Our profile in Ireland - SPAR Investor Hub€¦ · grow strongly at 44.5% year-on-year through...

SPAR - all rights reserved. 2018 | 1

OUR PROFILE IN IRELAND

SPAR operates in Ireland through itsownership of the BWG Group – the marketleader in convenience retail in Ireland, withapproximately 12% total grocery marketshare, and over 40$ share of the conveniencechannel.

In South West England, through Appleby Westward, we service 288 (2017: 285) SPAR stores. TheBWG Group operates a multi-brand retail strategy, which includes SPAR, MACE, XL, Londis and ValueCentre Cash and Carry. The acquisition of 4 Aces added the Gala convenience group and theacquisition of Corrib Food Products, expanded our offering in fresh and frozen poultry and other frozenfoods this year.

SPAR Ireland has a three-tier house brand strategy with S-Budget (entry level), SPAR (emphasis onvalue and quality) and SPAR Select (a premium offering). We also offer a Fresh Choice brand for fruitand vegetables and the Glenmor brand for fresh meat and poultry. There are three main offeringswithin the SPAR brand, namely SPAR, SPAR Express and EUROSPAR.


SPAR

SPAR provides neighbourhood shopping, with central locations and extended shopping hours tomaximise convenience.

EUROSPAR

EUROSPAR provides comprehensive supermarket shopping, offering a broad range of groceriesand general merchandise, fresh produce, in-store bakery, butchery, deli and ready-to-eatproducts and home-meal replacements.

SPAR Express

The SPAR Express format is used exclusively on forecourt sites.

Londis

Londis has a mix of store formats from neighbourhood supermarkets to small convenience stores.Our recent development plans and recruitment of new stores have dramatically changed the lookand feel of the Londis brand. The brand promise of ‘Local Like You’ is about a family philosophythat permeates throughout the group.

MACE

MACE is the longest-established convenience shopping brand in Ireland, and includes communitystores and forecourt shopping, with a total of 216 stores around the country.

XL

The XL brand is concentrated on a rural spread of smaller, independent stores that are servicedby the Value Centre Cash and Carry network.

Value Centre

Value Centre has a network of 20 Cash and Carry branches (excluding the recent 4 Acesacquisition) servicing over 20 000 customers across the independent retail, licensed andfoodservice trades.


BWG Foodservice

BWG Foodservice specialises in product innovation and the supply of multi-temperature productsto all sectors of the foodservice industry and has about 3 000 customers.

Gala

Following the acquisition of the 4 Aces wholesale business, BWG Foods now supplies 34 Galaretail stores in Ireland.

AWARDS FOR 2018BWG Group and the SPAR brands have a strong reputation following many top industry awards overthe years, with individual SPAR stores also regularly featuring among the best in their categories.

Recent awards for the BWG national distribution centre facility in Kilcarbery include the following:

We have also garnered digital technology awards for Best B2B Technology from Eir Spiders in 2017and the Tech Excellence Awards for the Private Sector Project 2018.

SPAR Fermoy won the Best Convenience Store Award for Stores 2 500 – 4 000 Sq ft at the ShelfLifeNational C-Store 2017 Awards.

The Londis advertising campaign won a range of innovation awards from the Institute of createadvertising and design.

Cash and Carry Manager of the Year, Garry O’Callaghan from the Value Centre, Limerick, was selectedby ShelfLife for a Grocery Management Award.


UNDERSTANDING OUR OPERATING ENVIRONMENTSince the deep recession 10 years ago there has been a structural change in consumer behaviour towardsvalue-conscious choices. Although Irish consumers are positive about their spending outlook, the shoppinghabits developed during the recession have not been forgotten. This has led to smaller average basketsizes and a greater level of promiscuity as shoppers spend across a wider range of store options.

Online options made it easier for consumers to seek out value, which in turn change how they engage withstores. Christmas 2017 was a victim of this, with deep Black Friday discounting disrupting consumer spendin a key trading period in terms of revenue and profit generation.

Groceries however remain predominantly a ‘bricks and mortar’ channel with low but growing penetrationof online.

The grocery sector overall returned to growth this year and the persistent gap between sales value andsales volume growth started closing in recent months. This would suggest that retailers are finallybeginning to extract some value growth from what has been a highly competitive, price-obsessed marketover the last decade.

There has been sustained grocery deflation in the Irish market with the cost of food decreasing. This isputting ongoing pressure on wholesale and retail margins. On the upside, in many cases where deflationhas occurred because of changes in the €/£ exchange rate, the lower cost of goods yielded a dividend toretailers as retail pricing did not always track the lower cost of goods.

In the supermarket sector, the three largest competitors have very similar levels of market share andcontinue to vie for top position. Competition remains intense and geared towards discount options.Consequently, BWG Foods has had to invest in pricing support to EUROSPAR retailers to ensure that theyremain competitive within the supermarket segment.

BWG invested in the wholesale pricing of key impulse categories such as soft drinks and confectionary toensure competitive pricing on the best-selling lines on our wholesale price from the distribution centre.Competitor prices are tracked weekly and our prices amended accordingly to match the lowest competitorprice. This ensures that the distribution centre is aligned to its key competitor set – an importantguarantee to retailers and an assurance that they are consistently able to buy at the very best pricesavailable on categories where profitability is key to the retail model.

The Kantar Worldpanel, a world leader in consumer knowledge and insights based on continuous consumerpanels, describes Ireland as ‘Europe’s most competitive grocery landscape’. To match or outperform themarket in terms of growth will continue to be a significant achievement for BWG Group.

In the UK market we saw several acquisitions of competitors by the large multiple supermarket operators.

Food inflation is forecast to rise with uncertainty over Brexit, the value of the sterling and weather impactsfollowing a wet winter and an exceptionally hot summer putting pressure on the agriculture sector. Half ofBritain’s food is imported, with 30% from EU countries. Food prices have varied by commodity type, withan average 2.9% like-for-like inflation during 2018. Forecast for food prices post Brexit vary widely.


Above-inflationary increases in labour rates – resulting from government-introduced changes to theNational Living Wage and National Minimum Wage – impacted overall wage costs for wholesale and retailbusinesses.

Regulatory changes remain a significant threat to total category sales in Ireland, particularly related to thealcohol category. The Public Health (Alcohol) Bill was signed into law by the President on 17 October 2018;each module within the legislation requires activation by the responsible Minister and no activation has yetbeen triggered.

There has been a long period of consultation on the Alcohol Bill and the structural separation element hasbeen substantially diluted from the original draft bill. In terms of minimum unit pricing (MUP), this isunlikely to be introduced in the near future based on the uncertainty of the seamless border and the needto balance pricing across the island of Ireland.

The potential impact of legislative and other tariff or duty changes post Brexit remains significant andunquantifiable at this stage, based on the uncertainty of the final solution post March 2019.


OPERATIONAL OVERVIEW

Buoyed by a long spell of fine weather, salesin the Irish retail sector grew by 2.8% in 2018.Retail categories such as grocery, DIY and hardware, and fuel benefited strongly from the sustainedspell of warm weather during June. From a grocery perspective, there was particularly strong demandfor seasonal products such as soft drinks, beer and wine, ice cream, BBQ food and fresh foodcategories, with the spike in demand pushing retailer supply chains to the limit during summer.

Once-off events such as the football World Cup and the royal wedding in the UK provided a welcomeboost to trade for retailers, with sales of soft drinks, alcohol, and magazines benefiting most.

This trend reflects a broader move towards event-led retail in recent years as retailers seek toleverage such events to help promote consumer spend.

All BWG retail brands showed growth in 2018 and either maintained or marginally grew their marketshare. According to Nielsen Scantrack statistics, the convenience market grew by 3.7% year-on-yearand the supermarket channel grew similarly by 3.7%.

Londis was the strongest performer among the BWG Group brands, with sales growth of 5.9%. SPAR,as our largest brand, increased sales by 4.1%. EUROSPAR outperformed the supermarket channel byachieving 4.3% sales growth. There is no empirical track of wholesale or cash and carry channel salesbut based on volume and value sales growth over the last 12 months, combined with supplierfeedback, we are confident that Value Centre has grown its market share in the wholesale channel, ashas BWG Foodservice.

STORE PERFORMANCE OVERVIEWEUROSPAR operates in the supermarket sector of the Irish grocery trade, which remains highlycompetitive in nature. EUROSPAR delivered wholesale sales growth of 1.79% – consistent with thatachieved over the past number of years –despite strong sterling weakness-induced deflationaryheadwinds. EUROSPAR store numbers also continue to grow, with four new EUROSPARs opened. Wecontinue our focus on executing the EUROSPAR strategy by developing the brand’s ‘Famous for Fresh’credentials. These manifest in the delivery of quality, in-store prepared, ready-to-eat and ready-to-cook fresh foods, and accompanying in-store consumption facilities.

Sustainable retailer profitability is also top of mind for EUROSPAR management, who aim to deliversales and profitability improvements to its retailer base.


SPAR sales were strong with overall wholesale growth of 3.04%. Performance was challenged by theloss of seven SPAR Stores from the Pelco group in January. After a challenging start to the year onnew business recruitment, 19 new SPAR stores started trading in 2018.

MACE wholesale sales grew by 4.4% this year with new format stores performing well ahead ofexpectations. Although store number growth is a key challenge, 12 new stores opened. In terms ofcategory performance, Fresh foods, particularly coffee to go, and alcohol, saw very strong growth.

Notwithstanding the fact that new store growth remains a challenge, the XL retail brand continues togrow strongly at 44.5% year-on-year through increased loyalty and a focus on fresh food categories.

Londis delivered growth ahead of the current market trends with wholesale sales increasing by 4.9%.Key weather events played a part in this performance and challenged our supply chain. Our continuedfocus on fresh food categories, combined with retailer profitability workshops, is having a positiveeffect on profitability and business mix. The signing of six new stores affirms our ability to attract newretailers to our brand.

The retention of stores remains paramount: the loss of four stores has been financially driven ratherthan the result of competitive interference. There is, however, a significant increase in retailerenticements from our competitors. With the expected initiation of retirement conversations withseveral retailers in the coming year, we are confident in finding suitable successors from within theoverall BWG estate.

BWG Foodservice continues to show strong double-digit growth, particularly in chilled, fresh andfrozen food categories. This growth has been driven by new customer ‘wins’ and expansion of rangesto existing customers. The BWG Foodservice business remains one of the fastest growing parts of theBWG Foods business.

Value Centre Cash and Carry had an exceptional sales year and continues to outperform thecompetitor set by increasing its market share.


DISTRIBUTION CENTRE OVERVIEW

SHOPLINK: OUR BESPOKE, BEST-IN-CLASS RETAIL SOLUTION

The development and deployment of the Shoplink platform was a major success factor for theyear. Shoplink is a bespoke, best-in-class solution to increase simplicity in stores and to driveretailer efficiency when ordering stock from BWG Foods. It enables 24/7 order placement, allowscustomers to review the full range of BWG products and deals, as well as selecting the bestpromotions. As a B2B platform, it enables complete integration between BWG and in-store EPOSsystems for live sales updates and complete order histories.

Shoplink is deployed to the entire BWG Group retail symbol estate, which opens options forsupply chain transformation, route optimisation and demand shaping. Shoplink is being deployedin the Value Centre Cash & Carry division. There has been a significant migration of customers tothe platform, resulting in higher value sales across a wider product range, delivering a highermargin.

The Shoplink platform was awarded Best B2B Technology 2017 at the prestigious ‘Eir Spiders’Awards. In the ‘Tech Excellence Awards’ it was recognised as the winner in the category PrivateSector Project 2018.

Improvements in our distribution centre capabilities this year included the deployment of digital shelfedge displays in the chilled warehouse environment. This has dramatically reduced the daily gridcreation process from one hour to one minute. The technology is currently being deployed for otherareas of the operation where dynamic signage or labelling requirements can benefit from improvedaccuracy and timeliness.

The retail foodservice and the quality of the fresh food offers in stores are crucial for successful andprofitable retail operations. We established a new retail support team who are responsible foridentifying and tracking new food trends and providing a retail response to satisfy the changing needsof our customers.

Our Retailer Benefit Programme has grown year-on-year in terms of the financial pool generated bysupplier support for the core ranges. This is now a very important part of the overall retail profitabilitymodel. Now in its fourth year of operation, several changes are planned, including a full review of thecore ranges, and the opportunity for retailers to adapt the programme to better match the profile oftheir store sales. This change will be available for 2019 and aims to recruit additional retailer supportfor the programme.

Within Appleby Westward, The Retailer Club was introduced to drive additional sales through selectedlines. For the retailer, this provided the opportunity to earn additional discounts based on purchasevolumes and to benefit from additional margins on SPAR branded lines.

We also created an affinity deal for retailers on credit card charges. With almost 800 members sincelaunching this initiative three years ago, average store savings on fees are significant.

The programme of company-managed ATM rollouts has proven to be a great financial success for the


BWG Group and its retail customers. This is the first venture by SPAR Ireland into financial services. 53new ATM facilities were installed this year and a further eight are planned.

INNOVATION IN 2018BWG Foods launched a consumer loyalty app for SPAR. The app allows the delivery of tailored, highlypersonalised offers to key customers. We also continued to trial innovative solutions in ordering appsfor the deli and lunchtime sector, which is delivering significant insights about consumer behaviourand ordering patters.

BWG Group’s loyalty and rewards programmes continue evolving for the retail brands SPAR,EUROSPAR and Londis. At EUROSPAR a new initiative was launched targeting lapsed SuperEasyRewards members and attracting them back to EUROSPAR stores with bespoke offers and tacticalpromotions.

There is continued rollout of Londis Smart Rewards across the Londis estate, with 25 Londis storeshaving the programme in place. Londis Smart Rewards has more than 20 000 fully registeredmembers.

A new bakery range was launched under the O’Dwyers brand. It offers a range of everyday bread andcakes, while the more premium Kake & Co brand will deliver high quality and seasonal products. Atotal of over 40 new stock-keeping units were launched within the new bakery range.

The BWG Wines & Spirits business features a range of exclusive wines that are sourced on behalf ofits retailers: these are key to offering a very strong consumer value proposition and delivering a goodretail margin. The continued popularity of these wines, based on great quality at very competitiveretail pricing, has been essential in driving the growth of the BWG alcohol business by over 5.5% in2018.

In Appleby Westward a new SPAR brand wine range was launched. Following several winetastingevents with retailers and distribution incentives, these products were successfully launched in stores.

The Irish market is heavily weighted towards pre-packed fresh produce lines. Fresh Choice is thehouse brand for fresh produce in BWG Foods. It allows us to consolidate our volumes under one brandand gives us better buying power when agreeing tenders and promotions. Fresh Choice is a significantpart of our total fresh produce turnover and is used for pre-packed lines only. All Fresh Choice linesare packed at source by our produce category partners to guarantee freshness and quality.

All subcategories within our produce business have pre-packed Fresh Choice lines, including fresh cutfruit, nuts and seeds, prepared bag salads and produce-based meal solutions. We have beensuccessful in winning several national foods awards for lines in our prepared grab-and-go ranges.

The Glenmor brand for fresh meat and poultry had a successful year of sales growth, includingsignificant uptake of the barbeque range. This is despite a challenging and competitive market. Thefocus with all suppliers is on maintaining sales growth through development of new product optionsand smaller case sizes for retailers.


2017 FOCUS AREA EXAMPLES OF PROGRESS AND CHALLENGES IN 2018

Monitoring and mitigatingthe risk of Brexit

There is an ongoing dialogue with government and trade bodies tounderstand and appreciate the changing dynamics of the ongoingnegotiations. There is also extensive consultation and dialogue withsuppliers on contingency strategies to ensure that stock is availablefor retail and wholesale groups in the rest of Ireland post Brexit inMarch 2019. We are assuming that there will be no sales from theValue Centre Cash and Carry wholesale business to the UK/Sterlingarea because of new legislation, borders, and tariffs in 2019.

We will continueinvestigating potentialacquisition opportunities

The acquisition of 4 Aces is complete, and the full integration processis underway. The acquisition of Corrib Foods was completed inSeptember 2018. Corrib Foods is a foodservice business which will becomplimentary to the existing BWG businesses. Corrib Foods willcontinue to operate as a stand-alone business for the next twelvemonths.

Continuing to supportretailers to achieve like-for-like top-line growth andsuccess in the retail business

BWG Foods has a significant co-investment commitment withretailers and will make further capex co-investment in the next year.

Continuing growth of theBWG Foodservice businessthrough new contract wins

BWG Foodservice is one of the fastest-growing parts of the BWGbusiness. Double digit sales growth has been driven by newcustomers and an expanded product offer. The acquisition of CorribFoods business will consolidate this growth and will add to ourfoodservice credentials. The acquisition will provide greater scale inkey areas of foodservice and provide access to new commoditysourcing for BWG.

Looking forward, BWGGroup’s capital investmentwill focus on an expansion ofthe chilled productdistribution facilityat Kilcarbery

Significant capital investment across the BWG distribution andinformation technology (IT) functions included the upgrade andrenewal of the physical IT structure and transport fleet. This wasprioritised over the expansion of the chilled product facility – theoriginal project is in planning for the coming year.


FOCUS AREAS IN IRELAND

BWG PRIORITIES FOR 2019Integration of the 4 Aces wholesale acquisition and delivery of synergies

Commence the communication and roll-out of the new SPAR strategy for 2019 and beyond

Delivery of the business plan for 2019, including• Mitigation of the Brexit risk to the business• Continued like-for-like top-line growth• Continuing to support retailers to achieve top-line and profitability growth• Completion of the Corrib Foods acquisition in foodservice

Innovation and differentiation around retail foodservice are key elements of the BWG Foodsoffer to its retail estate. The business has invested in new resources to create an innovationteam whose focus is to identify new food trends and to create new foodservice offers tosatisfy the changing needs and tastes of consumers.

SPAR RETAILERS’ TOP PRIORITIES FOR THE NEXT YEARDelivering like-for-like sales growth

Maintaining net profitability levels

Management of the labour challenge in a full employment economy

Ensure business continuity post Brexit


OUR FOCUS ON HUMAN, SOCIAL AND RELATIONSHIPCAPITAL

Retail is Ireland’s largest industry, the largestprivate sector employer, and a criticalcontributor to the country’s economy.As a market leader, the BWG Group has established operating policies that govern our engagements withmajor stakeholders and comply with all relevant legislation.

OUR EMPLOYEES AS AN ASSETAt SPAR Ireland we believe that the hard work and commitment of our employees – our most valuableasset – must be respected. We are committed to providing a working environment that is not only safe, butalso conducive to personal well-being and growth. BWG Group is a significant employer (both directly in itswholesale and retail operations, and indirectly through its extensive retail store network) and is fullycompliant with all labour legislation. BWG Group maintains positive relations with the two recognisedunions – the Services, Industrial, Professional and Technical Union (SIPTU) and the Mandate Trade Union –and no significant labour issues occurred during 2018.

The full employment economy is resulting in more pronounced employee risks, compounded by limitedrental accommodation in urban centres. There has, for example, been a significant change in theavailability of weekly waged employees, which has manifested itself in a drain of experienced pickers andqualified warehouse employees from the national distribution centre and a shortage of drivers across thewider market. Attracting skilled IT resources is also a challenge. BWG Foods is a well-established localemployer that works hard to recruit, train and retain talented individuals across the business.

The core skills required by our management team include the ability to manage and integrate newacquisitions, service orientation and innovation. Our training focus this year was on negotiation skills.

SPAR Ireland is committed to employee learning and development, and continues to train all employees toensure that they are adequately equipped to carry out tasks efficiently, safely and according to requiredstandards.

Read more about our employees in the section on material relationships.

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


HEALTH AND SAFETYThe health and safety of on-site employees is a highly regulated aspect of our business.

In terms of wellness initiatives, we do health screening for employees and have an Employee AssistanceProgramme that facilitates activities for head office employees such as pilates and gym session, runninggroups and nutrition talks.

All sites have passed the BWG Foods internal audit.

FOOD SAFETYAs a food retailer, the BWG Group implements best practice to ensure the safety and quality of all ourproducts. This is measured according to six key areas:

Industry standards, emerging issues and liaising with government bodiesAllergensSupplier approval

Retail employee trainingFood safety manualsStore audits


INVESTING IN OUR COMMUNITIESSPAR Ireland’s community investment policy is to raise awareness of and funds for a few deservingcharities and organisations within its communities.

These relate, among others, to cystic fibrosis, homelessness, hospice services, heart health and suicideprevention services. Our collaboration with Food Cloud, across BWG Group’s wholesale and retailbusinesses, connects our surplus food to nearby charities that need it, through an app and a website.

Through major sponsorships, the SPAR brand receives large-scale exposure and is associated with healthand wellness.

BWG Foods, its employees and the wider retailer communities have been involved in several volunteer andcharity initiatives this year:

Business in the communityMizen to Malin cycle in aid of cystic fibrosis

Pieta House CycleHowth to Bray Walk


OUR FOCUS ON MANUFACTURING AND NATURALCAPITAL IN THE SUPPLY CHAIN

We continue introducing innovative initiatives tomake our operations more environmentallyfriendly.Energy-reduction projects have been implemented in the retail and wholesale businesses. LED warehouselighting is a key investment for the group, along with a similar replacement programme of store lighting.We provide a fully funded solution for retailers looking to reduce their carbon footprint and electricity bill.

The scheme aims to replace inefficient lighting systems with LED systems. The up-front capital is fundedby the electricity provider and savings in electricity costs are shared between the parties. The funds paidout in 2017/2018 were used to fund new projects, of which 30% related to new schemes in Value Centrepremises and the national distribution centre as well as planned refurbishment work in retailer premises.

Typical savings are approximately 20% on the total bill. In addition to this, there are reductions in yearlymaintenance costs.

In terms of electricity usage, BWG is working on a tender for combined electricity volumes under an affinitydeal to its retail customers. Participation in the scheme will deliver average savings of about 5% perannum on total electricity charges.

Emissions are not measured, but all vehicles are Euro 6 rated, which means they all contain BlueTEC ECOtechnology, which delivers superior fuel efficiency.

Recycling of dry mixed recyclables and food waste, food composting and cardboard and plastic bailingtakes place at all BWG Group sites. All cardboard and plastic waste generated by the national distributioncentre is bailed for recycling.

Further initiatives to support sustainability and cost savings include:

A pilot of ‘compressed natural gas’ fuel for the transport fleetA move to compostable cups across the BWG Foods coffee programmeActive membership of Repak, the umbrella organisation for recycling and waste management.Repak is a not-for-profit company set up by Irish business and owned by its members. Repakcharges fees to its members in accordance with the amount and type of packaging they place onthe Irish market. These fees are used to subsidise the collection and recovery of waste packagingthrough registered recovery operators across Ireland so that the individual member companies areexempt from this requirement.

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