Metcash maestro

Metcash, the independent supermarket chain, is a defensive stock regularly chosen by investors for its resilient earnings stream. The year to June 2006 was no exception, as the South African chief executive of the company, Andrew Reitzer, reported a 36% increase in net profits.

In today's video interview with Michael Pascoe, Reitzer explains that although he believes his two rivals in the supermarket business '” John Fletcher at Coles and Michael Luscombe at Woolworths '” do a good job, he also believes there are regular abuses of market power that have to be continually monitored.

Reitzer also says the growth opportunities in the supermarket business will remain organic given there is virtually nothing left in the sector that has not been snapped up the big chains; and that the big challenge is now in the troubled liquor sector, where regulatory hurdles combined with a “wine lake” have squeezed profits.

The interview

Michael Pascoe: Given the overwhelming power of Coles and Woolworths in your market, how come you’re increasing sales?

Andrew Reitzer: I think the biggest thing in a market where you have two retailers that control 74–75% is to be different. I mean, we’d love to be bigger but I think in Australia that opportunity’s gone so we’re really focused on doing things differently. We have a different model. The store is owned by the manager. He doesn’t report to head office, he reports to the consumer and we do our ranging differently, our promotions differently. We focus on things like community, service, fresh and those are things that are really all paying off. That’s the reason our profits look good, as the wholesaler standing behind them and, believe me, their profits look equally as good.

Well net profit before extraordinary items up 36% to $76 million. Revenue up 37% to $4.8 billion. Is that an indication that there is a limit to Coles and Woolworths, that at some point independent retailers do begin to fight back?

I think that’s always the case that in any market around the world where you do have very, very high levels of concentration, and Australia’s number one in the world. But there is a stage of diminishing returns where if they have so many stores and such a big network and open another one, they don’t quite get the benefits as they used to when they opened a store two years ago. So it looks like the tide is turning. I think '¦ we don’t want to boast about it and we never run our business with a market share as an objective, we just do a great job for independent retailers. We’re their champion and they serve their consumers better than the opposition.

The ACCC uses Metcash as something of a canary in a coal mine. As long as your profits and market share are improving they say, 'Well, there’s nothing anti-competitive about Coles and Woolworths’. Do you agree?

I don’t always agree with that, you know. When we go to the ACCC or our customers go to the ACCC, we’re never there saying, 'Oh look, here’s product X, the chains sell it for a dollar and I can’t’, because we can. And many of the marketing strategies that the chains get up to, we can do the same. We’re in a position to do the same. Our issues with the ACCC revolve around the Trade Practices Act in creeping acquisitions. That’s the only real part that we’ve been complaining about, and at times the misuse of market power; and I think there have been a number of court cases the ACCC has won, which proves that the abuse of market power hasn’t disappeared; it’s still there when it comes to property. There was a bread case. Those things are still floating around so I think while the ACCC might be happy because independents are doing well and I think everyone in Australia should be happy because those are Australian family-owned businesses, but there are certain things that the ACCC should look at. Specifically creeping acquisitions and the abuse of market power where it’s used to '¦ negatively to achieve a goal.

One part of your business that is suffering is the Australian liquor marketers. Sales are up 4% but your profit’s down 10%. Is that margin compression going to continue?

Yes, I think the liquor industry in Australia is in troubled waters. On the one side we’ve got our competitors building very big stores and trying to change the buying habits of consumers, and on the other side, on suppliers, you’ve got a massive wine pool with prices coming down and consolidation happening amongst manufacturers. So we’re sort of squeezed between those two things. Looking into the future, yes, there’s going to be another two to three years of troubled waters but we think it’s very, very important that we service both the liquor and the grocery needs of our independent retailers. We believe that reforms will come through as time goes and one day in Australia, just like in Canberra, liquor products will be available on the supermarket shelves, just like the rest of the world and we need to be there to service our customers at that time.

What does that mean for all the investment in specialty liquor stores now though? If you’re right about the future of liquor marketing, what happens?

I’m not too sure. I think those specialist liquor retailers will always be there but it will be a situation just like the rest of the world where it’s just on the supermarket shelf because it’s part of your list when you go shopping, that you would like a slab of beer or like a bottle of wine and that you’ll be able to buy it in an environment very similar to Canberra or, for example, Victoria.

The Coles management keeps getting stick for not keeping up with Woolworths. How do you rate them given that you probably know more about them, your competitors, than any analyst?

I actually think both chains do a good job. Obviously, if you look at certain ratios, Woolworths is the winner at the moment but they both do a very, very good job. They do a different job to ourselves. They’ve both got massive challenges but we really don’t focus on that; we really focus on the independent retailer being different and looking after the consumer in a different and perhaps better way than the chains do, and that’s why we’re doing well.

Where’s your biggest growth market in the year ahead?

Really, just driving all three businesses harder. Obviously, the liquor industry’s the one where we stand the least chance because of the troubled waters but the convenience store sector and IGA will continue to power ahead.

KKR has been knocked back at Coles. Is your door open?

No, there’s definitely no open door at Metcash.