AVI comfy in Spitz, but Green Cross pinches a bit

The Spitz store in Rosebank, Johannesburg, is classy, elegant and spacious. The brass fittings are tasteful rather than ostentatious. There's a beige carpet and powder-blue chairs. Three men in their early 30s are browsing on a Wednesday morning.

You can buy a pair of Kurt Geiger slip-on sandals for R1,595 or Stuart Weitzman boots for about R12,000. In between is a pair of Church's men's shoes for R5,595 or Nina Roche women's shoes for R3,500.

This is clearly upmarket territory.

When AVI bought part of Spitz more than 10 years ago, analysts slammed the deal, saying the shoe did not fit. At the time, AVI made biscuits and packaged tea. Analysts said food did not mix with footwear. But a decade later, the shoe seems to fit fairly well.

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"What was never understood at the time was that AVI is essentially a brand-owning business," AVI CEO Simon Crutchley said this week. "We believed the economy was changing and ... there was a real asymmetry between the number of visible international brands that people had access to ... versus food and beverage brands, where multinational and local brands had been visible for decades.

"Because of South Africa's political history there hadn't been any meaningful opportunity to grow international fashion brands." Fashion retailers such as Truworths, Edgars and Foschini were "substantially mono-branded fashion retailers with few or no global brands in their stores", he said.

So AVI considered Spitz an interesting brand acquisition as it was not just a retailer but owned a number of international shoe brands and had strong licensing deals with leading international brands.

"These brands were fundamental to why we bought Spitz and that's how we have managed it. Our core focus has been to ... widen the distribution of these brands," Crutchley said.

So AVI bought 60% of Spitz in 2005 and the remaining 40% the next year for R334-million. In 2012, AVI bought footwear maker and retailer Green Cross for R382.5-million. When AVI bought Spitz, it had 25 stores. Today, there are more than 70.

Shoes contribute 10% to 15% of group profit, as AVI fights for wallet share against overseas brands such as Aldo and Nine West.

It is difficult to determine market share as the shoe industry is fragmented. Shoes are sold through department stores, retailers, value-box operators and independent retailers, as well as dedicated shoe stores. Euromonitor valued the sector at R49.5-billion in 2015, with growth highest in women's footwear.

Investec food and beverages analyst Anthony Geard said AVI had done incredibly well out of its investment in shoes.

"The shoe market is hugely fragmented. They play near the top end, though the Spitz brand sells not only to upper LSMs. There are some consumers who are not especially wealthy, but they will save up to buy a highly aspirational pair of shoes. It's a case of really understanding their market very well.

"There's been a lot of pressure in the last few years. All the shoes are imported in that category, but some relief [is possible] with a stronger rand."

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Geard said AVI was trying to reposition Green Cross, and expected a lot of benefits from bolting it onto Spitz. "But this has not really worked yet."

The group is aware of this, and is trying to make the brand more interesting. "Green Cross was another business we bought because it has a strong brand identity; we're trying to express it differently to consumers," said Crutchley.

Chris Gilmour, an analyst at Barclays Africa, said AVI's shoe category showed patchy success. "Green Cross hasn't been great, whereas Spitz has been very good. Certain parts of Spitz compete with imported shoes here. Kurt Geiger, at the top of the range, does particularly well among the black middle class."

Analysts did not understand AVI buying Spitz, said Gilmour. "Until then, AVI was about biscuits and crisps and coffee creamers. They were a brands company and had a few perfumes in those days but at the cheap, lower end. They've got more upmarket now. It transcends so many areas, not just food."

In a voluntary trading update last month, AVI said the performance of its fashion brands was sound in a difficult trading environment. Demand in December had been good, with Spitz in particular posting solid revenue growth compared with December 2015.

The operating profit of both Spitz and Green Cross grew despite pressure on footwear sales volumes "at the materially higher price points necessary to protect gross profit margin". AVI said consolidated headline earnings per share for the six months to December would be 7%-9% higher than a year earlier and consolidated earnings per share 8%-10%.