Metcash chief Ian Morrice grabs reverse on convenience stores

Sue Mitchell
June 23, 2014
The Age
Wholesaler Metcash is chasing an extra $1 billion in sales from the convenience and food service sector after warning investors that earnings from its core food and grocery pillar are unlikely to return to growth until 2016.
One year after taking the helm from Andrew Reitzer, Metcash chief executive Ian Morrice is reversing his predecessor’s decision to scale back convenience and food service operations, saying Metcash is well placed to grow its share of a fragmented market worth $11.5 billion.
Mr Morrice said Metcash’s $9 billion food and grocery business remained the primary focus and was key to restoring the fortunes of the group and independent retailers as competition from Woolworths, Coles and Aldi intensified.
But there was scope to grow convenience and food service sales from $1.5 billion to $2.5 billion a year within three to five years, he said, by taking advantage of Metcash’s national distribution footprint and by offering customers a total wholesale solution.
Metcash had a strong position in the convenience sector, even after closing 15 loss-making Campbells Cash & Carry stores and selling the Bidvest food service unit two years ago.
“It would be fair to say in recent years those have been declining businesses for us as we’ve been trying to institute various recovery plans for the supermarket business, but actually the convenience business … has real growth potential,” Mr Morrice said after reporting a 17.9 per cent slump in group net profit to $169.2 million for the 12 months to April 30.
“The market is worth $11.5 billion and we currently have sales of $1.5 billion, so we have less than 15 per cent share of the addressable market,” he said. “We don’t see any reason why over the next three to five years we couldn’t potentially add up to $1 billion of sales through the various strategies we’re developing in both the C-store (convenience store) andcash and carry sectors.”
The ambitious convenience sales targets softened the blow from a second consecutive year of declining profits from Metcash’s core food and grocery unit.
Group earnings before interest tax and amortisation fell by 11.7 per cent to $406.7 million and underlying net profit by 10.9 per cent to $250.1 million. Group EBITA would have been $53 million weaker if not for Metcash’s expansion into hardware and automotive parts and accessories in the last few years.
Earnings from food and grocery, which accounts for 74 per cent of group profit, fell 19.5 per cent to $304.3 million as total sales slipped 0.5 per cent to $9.1 billion and like-for-like sales to supermarkets declined 2.1 per cent.
Margins fell from 4.14 per cent to 3.35 per cent and the IGA group lost market share, even though 53 new stores were added to the network, 63 were extended or refurbished and 38 were handed over to new owners.
Mr Morrice said sales from food and grocery were expected to return to growth in 2015, but earnings were not expected to improve until 2016.
Metcash plans to invest more than $40 million this year into price reductions and improved product range as part of a five-year plan aimed at securing the long-term future of independent grocery retailers.
Early results from pilot programs aiming at matching prices on branded and private label groceries and improving the fresh food range in stores were encouraging, Mr Morrice said, and group sales for the first six weeks of 2015 were in line with expectations.
“For every one per cent price investment we expected a 3.3 per cent increase in sales and we’ve had a sales response that’s slightly higher than that,” he said. “It’s early days and there’s lots more work to do. But there is a sense of momentum building across the group, both in the transformation program in Metcash food and grocery, supermarket and convenience, and the other pillars.”
Allan Gray fund manager Simon MaWhinney said profits were in line with guidance and early results from the pilot programs were encouraging.
“But it’s all anecdotal in so far as it hasn’t yet been rolled out on a larger scale … this is a long term story,” he said.
As Metcash was trading at a discount to peers there was room for error – “you can afford to have things go not quite according to plan,” Mr Mawhinney said.
Liquor sales rose 8 per cent to $3.2 billion and earnings by 14.2 per cent to $53.8 million as smaller liquor store retailers gained share in a flat market.
“While this segment has been a standout,” said Citigroup analyst Craig Woolford, “we expect a more difficult year ahead given lower price inflation and more competition from Coles.”
In hardware and automotive, sales rose 23.6 per cent to $1.2 billion and earnings by 47.8 per cent to $53.5 million, buoyed by acquisitions and strong organic growth.
Mitre 10 sales rose 10.2 per cent as it poached hardware stores from Woolworths’ Home Timber and Hardware, while same-store sales rose 3.4 per cent, buoyed by stronger trade spending.
The bottom line result included one-off restructuring costs and impairment charges of $54.0 million (compared with $2.2 million in 2013), mainly from the food and grocery transformation plan. Metcash also booked losses of $10.5 million (compared with losses of $59.9 million in 2013) from Franklins stores, all 80 of which have now been sold or closed.
Metcash cut its final dividend from 16.5¢ to 9¢ a share to preserve cash for reinvestment and announced plans to underwrite its dividend reinvestment plan to the tune of 50 per cent. Full-year dividends fell 34 per cent to 18.5¢ a share.