Metcash independents see market share under threat

Grocery, liquor and hardware wholesaler Metcash has returned to profits in the 2019 financial year but remains under pressure to maintain market share, sales and earnings.

Metcash has restructured and developed strategies to strengthen its independent retailers in the face of increasing competition, especially in its supermarket and convenience store business.

The challenge is reflected in the closure of 54 stores in the past two financial years in Western Australia following the entry of the German discounter Aldi into the market and a planned Costco opening in Perth next year.

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While Metcash added 49 stores in FY18 and FY19, most are smaller-format stores in line with its strategy. The IGA stores remain vulnerable as competition in the grocery sector increases, not just from Aldi, Costco, Kaufland and online vendors but also from the small-store formats Coles and Woolworths are introducing to maintain growth or, at worst, defend their market shares.

In May, Metcash opened the first of its new-generation IGA Express stores in Bondi, Sydney, and plans to roll out a further nine stores in a trial for the format, which focuses on fresh foods, including meal solutions.

The Bondi store is generating 50 per cent of its total sales in fresh products and 10 per cent in ready-to-eat meals.

The initiative could help flagging sales growth but could have limited appeal outside high-density inner urban markets and could cannibalise convenience store sales. The best locations for the new IGA Express offer will also, no doubt, be on the radar of Coles and Woolworths.

Metcash has invested heavily in logistics, retailer support programs and pricing for its food division, absorbing $345.5 million in writedowns on its accounts that for FY18 resulted in a $148.2 million loss.

FY19 marked a return to profitability, with improve earnings from the Mitre 10 and Home Timber and Hardware banner groups and liquor banners offsetting a 3 per cent decline in grocery earnings.

Metcash profit for the full year ended April 30, 2018, was $192.8 million, of which $182.7 million was in food earnings.

While the hardware banners have benefited from the demise of the Masters Home Improvement chain and Metcash has achieved around $34 million in synergies following the Home Timber and Hardware acquisition, the hardware division has seen sales hit by a dip in the housing market.

In contrast, supermarket sales have shown some encouraging signs in the first seven weeks of FY20. Jeff Adams, Metcash CEO, says the momentum can continue as initiatives taken in the past year flow through to stores.

Adams believes Metcash can achieve sustainable growth into the future but it is hard to see how the wholesaler can maintain market share in its food business which currently generates 60 per cent of total company revenues and around 55 per cent of earnings.

Competition is increasing, and is certain to see the closure of more independent stores as Aldi and Costco continue their rollouts and Kaufland opens its stores. With deeper pockets than Metcash, Coles and Woolworths are also upgrading stores to bolster their market share.

Metcash is also about to lose a significant slice of its business in South Australia when the Drakes supermarket group opens its own warehouse facility.

Metcash has secured a five-year supply agreement with Drakes in Queensland, but the loss of the business of the dominant independent supermarket operator in South Australia will directly impact on sales and earnings for the wholesaler.

There is also the threat to Metcash that the Drakes warehouse could entice other independents – or encourage other retailers to press for better deals.

The Ritchies group in Victoria, New South Wales and Queensland would certainly be closely watching the move by Drakes.

The problem for Drakes, Ritchies and several other independent groups which are customers of Metcash is the extent to which their ability to compete with Coles and Woolworths and the international chains is compromised by other customers of the wholesaler, particularly the smaller stores.

Metcash has successfully turned around and reinvigorated its business in the past three years but it still faces significant challenges going forward as competitors seek to grab market share from the independent supermarkets.

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