Metcash woes deepen
Metcash said in December that its full year earnings were expected to fall by at least 14 per cent after disappointing first half sales and profit results.
While investors reacted harshly to the profit downgrade warning, Metcash has since been hit with allegations that it engaged
in unconscionable conduct in dealing with suppliers.
The wholesaler has also been forced to defend a Federal Court action by Arora Group, a company that operated 19 supermarkets in NSW.
The Arora is seeking significant damages from Metcash after 11 of its 19 stores failed.
Arora bought 16 stores from Metcash for $9 million and converted two Franklins franchise stores it operated to the IGA brand after Metcash acquired the Franklins chain and onsold corporate stores to independent retailers.
It is seeking to stave off receiver managers by securing a court judgement against Metcash on the grounds that it did not receive full and proper information on
the stores it bought from the wholesaler, including information on possible changes to trading terms and the security Metcash took over the supermarkets to protect its financial exposure on debts.
According to court documents, Arora owes Metcash $14 million in unpaid rent and stock.
The case highlights the difficulty that Metcash has had in integrating Franklins stores into its IGA and lifting their sales and profitability.
The allegations of unconscionable conduct also point to the wholesaler’s battle to maintain sales and earnings growth in the face of competition from Coles, Woolworths, and Aldi as well as emerging chain, Costco.
Last year, Metcash launched a price match initiative to counter discount price marketing campaigns by both Coles and Woolworths
The price match initiative was funded, in part, by increases in rebates and levies on suppliers, including charges to fund retailer overseas study trips.
Two suppliers, Cofco Distributors and Fast Track Logistics, have launched legal action in the Federal Court claiming they have paid out more than $10 million in rebates and $400,000 on study trip levies since 2008.
In a hearing set down for March 6, the companies claim the charges were excessive and resulted in cash flow problems and losses.
They allege there have been 33 different rebates charged by Metcash representing discounts of around 25 per cent on sales of around $39.2 million the companies made over the past six years, although Fast Track Logistics claims that rebates in the year ended June 30, 2014 equated to 69 per cent of sales.
Metcash has indicated it will vigorously defend both legal actions and points out that the overseas study trips have been supported by supplier contributions for decades and underpin higher retail standards in independent stores.
Hit from all sides
The court battles are troublesome enough for the wholesaler, but the real concerns for investors relate to the transformation program and sluggish growth of the critical food and liquor divisions, which account for around 90 per cent of total revenue.
In the first half of the current financial year, Metcash food and grocery achieved a bare 0.5 per cent lift in sales, a result representing comparable sales of negative 1.5 per cent after allowing for 1.3 per cent deflation on prices.
Metcash has lifted fresh food sales by 4.1 per cent on a comparable store basis and substantially grown Black & Gold housebrand sales following a revamp that incorporates a rollout of new packaging.
It has also reversed a sales decline in stores where the price match program has been implemented and is moving to extend the program to smaller stores.
Metcash conceded last year that its independent supermarkets were losing marketshare as a result of store closures and the expansion of the major chains, including Aldi’s continued network growth and entry into the South Australian and Western Australian markets.
The company has developed a transformation program that aims to change from the traditional supply-led wholesale model to a consumer-led, retail-oriented operation.
It is attempting to reduce stock purchases by independent retailers from external suppliers by enhancing its fresh food offer, improving product ranges, and sharpening pricing to allow its IGA supermarkets to be competitive with the chains and differentiate.
Metcash is working on store formats to improve productivity and the customer experience and is supporting ownership transfers to retain profitable and strategic independent stores in the IGA network when retailers decide to sell their businesses.
Mitre 10 lifted sales by 16.5 per cent in the first half of the current year, with a like for like increase a creditable 3.9 per cent given the continued expansion of Bunnings and rollout of Masters Home Improvement stores.
Metcash has not attracted as many independent hardware retailers from other groups, particularly the Woolworths- owned Home Hardware banner, as it had expected when it acquired Mitre 10, but is continuing to achieve sales and earnings growth.
As well supply chain improvements and expanded international sourcing, Mitre 10 has been upgrading stores and developing store within a store concepts with Beaumont Tiles and Stihl and expanding its auto offer.
Metcash is continuing to consolidate and integrate its auto division after a series of acquisitions, including the franchised Midas chain, ABS, and Malz Automotive and Leisure Zone.
Boosted by new stores, the Metcash automotive division lifted sales by 21 per cent in the first half of the current financial year, although the franchised Autobarn retail stores revenues rose only 0.6 per cent on a comparable store basis.
This story first appeared in Inside Retail PREMIUM issue 2034. To subscribe, click here.