IGA in ‘convenience’ face lift as Metcash swings to loss

Smaller IGAs will be given a facelift as grocery wholesaler Metcash tires to capitalise on consumer demand for convenience with a new “modern day” express offer which it hopes will help it return to growth in the face of crushing competition from Woolworths, Coles and Aldi.

“We have really good real estate out there but I would say our offer… could be significantly improved,” Metcash chief executive Jeff Adams said on Monday.

“So the opportunity will be to bring that up to a modern standard – more convenience foods, ready meals, ready to eat, ready to cook.”

Metcash has refurbished 325 IGA stores under its “diamond” store improvement program, including 75 in the past year, which resulted in an average improvement in sales of more than 10 per cent.

But until now its has not focused on its smaller stores.

Woolworths has been rolling out small-format “Metro” convenience stores, while Coles is also moving into smaller format stores.

Mr Adams previously ran British supermarket Tesco’s Express business, and said he saw demand in Australia for a store format that catered to customers who shopped more frequently, and wanted to do so more quickly and easily than was possible in a full-size supermarket.

It will trial 10 stores this year with the new format, and it will be expanded if successful. Spending on its refurbishment program would be steady in the next year and would “accelerate” the year after, Mr Adams said.

Metcash on Monday revealed a full-year after-tax loss of $149.5 million, down from a profit of $171.9 million last year, after it slashed the value of its food business by $345.5 million earlier this month.

That writedown was mostly due to losing its largest South Australian customer, Drakes Supermarkets, which terminated its relationship with Metcash to start sourcing its own groceries.

Mr Adams hosed down suggestions that other wholesale customers could follow, particularly in South Australia, where it is trying to sign Foodland supermarkets up to use a new distribution centre.

“We’ve had absolutely no indication from any of the other retailers that they had similar intentions,” he said.

“In fact our conversations with the other Foodland retailers are going very well, and we suspect that we’ll get those results of their support very soon.

“They believe the way that the model is structured is the right model for the independent network – I think Drakes had a different view.”

Mr Adams said that Drakes’ decision to go it alone did not “make sense” given the size of its business.

Comparable sales at the almost 1400 IGA supermarkets and convenience stores that Metcash supplies fell 0.9 per cent in the year, as they came under pressure from Coles, Woolworths and Aldi, which is continuing to expand in South Australia and Western Australia.

But Mr Adams said there had been an improvement in trading in the seven weeks from April 30, while “operating efficiencies” would help address the financial impact of losing the Drakes account.

Simon Mawhinney, managing director at fund manager Allan Gray – which is Metcash’s largest investors with about 10.5 per cent of shares – said unanswered questions remained over whether any other supermarkets would follow Drakes and leave the network.

“Things are uncertain – they didn’t think that Drakes was going to leave and then they did,” Mr Mawhinney said.

Metcash said its underlying earnings before interest and tax, which excludes the impact of the write-down, increased 9.2 per cent to $332.7 million.

That growth was mostly thanks to the contribution of the Home Timber and Hardware business for the full year, compared to only seven months of last year.

In a sweetener to investors, Metcash announced a $125 million off-market buy back, which the $2.7 billion company said it could conduct while retaining enough capacity to fund its future growth plans.

Mr Mawhinney said the result was “quite good, considering all of the headwinds that the company has and continues to face”, and called the share buyback an “excellent initiative”.

Price deflation was Metcash’s biggest headwind, Mr Mawhinney said. On that front, there was some relief, with deflation falling from 2.7 per cent in the first half to 2.1 per cent in the second half.

UBS analyst Ben Gilbert said Metcash returned a “solid result” across its business areas, with the “positive surprise” of buy backs.

Metcash’s shares rose 2.15 per cent to $2.85. The stock is down 22 per cent over the past month, after being sold down heavily on news of losing the Drakes contract.

The company announced a final dividend of 13¢, fully franked and payed on August 8.


Extracted from SMH

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