Metcash faces retail revolution from store owners

JANUARY 23, 2020

The Australian

Metcash could soon have a battle on its hands to retain its grocery distribution and retail business, with a group of independent store owners setting up a rival business that could ultimately secure control of the assets from the $2.4bn listed group.

Metcash owns the Independent Grocery Alliance (IGA) but individual stores are owned independently.

Now those independent retailers linked to Metcash want to start a new low-cost co-operative business that buys groceries direct from suppliers.

The move is being spearheaded by Stone Advisory, an independent adviser run by former Coca-Cola Amatil executive Warwick White and established by IGA retailers.

A Stone Advisory newsletter sent to IGA store owners says retailers will be asked to join Co-Operative Supermarkets early this year by investing in a bond repayable within five years.

The new entity will operate through a subscription model.

While the initiative is being positioned as one to “complement” the warehouse operations of Metcash, some in the industry are not so sure, saying it would cut the listed group out of the equation.

The plan stems from a belief among IGA retailers that a co-op to secure groceries would boost performance.

They are drawing on the expertise of leading players in the German and French markets, Leclerc and REWE, and Foodstuffs across the Tasman which owns Four Square, New World and Pak’n Save supermarkets along with private labels including Pam’s.

Metcash is battling major losses. In the 2020 half-year it plunged $151.6m into the red, despite generating $234.7m of earnings before interest, tax, depreciation and amortisation.

No doubt it will be calling on the services of adviser Luminis Partners to weigh its next move.

Analysts at Credit Suisse said in a research note they did not see an easy solution to the challenges Metcash faces in its grocery business, which has suffered from the loss of the Drakes and 7-Eleven contracts.

They floated the idea of a sale of the food distribution operation to retailers, which would achieve a better alignment of interests and probably facilitate a higher level of investment in the food pillar.

But sources say Metcash would be unlikely to part with the business and that the only way they could embark on such a plan would be through a hostile takeover.

Many doubt the group could pay more than $2.65 per share, the level at which it currently trades, but should the independent grocers agitate for change, it could push the share price to a level where the assets could be within its reach.

The Stone Advisory board includes Ritchies chief executive Fred Harrison and Vasilli Karellas of the Karellas Group.

IGA is the Australian branch of the international US-based Independent Grocers Association.

It is the fourth-largest chain, with 7 per cent of the grocery market, but has struggled to compete with rivals Woolworths, Coles and Aldi.

In March last year, Metcash released a strategy update.

It was to outlay $270m across its three core divisions of food, hardware and liquor over three to five years.

The plan was led by chief executive Jeff Adams and involved rebranding and supporting retailers with secured loans to boost growth across the portfolio, including the rollout of small format stores.