSPAR branded seafood products to ensure correct identification and labelling.

We expanded this initiative beyond SPAR house brand products to all seafood and fish in procuredthrough our distribution centres. We engaged with and assessed all suppliers who engaged directlywith distribution centres according to the standards stated in the SPAR brand procurement policy. Wealso focused on training buyers at the distribution centres and gathering seafood information from allseafood suppliers to assess whether any species were red listed. Work was also done to assistretailers that sourced their own seafood and a pilot project was launched with Fish4Africa, whichsupplied fish directly to SPAR stores.

Documents

The 2018 SPAR strategy development process started with the … · 2018-12-21 · The SPAR board believes there is an inextricable link between strategy, risk, sustainability, and