Given that the resurgence of Coles since it was acquired by Wesfarmers has had a marked effect on the growth rate of the dominant supermarket group, Woolworths, it perhaps isn’t surprising that the ripples from its aggressive pricing strategies have also impacted the independent grocery sector.
Today’s Metcash announcement of job losses, restructuring charges and writedowns doesn’t mention Coles but it has been evident in Metcash’s results over the past two years that its growth has slowed significantly and the obvious cause, given the Woolworths’ experience, is Coles.
Indeed, given that the most visible aspect of Coles’ campaign has been the heavy discounting of key staples, it was inevitable that it would have a sharp impact on the smaller supermarkets and convenience stores that Metcash supplies.
Metcash’s Andrew Reitzer, announcing the results of the group’s strategic review, cited "difficult market conditions," continued price deflation and value-conscious consumers for lower prices and margins but there is little doubt that the escalating hostilities at the big end of the grocery market would be a major contributing factor.
The grocery wars have also spread to liquor, where Woolworths’ dominance is most entrenched but where Coles is again trying to renew its attack on the sector. Metcash made no reference to its Australian Liquor Marketers division, which wholesales to independent liquor outlets, but it would appear a reasonable assumption that conditions in that segment are also tough.
Metcash’s response to the difficult industry circumstances was unavoidable. If its independents, and its own stores, are to be competitive it had to lower its cost base significantly.
Unhappily, that means the loss of 478 jobs as it rationalises and centralises its core wholesaling activities and shifts the focus of its Campbells business away from traditional convenience stores to the integrated petrol and convenience format. Metcash is also cutting a swathe through its head office and will sell its Foodlink specialist food service business.
It will also book mainly non-cash impairment charges of between $75 million and $90 million against its interest in two Queensland joint ventures that have been impacted by the floods, cyclones and downturn in tourism in the state.
The restructuring of its core will result in one-off charges of between $34 million and $43 million but will, Reitzer says, lead to savings of $25 million to $30 million in 2012-13 and a further $10 million to $15 million in 2013-14.
Reitzer says its independents are holding their market share and remain "resilient" in a difficult trading environment. Given that both Coles and Woolworths consistently claim they have been increasing their share there is something in the grocery market numbers that doesn’t add up. Coles is certainly taking share from someone, or perhaps several someones.
Metcash, setting to one side the charges and writedowns announced today, is maintaining its guidance for low to mid-single-digit growth in its underlying earnings per share for this financial year, which would be a creditable outcome in the challenging circumstances facing retailers generally, even grocery retailers.