By: Bloomberg 

SPAR is planning to acquire smaller retailers to help South Africa’s second-largest grocer by revenue expand beyond the food segment and win market share in a struggling economy. 

The company, which is selling its loss-making Polish unit, wants to increase South Africa’s contribution to its revenue to 70% in five years from 60%, CEO Angelo Swartz said.

SPAR, which also owns a chain of building materials stores, plans to expand into pet shops and two other categories, he said.

Swartz said the proposed expansion will help take on competition fighting to lure shoppers in Africa’s slowest-growing economy after war-ravaged Sudan, and Equatorial Guinea.

Companies, including SPAR, are banking on the nation’s new so-called government of national unity to prioritize economic growth, which is key to adding jobs and increasing disposable income. 

“There’s a shift happening in retail in South Africa, particularly among the food retailers who have scale advantage,” Swartz, 42, said in an interview in Bloomberg’s Johannesburg office.

The larger grocers are trying to maximize their “advantage by going into categories that we weren’t involved in before. That naturally leads to growth outside of the core supermarket business,” he said.

The Durban-based company expects its non-food business to account for 30% of sales in five years, Swartz said.  

The company’s shares have dropped 1.2% this year compared with a 7% gain at larger rival, Shoprite.

SPAR, which is restructuring its obligations and cutting debt, would consider a purchase that would return about 3 percentage points more than its weighted average cost of capital, which stood at 8.9% as of Friday, according to data compiled by Bloomberg. 

Withdrawing from the Polish unit will free up about R500 million of earnings a year, according to SPAR.  

The company may also pare or sell its operations in Switzerland, the UK and even Ireland, which is one of its best-performing markets.

“We are very happy with our operations in Ireland, but I think we are a South African business, and we have to look after our market first,” Swartz said. 

SPAR, which supports franchisees trading under its brand through its warehousing and distribution network, may still expand in Sri Lanka where it has partnered with Ceylon Biscuits, he said. 

Swartz was appointed in October with a mandate to strengthen the retailer after top executives resigned over governance issues. SPAR’s profit has dropped for two straight years.

“Raising the standard of governance within SPAR is high on our agenda,” he said.

“SPAR has grown on the back of exceptionally strong people, but I don’t think we’ve always followed that up with the process. So setting up the right processes is becoming the safeguard.”