Metcash result hit by 'intense' competition

Madeleine Heffernan
NOVEMBER 28 2016
The Age
Metcash chief executive Ian Morrice says competition in the supermarket sector in the six months to October 31 was the most intense he has seen in his years in the top job, after the expansion of Aldi into his company’s South Australian stronghold hit its first-half result.
The food, alcohol and hardware supplier reported a $74.9 million profit for the half year ended October 31, below JPMorgan’s forecast of $78.4 million, while group earnings before interest and tax fell 4.2 per cent to $128.1 million, higher than Ord Minnett’s forecast of $122.6 million.
More Australians are steering clear of artificial sweeteners, sugary foods and drinks, and fatty meats and dairy products in the supermarket.
“We’ve seen footprint growth from Aldi obviously in South Australia and Western Australia, we’ve seen over $1 billion of price investment from the market leader [Woolworths] and competitor response to that, as well as continued high deflation environment,” Mr Morrice told analysts on Monday.
“So against that backdrop and that most intense period, we think that we’ve withstood that quite well, if you look at our supermarket business in particular.”
Metcash tipped an improvement in its key food and grocery earnings in the second half and a resumption of dividends next financial year, boosting its shares more than 5 per cent to $2 just before 11am.
Metcash supplies groceries to IGA, Foodland and FoodWorks supermarkets, Lucky 7 convenience stores and Campbells Wholesale, and alcohol to chains such as Cellarbrations and the Bottle-O.
It recently expanded its hardware distribution business through the purchase of Woolworths’ Home Timber & Hardware chain, creating a No.2 competitor to Bunnings.
Metcash said earnings growth had continued in the liquor and hardware pillars but this was more than offset by lower earnings in food and grocery, which have been hurt by Aldi’s expansion as well as price competition from Woolworths and Coles.
Aldi opened its first stores in SA at the start of 2016 and plans to have 18 in the state by the end of the year and 50 in the long term. Aldi also opened its first stores in Western Australia in July and plans to open up to 20 there by the end of the year.
“While there was continued positive momentum in the food and grocery pillar from strategic initiatives, and reducing operating costs … they were insufficient to offset the impact of an intense trading period as well as weaker earnings in the convenience business,” Metcash said.
After spending more than $150 million on cutting prices and helping retailers refurbish their stores, Metcash said like-for-like sales at IGA supermarkets grew 0.3 per cent – the fifth consecutive reporting period of sales growth. Metcash last week released a new private-label range.
Mr Morrice said like-for-like sales growth of about 1 per cent in the supermarket sector was “the industry norm right now”.
While Metcash’s result was largely in line with expectations, brokers noted it had been boosted by a $5 million property sale and dragged down by the poor performance of it convenience store division.
“Tough to gauge this result, plenty of moving parts,” Credit Suisse said.
“Management pointing to second-half recovery which always concerns, but I sense the market will be OK with the resilience of the core supermarket performance (noting the weakness in food and grocery was due to convenience).”
Macquarie’s retail, food and beverages analyst, Andrew McLennan, said the result was “pretty good” given intensifying conditions.
The improvement in the second half would be driven by an extra trading week, an improvement in sales to convenience stores, and results from its cost-cutting and efficiency program, Metcash said.