Will Metcash be the first casualty of the supermarket wars?

STAFF WRITERS
SEPTEMBER 29, 2015
AAPnews.com.au
Metcash has held an investor day to convince the market it can turn things around.
SOME analysts believe struggling grocery supplier Metcash could be gone within a decade in the face of intense competition from Woolworths, Coles and Aldi, but the company says it can turn things around.
Metcash, which supplies more than 2000 IGA, Foodland and Foodworks supermarkets, says it is already beginning to see signs of improvement through a renewed focus on fresh food and private label brands.
At an investor day on Tuesday, group chief executive Ian Morrice and his senior executives gave updates on their plans to revamp Metcash, which suffered a $384 million loss in 2014-15.
The key part of the plan is known as Project Diamond, which was launched in 2014 with a focus on store refurbishments, fresh food, lower prices for shoppers, and a restructure of private label brands including Black & Gold.
Marketing head Madeleine Fitzpatrick said IGA prices had been slashed across about 900 stores and fresh produce ranges expanded since September 2014.
A major advertising campaign launched by Metcash in June featuring actor Shane Jacobson, also appears to have helped convince more shoppers to choose IGA supermarkets.
She said a survey had found that shoppers were now significantly less likely to think IGA was the most expensive supermarket. Wholesale sales had improved, along with those for products “price matched” with rival supermarkets.
Black & Gold sales were up seven per cent and transaction numbers had risen, she said in slides accompanying the investor day presentation.
Prices on Black & Gold products had been cut and the packaging revamped.
National operations manager for the Diamond store accelerator program, Roy Leisk, said the expansion of fresh food offerings was also paying off.
Average basket sizes and numbers had risen, with higher fresh food and total retail sales having been sustained into fiscal 2016. Sales of avocados, chicken and berries were particularly strong, enjoying double-digit growth.
Plans are also under way to roll out specialty cheese lines in more stores.
A further 100 stores would sign up to the accelerator program in the year ahead, Mr Leisk said.
Metcash executives also outlined plans to expand the liquor and hardware divisions, which distribute to the Cellarbrations chain and Mitre 10.
SHARE SELL-OFF
The investor day came after months of declines in Metcash’s share price. The IGA supplier is the most shorted stock on the Australian share market for 2015 so far, which means it has the most investors backing its share price to fall further.
Some analysts are even predicting Metcash, whose shares have slid by about 40 per cent since January, will become extinct within a decade.
Morningstar analyst Gareth James said Monday the wholesaler would have to be creative to remain relevant in the changing supermarket landscape.
Supa IGAs and Foodland in particular are set to lose more market share to Aldi as the German discounter expands into South Australia and West Australia. “Aldi can sell products cheaper than other supermarkets,” Mr James said.
“It will win market share wherever it expands into and most of that market share will come from the independents. There is a huge risk that Metcash is going to be squeezed and it will be the key loser as a result of the increasing competition.”
Aldi’s successful low-cost model has also driven a fresh price war with the major supermarkets. As a result, IGA outlets have been forced to price match Coles and Woolworths on as many products as possible, cutting further into profit margins.
Mr James said some of the independent stores were successfully branching out to other suppliers and catering for niche markets including halal and kosher products.
“Even if the store owner can tailor their store to the niche market it is operating in, it doesn’t change the fact that it may source products from someone other than Metcash and that is another threat to Metcash’s business,” he said.
Metcash has sold its automotive business to help raise funds to turn around its ailing food and grocery business.
In July, it appointed former Coles managing director Steven Cain to head its core IGA business, while Mark Hewlett was recruited from Woolworths to lead the company’s search for new business.