Metcash to invest $270m over five years

Sue Mitchell
Mar 4, 2019
AFR
Metcash will invest $270 million over the next five years in store refurbishments, new store formats, logistics and digital to reduce operating costs and reinvigorate sales at independent food, hardware and liquor retailers.
Unveiling the wholesaler’s new growth strategy on Monday, chief executive Jeff Adams said Metcash aimed to cut costs by about $25 million a year over the next five years — including $50 million in 2020 and 2021 — to offset the impact of inflation.
At the same time, the wholesaler plans to help retailers grow topline sales by accelerating store refurbishments under its “diamond store” (supermarkets) program, open more small-format convenience and local stores, realign the IGA brand, differentiate ranges according to locations and store sizes, and offer better pricing for independents who comply with Metcash’s standards.
Capital expenditure in food and grocery is expected to reach $165 million over five years, comprising $100 million on rebranding and refurbishments (with Metcash providing loans to retailers), $10 million on small-format store pilots, $25 million on logistics and $30 million on systems including automated charge through (IndieDirect), loyalty programs and new promotional platforms.
In hardware, Metcash plans to spend $90 million to accelerate its “sapphire store” refurbishment program, which has helped boost retailers’ sales by about 15 per cent, expand its range to cover the “whole of house” including plumbing and flooring, cement and steel, roll out Hardings Plumbing and Tait flooring across the network, and accelerate its digital rollout, including rolling out click and collect.
It also plans to open 40 trade-only stores and offer new Trade + Pass accounts, close two distribution centres, and spend as much as $50 million buying more retail stores from independents to prevent them falling into the hands of Bunnings, which has opened its chequebook as sales growth slows. Some will be on-sold to independents.
In liquor, Metcash’s ALM, which supplies about 90 per cent of independent retailers, plans to invest about $15 million to build or acquire corporate stores, increase its 10 per cent share of the “on-premise” market to 20 per cent, roll out the upmarket Porters Liquor chain nationally, expand its private-label offer and tailor ranges to better suit store locations and a consumer shift towards premium wine, beer and spirits.
Balanced approach
Mr Adams said the strategy, dubbed M-Future, balanced revenue growth and cost reduction and was aimed at delivering long-term sustainable growth.
“It’s a program of balancing revenue generating and growing initiatives, with us still keeping ourselves focussed on getting costs out of the business,” Mr Adams told The Australian Financial Review .
“We are quite confident with the plans we’ve got and their ability to get us into growth,” he said.
“What we can’t control is what happens in the external market — if the markets were to behave rationally we can see where they would get us into growth.”
Metcash expects to book about $30 million in restructuring costs, taking the total cost of the strategy to $300 million, and is confident of achieving returns above its weighted average cost of capital.
The capex will be funded by internal resources and Metcash would not need to raise new capital, Mr Adams said.
Suppliers, retailers on board
Metcash has previously faced opposition from independent retailers to some of its plans, including reducing their product range, changing promotions and “clipping the ticket” on about $1 billion of stock retailers sourced directly from suppliers.
“We have discussed the plans with retailers and suppliers and they are supportive and aligned,” Mr Adams said.
Metcash is Australia’s dominant food and grocery wholesaler but its key customers, independent retailers trading mainly under the IGA banner, are losing market share as Woolworths, Coles and Aldi open stores and cut prices.
The wholesaler has responded by cutting costs in food distribution under its three-year Working Smarter program to protect margins and fund price investment and by helping independents refurbish stores and improve their product ranges to differentiate from the major chains.
Metcash has also reduced its reliance on grocery distribution by expanding its liquor and hardware wholesaling businesses, merging Mitre 10 with Woolworths’ Home Timber & Hardware in 2016.
Cost reductions under the $125 million Working Smarter program have helped offset some of the pressure on margins, but underlying earnings from food and grocery distribution have been going backwards for five years due to operating deleverage.
Analysts say Metcash cannot rely on reducing costs to boost earnings and needs to do more to help independent retailers grow sales.
Trading update
“Working Smarter has offset the operating deleverage to negative wholesale sales growth in recent years, rather than accelerated earnings growth for the business,” said Citigroup analyst Bryan Raymond in a report in December. “It is critical for Metcash to return to sales growth once this program is completed.”
Metcash shares have fallen 8 per cent since the first-half results in December, when Mr Adams warned that second-half earnings would be hit by about $8 million of additional investment, mainly in a new express format and loyalty program.
In a trading update on Monday, Mr Adams said total food sales for the year to date were marginally higher than the corresponding prior year period. In supermarkets, the rate of decline in wholesale sales was broadly in line with that reported in the first half of 2019, when like for like sales excluding tobacco fell 1.9 per cent.
In liquor, sales in the current half remained strong, supported by increased wholesale customer volumes, but hardware sales have softened, reflecting the slow-down in construction activity in the trade sector.
Credit Suisse analyst Grant Saligari said the trading update was in line with expectations, but it would take time for investors and analysts to understand the opportunity ahead as Metcash looked to chase growth.
“Rolling out more convenience (everybody is doing it) … rolling out Porters Liquor (tough market, competition galore) … and increasing exposure to new home build. All tough markets, and it’s not clear that Metcash have a competitive advantage in any of these. So will take some convincing to get the market to back the capex spend,’ he said.
.Metcash shares were up 4.6 per cent to $2.72 in early trade.