Procurement Policies to create market access for Small Business & Cooperatives: Spar briefing

Small Business Development

04 November 2015
Chairperson: Ms N Bhengu (ANC)
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Meeting Summary

The Committee was engaged in hearing from a number of retail organisations on their procurement policies and how they assisted in opening up markets for small businesses. Spar Group briefed the Committee, noting that Spar was founded in the Netherlands in 1932, and started in South Africa in 1963. The main objective behind the organisation was to put independent retailers in a position to compete with large chains. Spar operated about 1 811 stores across South Africa, broken down into different types of stores. It employed around 64 500 people, showed sales of R76.5 billion and had a customer base of around 60 million people per month. The models were SuperSpar, Spar, KwikSpar, Build It, TOPS, Savemor and Pharmacy. There were only 247 stores owned by black owners, and Spar was fully aware that this was a figure that it had to increase. However, it faced challenges of many of the potential entrepreneurs lacked experience and funding, and this was simply too great a risk for the company to take; it preferred to accept retailers with both experience and some financial backing. However, it was engaging in enterprise and supplier development. Although 60% of group supply chain was provided by major, big-brand suppliers and around R6.5 billion per annum was provided by Spar brands. Around R14 billion per annum, or 20% of stock, was provided by suppliers who were chosen at local level, and thus their precise identity was unknown to the Group. The Spar retailers retained significant autonomy in how they ran their stores, although they were obliged to comply with strict quality standards, so whichever suppliers they chose would have to meet these requirements. Spar had initiated a Rural Hub Model, in Mopani District in Limpopo, to start from the next growing season, which aimed to empower local small farmers from previously disadvantaged and rural backgrounds. Part of this was the setting up of a Fresh Assembly Point, in which ownership would, for about five years, be shared between Spar and local farmers, with Spar withdrawing over the five years although it may continue to mentor. Funding had been obtained from the Dutch Government, the Masisizana Fund and Jobs Fund. Inconsistent quality and levels of supply from small farmers was a challenge.

The Chairperson noted that there were commonalities between the Committee's aims and those of the Spar and urged the Department of Small Business Development to work with Spar to ensure that the objectives of empowering black people, and particularly small businesses and local farmers, were realised. Members wanted to hear more about how Spar was trying to achieve transformation and urged it to take a cue from the National Development plan. They asked how it measured success, asked for more information on its BBBEE rating, where the percentages for development were being spent, and where the value add was. They asked for more detail on the funding, and how it might change or be developed over the years, and when the new organisation might wean itself off grant funding. Members questioned the equity of ownership, directorship, management and staff within the Spar Group and the retailers, and whether employees were permanent or temporary, and how the new legislation around labour broking had affected its temporary staff. Members asked if it was obtaining supplies from small enterprises and cooperatives and asked for breakdowns. They also wanted details of who owned stores, how many were owned by the same individuals, where they were and who owned the buildings, and on community development. Members asked if there were stores in the rural areas, how Spar might help with education, and whether employees were permitted to unionise. Some of the figures would be provided in writing to the Committee.

Meeting report

Retail Industry Procurement Policies: Access to market for small business: Spar briefing
Mr Graham O’ Connor, Chief Executive Officer, Spar Group Ltd, said that Spar was founded in 1932 in the Netherlands by Adriaan van Well. The objective of the organisation was to put independent retailers in a position to compete with the chains. In South Africa Spar was founded in 1962 by Colin Michelsen, and was launched in 1963 with 8 wholesalers and 500 stores. Today Spar has 1 811 stores across the country employing 64  500 people with retail sales of R76.5 billion, and a customer base of 60 million per month. Since 1992 the sales had grown from R1 billion to the 2015 figure of R76.5 billion. The number of wholesalers had declined since 1963, from 8, to 1 wholesaler in 2015 and the number of cases despatched since 1987 had increased from 20 million to 219 million in 2015.
Mr Roelof Venter, Group Retail Operations Director and Guild Chairman, Spar, noted that in September Spar had 1 811 stores, comprising 315 SuperSpar, 366 Spar, 132 KWIKSPAR, 320 Build IT. 608 TOPS, 25 Savemor and 45 Pharmacy. There were 247 black owned stores within the Group. The Group was not happy with this number and every effort was being made to increase it. Many young people who were keen and wanted to get into retail through Spar Group Ltd often lacked experience and funding, and although the organisation wanted to give these people an opportunity the risk was too high. So potential retailers that had experience but lacked funding were usually considered, and those with both experience and funding would be given first preference.

Mr Kevin O’Brien, Risk, Sustainability and Corporate Governance Executive, Spar, said that in the Spar Group supply chain, a significant proportion was absorbed by suppliers with big brands, amounting to R56 billion per annum, or about 60% of the spend on suppliers. The Spar brand accounted for about R6.5 billion per annum. The remaining R14 billion, or 20% per annum was sourced from suppliers that were unknown by the Group, because these suppliers were at the retail level. Spar's retailers were independent and sourced locally. Spar had initiated a Rural Hub Model which aimed at empowering local small farmers from previously disadvantaged and rural backgrounds. Spar was in the process of setting up a Fresh Assembly Point (FAP) in which it would share ownership with these local small farmers. The FAP had ensured that quality and safety of food is prioritised and the international standards for food quality and safety set by Global G.A.P had been adhered to, with Spar also having established a local G.A.P standard of food quality and safety, accepted by Global G.A.P to ensure that the quality and safety of food was adhered to at all times .

Within the FAP, Spar would only share ownership up to a certain point of time, then would step back and allow the small farmers to run this operation themselves. The first pilot site that was being initiated was in the Limpopo province, in Mopani district. This had been chosen because of the high number of emerging farmers, high poverty, and the proximity of Spar retail stores within about a 200 km radius. The ownership of this initiative would be shared with the farmers. Spar had received R21 million from the Jobs Fund, R15 million from Masisizane Fund, in partnership with Old Mutual Group, and R21 million from the Dutch government to fund this initiative.

Mr Venter said the main problem with local farmers, especially small farmers, was consistency and this tended to overshadow the benefits that there might be for Spar and retailers to purchase from local farmers. However, initiatives like the Rural Hub were meant to ensure that the problem of lack of consistency was eradicated, whilst simultaneously empowering the local farmers.

The Chairperson noted that there were common areas in what the Committee intended to achieve and what Spar was trying to do, and she said that the Department of Small Business Development (DSBD or the Department) would work with Spar to ensure that the objectives of the organisation, in terms of empowering black people and particularly small businesses and local farmers, were realised. She noted that the Committee and the private sector were meeting now while the Committee was still assessing the programmes that the DSBD had inherited from the Department of Trade and Industry (dti), and that the Committee aimed to smooth and achieve continuity in developing small businesses sustainably. She noted that the model presented by Spar related closely to what the Committee had been doing on the ground, and this was an opportunity that the Department should not overlook.
Mr R Chance (DA) asked for more information on the main drivers behind the process of transformation, and to what extent was Spar taking a cue from the National Development Plan (NDP), as this identifies some of the challenges that are facing the country. He asked how Spar measured its success – whether by revenue, turnover, growth, return on equity or economic development priorities achieved. The priorities of the country were new business creation and job creation which in turn would lead to the reduction of poverty and unemployment and inequality. For example Pick n’ Pay had publicly said that it intended to create 100 jobs a day. This was a different type of measure of success that a business could have, and it did speak to the broader priorities outlined in the NDP. He noted that Spar had talked about BEE in their presentation, and asked where BEE featured in the organisation’s strategy. He asked how the 3% that had to be spent on supply and enterprise development was being spent, and how seriously Spar took its BEE rating. He asked where the greatest percentage of supplier development was happening – in fresh produce or other categories? He wondered what would happen if the organisation restructured its supply chain to increase the number of small suppliers who would then probably employ more people per unit of output, given that  small businesses were more labour intensive than big businesses which were capital intensive. This should have an impact on job creation and the total wages paid. He urged Spar to go back and analyse its supply chain figures in light of the NDP. He wondered if the value add in the supply chain was being transferred to businesses that were self-sustaining. He asked what portion of the  Masisizane Fund grant was a pure grant and how much was a loan. He asked when the new organisation was likely to wean itself off grant funding to make the rural hub model a fully self-sustaining project.
Mr S Mncwabe (NFP) said that his questions had been covered by Mr Chance.

Mr T Mulaudzi (EFF) said his main concern was about transformation. He questioned the equity of ownership and directorship within the Spar group, noting that most of the delegation was white and male. He would particularly like to know how many black women and young black people there were within the organisation. Out of the 1 811 stores, it had been said that only 247 stores were black owned, which is less than 10%, and he wanted to know what was being done to address that. Although Spar had spoken of selling shares, no details had been furnished to the Committee, as to how many shares were being offered to the black public customers, and what model was used to advertise the share offering. He noted that R14 billion of goods were sourced from local suppliers, but wanted to know how many were small business enterprises and cooperatives. He thought there was a shortcoming on Broad Based Black Economic Empowerment (BBBEE) within the Spar. He asked for more details on the employees, asking if Spar was creating sustainable jobs or just casual jobs; the majority of workers seemed to be casual workers. He asked if the Dutch Government funding was a once-off funding, or paid annually, and how many small businesses and local farmers had been assisted out of this fund?.

Reverend K Meshoe (ACDP) asked for more detail on how come the organisation did not know who their local suppliers were.
Mr Venter wanted to quickly answer that point; 80% of suppliers were the “big brand” and 60% of that 80% was disclosed. However, the 20% related to suppliers to independent retailers and the Group would not have that information.

Rev Meshoe said there were then two points to follow up. The “unknown” 20% may not get the opportunity to be developed, if Spar did not know who they were. How did the organisation determine the quality of what the unknown 20%  produced? He asked for more elaboration on entrepreneurship and family values and the key drivers that resulted in such impressive revenue streams.

Mr X Mabasa (ANC) asked whether Spar saw itself as having a role to play in transformation, pointing out that if the private sector did not play a strong role, inequality gaps would still prevail and not be narrowed. He asked if Spar had any strategies to help people with disabilities. There were now new challenges with tertiary education, around fees and free education and he wondered if Spar saw itself playing any role alongside government. In relation to the buildings from which Spar operated, he asked if it worked with community members to build up any infrastructure so that it did not only serve Spar alone. He asked if the Group had any influence on its retailers to help them play a social development role, or whether that was left to individuals in those constituencies. He asked about Spar's policy on temporary workers. He also wanted to hear about its capacity to train and equip people in entrepreneurial skills.
Mr S Bekwa (ANC) said Spar retailers were mostly situated in urban areas, and wondered if Spar had considered taking its shops to remote rural areas where it would be easier for people to access the stores, and create employment in those areas.
A Member questioned the rural hub project, saying there had not been any time frames attached to the mentoring and handing over. She wanted to know whom exactly Spar aimed to empower. She also wanted figures around women empowerment. She too wanted more details of the Dutch funding, whether it was expected to be indefinite, or whether at some point the South African government was also expected to come on board,. She asked whether Spar had been engaging with any government departments to try to get them involved, to cover off all areas properly.
The Chairperson spoke of the role of DSBD, noting that it was mandated to develop small businesses and cooperatives. She noted that the responsibility to engage with other departments lay not with Spar but with the Department, who would identify where opportunities existed and then identify key departments that should be playing a role in making the small businesses and cooperatives  sustainable. It was also the DSBD's responsibility to bring the private sector on board to contribute towards the sustainability of small businesses and cooperatives. Therefore, a coordinator for the Spar project was much needed, in order to manage the roles of each key role player; it could not be left to one organisation alone.

Mr Mulaudzi asked if Spar employees were allowed by the organisation to organise themselves or to belong to a union of their own choice.

Mr O’ Connor noted that the organisation was very committed to transformation, and although the instructions given to Spar when preparing this presentation did not ask that it should address BBBEE, he could say now that Spar was very committed in to it and was achieving good ratings. Spar certainly could still improve its scores, currently at level 6. He reiterated that Spar was not happy about the low number of black-owned stores, and was continuously working hard to improve that number. In terms of transformation, Spar had recently appointed one black female in a top executive position, and there were several female directors in a few regions. At the Group level there was one black male, one black female, and one Indian male, out of the six directors of the Board. He would gladly engage with Members again and had handed out his business card.

He agreed that Spar's aims aligned with those of the Committee, and would not play the “blame game” but would happily engage with the Committee on issues and questions raised. Spar's success could mostly be attributed to its peculiar decentralised nature and ownership of what belonged to its retailers. The Group dealt with its retailers like family, along with the communities that the organisation had been serving over the decades.

Mr Venter added that the success of the organisation was mainly due to the independence that the retailers had. They were solely responsible for the success of their retail stores and all efforts they make were grand because ultimately they reflected back to the Group. He wanted to speak again to the question of the 20% of unknown suppliers. Spar had a programme that would  ensure that all the suppliers' supplies were inspected to ensure that their products adhered to the food quality and safety standards. Retailers had access to the same information and documents to ensure adherence to those standards and they had to meet the criteria.

In relation to employment creation, Mr Venter again reiterated that retailers operated independently. At the retail level Spar aimed at creating more a 100 jobs a day because the organisation was opening 34 Spar stores, and about 30 TOP stores, 14 pharmacies and about 10 or 12 Build ITs. This year alone the Group had opened 30 stores and so had created employment there. He spoke to the question on the rural areas and said that Spar was the best represented in rural areas already in the small chains, and it had a system to look at the market in a particular area before opening up a store in that area; if a store was not deemed sustainable then it would not open one there. However, this did allow the Group to go to marginal areas.  In regard to infrastructure shared in the community, he explained that often a potential retailer would approach the Group asking that it build a store in a particular place. How that retailer would then share space was up to him or her individually. However, the Group could look further into this as it did speak to empowering the community. The Group needed to engage with the independent retailers on this issue. The cooperative was also something that the Spar Group would definitely look at, because it had not been something prioritised in the past.

The Chairperson asked what was being done to create a broader spread of ownership in the retail stores, noting that often one person might own more than one store. If the Group decided to open a store, she asked if it was sensitive to pre-existing general dealers in the vicinity, and whether it would try to ensure that the opening of a new store would not adversely affect existing dealers.

Mr Venter in response agreed that some retail owners owned a few stores but that did not mean they got first preference.

The Chairperson asked for a breakdown of the information of who owned what, where and how many stores they owned. She also would like to see these details for the black owners. Ownership of stores was something that the Committee was particularly interested in, as it sought to address inequality.

Mr Venter responded that that information would be sent to the Committee; he did not have all the figures to hand immediately.

Mr Venter said, in response to questions about union membership, that retailers negotiated separately with the trade unions but there was no policy that hindered any employee from being a part of any union. The central Group assisted and monitored their retailers to ensure that they adhered to legislation.

Mr O’ Brien said that there was a lot of research behind the rural hub project, with more than two years work. It was due to start in the following year's growing season. Research results would also be shared with the Committee. He noted that a major challenge lay in trying to develop a business model that was not reliant on grants. The delay in setting up the hub was mainly caused by the need to obtain grants and assess the cost-benefit analysis of obtaining those grants. The Masisizane Fund was a loan at a lower rate which would be easier for the farmers.

He said that although there was not sufficient time to give a breakdown of the gender and race of the farmers, he noted quickly that there were around 200 in Limpopo, farming between 5 and 20 hectares, so the opportunity for growth for the hub was quite significant. Spar was looking to move out of ownership of the hub within around five years, and during that five years the farmers who would be taking over would be provided with mentorship, and this could even continue after it had left.

The Chairperson reminded the presenters to speak to how Spar measured its success, ownership and management in the group and how it planned to narrow the gaps in inequalities, as also whether it could play a role in the fees question, in higher education.

Rev Meshoe asked whether there was a policy that sought to limit the number of retail stores that an individual or family can own, and if not, then how Spar would address inequality, because the absence of such a policy would continue favouring those who were already advantaged.

Ms Thuli Tabudi, Group HR Executive, Spar, said that the issue of employment equity was one area that the organisation continued to work on, and measures had been put in place to accelerate transforming those who were previously disadvantaged people; Spar recognised that it was not yet at an optimal point on this but was working on it. She added that it was also addressing the disabled, had started with development of disabled children and had partnered with some disability organisations to have disabled people absorbed. It was also working with a number of agencies and its involvement in this regard did not go only to clerical positions but also it aimed to empower people to become managers. A limitation was that sometimes  the environment or working conditions in the distribution centres may not be conducive, and they were also labour intensive.

Mr O’ Connor said, in response to the education question, that more than 80% of retailers made contributions to local school in their areas, and some of the retailers had built classrooms, put in doors or other infrastructure. About 50% of the buildings were actually owned by the retailers themselves, whilst the rest were owned by the local business people and communities in areas. The Group ensured that retailers did not pay any temporary workers  below the minimum wage. Spar measured its success on the profitability, impact and brand point of view.

Mr Mabasa asked what was the maximum period that temporary workers would remain temporary and not move over into permanent posts.

Ms Tabudi responded that there were two types of employees; firstly full time employees, then permanent but part-time, who would also receive a variety of benefits like medical aid and UIF and pension fund. When a permanent position opened up, first preference would be given to the part-time employees.

Mr Mabasa asked what the maximum period was for a part-time permanent staff member.

Ms Tabudi replied that she was not aware of a specific period of time at the retail level, but in the Group, this might be between two and five years. The Group did not dictate to, but only provided monitoring to the retailers.

Mr Chance noted, on Mr Mabasa’s question, that legislation had been passed to note that temporary employees would be regarded as such for three months only and asked what effect this had had on the Spar Group.

Ms Tabudi replied that Spar had converted those formerly employed through labour brokers into permanent Spar employees, and they had been absorbed by Spar. In one division over one hundred people were converted in this way.

The meeting was adjourned.

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