Metcash shifts sights from costs to growth

Sue Mitchell
Mar 4, 2019
AFR
After stabilising earnings by cutting costs, wholesaler Metcash is chasing sales growth by spending $300 million over five years buying and refurbishing stores, opening small stores and ramping up digital investment to cater for growing consumer demand for convenience.
Metcash has cut costs by about $125 million over the past three years to offset inflation, but the focus on savings has come at the expense of independent retailers – particularly in the highly competitive $110 billion food and grocery market – leading to underinvestment in stores and online.
Chief executive Jeff Adams, who took the helm 12 months ago, said Metcash still needed to cut costs by about $25 million a year to head off inflationary pressures, but it was time to step up investment to help independent retailers increase topline sales, respond to changing shopping habits and reverse a long-term decline in market share.
“The guys have done a great job of stabilising the [food] business over the last few years. It’s a business that had been challenged and lacked investment over a number of years – as a result of that, it’s really fallen behind global trends,” Mr Adams told The Australian Financial Review. “Our plan is to invest back into that business, improve the competitiveness of our retailers and align ourselves better to those global trends.”
The wholesaler plans to invest about $165 million over five years to accelerate supermarket refurbishments under its “diamond store advantage” program, open small-format convenience stores, realign the IGA brand to suit different shopping occasions, differentiate ranges according to locations and store sizes, and offer better pricing for independents who comply with Metcash’s promotional programs.
The capital expenditure comprises about $100 million for rebranding and refurbishments (with Metcash providing loans to retailers to fund refurbishments), $10 million on small-format store pilots, $25 million on logistics and $30 million on systems including a new loyalty program and promotional platforms.
In hardware, Metcash plans to spend $90 million in three years to accelerate its “sapphire store” refurbishment program, which has helped retailers boost sales by about 15 per cent, expand its range to cover the “whole of house” including plumbing, flooring, roofing and kitchens, roll out Hardings Plumbing and Tait flooring across the network, and accelerate its digital push, including rolling out click-and-collect services.
It also plans to open 40 trade-only stores, close two distribution centres and spend as much as $50 million buying retail stores from independents to prevent their falling into the hands of Bunnings.
Shift in focus to growth
Some of these stores will be on-sold to independents, others will be retained as corporate stores to rest new concepts, products and systems.
In liquor, Metcash, which supplies about 90 per cent of independent retailers through brands such as Cellarbrations, Bottle-O and Thirsty Camel, plans to invest about $15 million to build or acquire stores, double its share of the “on-premise” market to 20 per cent, roll out the upmarket Porters Liquor chain nationally, expand its private-label offerings and tailor ranges to better suit locations and a consumer shift towards premium wine, beer and spirits.
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 of about 11 per cent.
The capex would be funded from cashflows and borrowings and Metcash would not need to raise new capital, Mr Adams said.
Analysts said the additional capex was more than they had forecast and investment in corporate stores would increase Metcash’s exposure to retail spending.
However, investors welcomed the shift in focus from costs to growth, sending Metcash shares up 2.7 per cent to $2.67.
Pendal Group analyst Sondal Bensan said: “$300 million sounds like a lot but … it’s over five years years and it compares to circa $650 million that will be paid out as dividends; that is, shareholders receive 70 per cent of the free cashflow similar to most other corporates.
“Also, of the $300 million, circa $100 million is earmarked for potential secured customer loans to support network investment, which is a very low-risk, non-dilutive allocation of capital,” he said.
‘There are opportunities to grow the network’
Mr Bensan also dismissed concerns about Metcash increasing its retail exposure, saying it already owned 90 Mitre 10 and Home Timber & Hardware stores and had stakes in several food and liquor retailers.
“There are opportunities to grow the network where others aren’t taking up the opportunity,” he said. “The retail stores could be sold on to retailers in future, releasing capital.”
Mr Adams said the new strategy, dubbed M-Future, balanced revenue growth and cost reduction and was aimed at delivering long-term sustainable growth.
“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.”
In a trading update, Mr Adams said total food sales for the year to date were marginally higher than the same period last year, but wholesale supermarket sales continued to fall after slipping 1.9 per cent (excluding tobacco) in the first half. Sales remained strong in liquor but hardware sales had 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 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,” Mr Saligari said.