crease, reduced debt levels and noted an interest in a merger of some, if not all, of Woolworths’ hardware assets. The half-year result was well short of a champagne moment but did suggest that CEO Ian Morrice’s transformation strategy, which includes investment in price matching on groceries, is stabilising trading, albeit at the cost of lower profitability. Coming off the disastrous 2015 financial year results that saw Metcash post a $384.2 million loss after writedowns of $638.8 million, investors may have been a trifle more optimistic with the half-year announcement of an underlying profit of $86.9 million. However, it is more likely that announcements by two major supermarket chains supplied by Metcash provided encouragement to investors that the wholesaler can continue to compete successfully with Coles, Woolworths, Aldi and Costco. Foodland IGA announced it will open 22 new stores over the next five years in a $200 million expansion program, while Ritchies IGA indicated it is keen to expand its network on the eastern seaboard after acquiring the Mildura-based Fishers Supermarkets. The announcements were made by the two leading independent supermarket retailers in Australia, Roger Drake and Fred Harrison. Drake has more than 50 stores in South Australia and Queensland, generating annual sales of over $1 billion and will be a key player in the Foodland IGA expansion. Harrison is CEO of the Ritchies chain of 67 stores through Victoria, NSW and Queensland, with sales of more than $860 million – but those numbers will climb following its recent acquisition. Metcash has a stake in both chains, as well as some of its other larger customers, but Drake and Harrison run their supermarkets independently and are first among equals when the wholesaler develops and implements its business strategies. The expansion announcements by Drake and Harrison demonstrated a confidence in Metcash that was no doubt crucial to the modest but important investor support for Metcash’s struggling share price. Drake Supermarkets is now the leading chain in the Metcash customer base and has traded better than its Victorian-based counterpart in the past three years. Drake increased sales in that period, while Ritchies sales virtually stalled despite adding new stores. Drake’s foundations are in the Foodland IGA group which has long been the strongest independent network in Australia, often outpointing Coles and Woolworths and, until now, has been spared the competitive pressure of Aldi. Aldi will open its first stores in South Australia early next year and plans to open at least 50 stores in the state in the next few years. Ritchies has faced much more competitive heat in its markets from Coles and Woolworths, Aldi and even Costco. Arguably, Ritchies has been a fraction too kind and supportive to Metcash, helping the wholesaler to retain sales volumes by acquiring independents looking to exit the industry. But, in many ways that underlines Harrison’s heart and soul commitment to the independents. While the Foodland IGA announcement this past week was about new greenfield locations, Ritchies growth is expected to be a mix of new sites and buyouts, like the Fishers Supermarkets chain. The other key Metcash players Drake and Harrison are as critical to the continued investor confidence in Metcash as Morrice or his supermarkets division CEO, Steven Cain, a British retail executive who had a stint as MD of Coles Supermarkets before working with the private equity firm, Pacific Equity Partners. Foodland IGA has 32 per cent market share in South Australia and it is preparing to fend off Aldi by adding 22 stores to its existing 118-store network while refurbishing around 25 per cent of its existing supermarkets. Foodland IGA will also develop a major new distribution centre in a $200 million investment plan. New stores will be in both metropolitan locations, such as McLaren Vale, Salisbury East and Mawson Lakes, as well as country centres and will range in size from 1000 to 4000sqm. Ritchies is targeting $1 billion plus in annual revenues this financial year with a lift in sales on the back of the Metcash price matching initiative and the acquisition of the 16-store Fishers Supermarkets chain, which was the second largest IGA chain in Victoria after Ritchies. Ritchies IGA paid more than $20 million for Fishers Supermarkets and is expected to formally assume ownership of the chain in March. Founded in 1911, Fishers Supermarkets is headquartered in Mildura and has 16 stores in Victoria and NSW. Ritchies’ strategic purchase will underpin its market share and add to its buying power, sales and earnings. Ritchies sales and earnings had been slipping in the past three years, with the chain caught in the middle of the jousting between Coles and Woolworths and the expanding Aldi and Costco chains. For the 2015 financial year, Ritchies is reporting a one per cent lift in sales to $854 million despite the closure of four loss-making stores. Earnings for the last full financial year jumped to $9.7 million, up from $2.5 million in 2014. While the price match initiative Metcash has rolled out in more than 900 stores has required an investment that has impacted adversely on the wholesaler’s bottom line in the short-term, it has had a positive effect for Ritchies and other independent supermarket retailers. Harrison is arguing that the death of independent retailers and the demise of Metcash has been greatly exaggerated despite a market share decline in the past five years for IGA from around 19 per cent to 14 per cent. Harrison argues that the price match initiative has countered the customer perception that independents are more expensive than the chains, while allowing them to leverage their advantages as local operators who are not tied to a cookie cutter store model. It is difficult to predict a major rebound in sales and market share for IGA given that Aldi is now moving into new territories in South Australia and West Australia in 2016, while Costco expands its network and Coles and Woolworths appear odds on to fight out a fierce price war. However, consistent with the litmus results for Ritchies, the IGA supermarkets did post like for like store sales growth of 0.6 percent in the half year to October, the best performance by the independents in two years. Metcash in hardware merger? Respite in the food and grocery sector could be enough for Metcash to regain some momentum in its own business after abandoning last June its foray into the automotive aftercare retailing and services markets. Metcash used the $275 million proceeds from its sale of the automotive division to Burson Group to pay down debt and enhance its balance sheet, as well as to help fund the price match initiative. But the company is again prepared to tap investors or financiers for funds to explore new opportunities, including developing a fledgling food export business and a possible merger of Woolworths’ Danks and Home Timber & Hardware business with its own Mitre 10 chain. Liquor and hardware both lifted sales and earnings before interest and tax in the half-year ended October 31, by four per cent to $25.9 million and 22.1 per cent to $11.6 million, respectively. However, the food and grocery business is the main game for Metcash with annual sales of more than $9 billion, compared to $3 billion for liquor and around $1.3b for hardware. The underlying profit of the food and grocery division is more than four times the earnings of the liquor and hardware businesses. While Morrice warns that highly competitive market conditions will persist in the second half of this financial year, the $638.8 million in write-downs in the last financial year cleared the Metcash decks and have allowed the company to pursue new strategies to reinvigorate the food and grocery business and compete with the chains. The investment in price matching is around $40 million a year and Metcash is also assisting IGA retailers with store refurbishments and space re-allocation to accommodate higher-margin and faster-growing fresh food ranges. Morrice has told grocery suppliers that the price match program had so far been gross dollar profit neutral for IGA retailers with higher volumes offsetting price reductions of between four and eight per cent. Independent retailers are funding 50 per cent of the price match initiative, which runs across more than 2100 product lines. Morrice’s plan to reinvigorate Metcash has a timeframe of five years and it is likely to be at least two years into the plan before there are clear signs of a sustainable improvement in sales and earnings and protection of market share. The results for the first six months with sales up 1.4 per cent to $6.6 billion, including a 0.7 per cent lift in food and grocery sales to $4.54 billion, are not that much to gloat about, especially with underlying earnings down. Morrice is convinced there is evidence that Metcash’s transformation plan is, “producing positive results across the group” and underpinning “a continuing improvement in the sales trend for the food and grocery pillar in highly competitive trading conditions and price deflation”. The 2016 first half results demonstrate that Morrice and his team have stabilised Metcash. There is a lot of work to be done to get the business back to growth. Investor confidence is fickle and Metcash has some other important stakeholders – its suppliers and retailers – that need to be convinced to keep the faith in the months, let alone years, ahead. For the significant contribution they have made to the confidence cause, that Christmas tipple for Drake and Harrison should be high on the Metcash Santa shopping list. Want more Inside Retail? Subscribe to Inside Retail Weekly now and get our premium print publication delivered to your door every week.