Metcash signs five-year supply agreement with Drakes in Queensland

Sue Mitchell
Jun 3, 2019
AFR

Metcash has signed a new five-year supply agreement with independent   food retailer Drakes Supermarkets in Queensland, removing a major threat to its revenue if Drakes were to have moved to self-supply.

A year ago, Drakes announced plans to build its own $80 million distribution centre in South Australia and move to self supply in that state when its $270 million supply agreement with Metcash expired in June 2019.

Drakes was widely expected to also shift its Queensland business to self supply after the Adelaide distribution centre was operating. The centre was due to be completed this month.

However, Metcash said on Monday it had reached agreement to supply Drakes stores in Queensland for a further five years following the expiry of its existing supply agreement on June 2.

Metcash has a joint venture and 26 per cent equity investment in Drakes in Queensland.

Metcash has signed a new five year supply agreement with Drakes Supermarkets in Queensland, removing the threat of Drakes moving to self-supply in that state.  Craig Sillitoe

Metcash has also entered into a new supply agreement with Drakes to supply its Foodland supermarkets in South Australia for another four months, to September 30.

This may, at the option of Drakes, be extended up to September 30, 2020.

Drakes is Metcash’s largest wholesale customer in South Australia and accounts for about 3.5 per cent of its food and grocery sales.

The eventual loss of the Drakes contract in South Australia is expected to cost Metcash about $270 million in sales and $16 million in earnings.

In Queensland, Drakes is estimated to account for about 3.8 per cent of Metcash’s food and grocery sales.

In 2017 Drakes, which has about 50 stores and $1 billion in annual sales, dropped Metcash’s IGA banner in Queensland, rebranding all its Queensland stores as Drakes Supermarkets.

The move followed extensive market research that showed consumers associated IGA with smaller convenience stores, while Drakes was part of Metcash’s Supa IGA network and its full-service stores are almost as large as those belonging to Woolworths and Coles.

Some analysts believe other large independent retail chains are watching Drakes’ move to self-supply and might consider following suit.

“At this stage we do not envision any other supermarket contracts leaving Metcash in 2019,” Citigroup analyst Bryan Raymond said in a report last year. “However, other multi-store operators are likely watching Drakes’ exit carefully and evaluating the economics of a similar strategy.”

Multi-store independent retailers big enough to support their own distribution centres include Ritchies, which has 76 stores in South Australia, Victoria and NSW and annual sales of about $1 billion, and Romeo’s, which has about 38 stores in South Australia and NSW.

However, JP Morgan analyst Shaun Cousins believes the risk of further defections is modest. Independent retailers would have to consider whether moving to self supply or to another wholesaler such as SPAR would lead to superior deliveries, lower costs, better access to products at attractive rates and better marketing support.