Metcash's grocery chiller

Metcash is finding conditions in its core food and grocery wholesaling business increasingly tough as clashes between the supermarket behemoths put pressure on prices.

For years Andrew Reitzer deftly exploited the weaknesses of a major competitor. As his era at the head of Metcash nears a close, the continuing resurgence of Coles has closed that opportunity for easy gains and the stresses are showing.

Reitzer, who has foreshadowed his retirement in June next year, was forced to downgrade his full-year guidance while releasing Metcash’s first-half results today. Where previously Metcash had flagged a 1 per cent to 3 per cent fall in underlying earnings per share, it is now saying it expects a 2 per cent to 6 per cent fall.

That change, which produced a predictable sharemarket response, came after reported earnings for the first half fell 13.1 per cent and earnings per share 20.3 per cent.

While the result was to some degree disfigured by the massive restructuring program Reitzer announced earlier this year, with Metcash saying its underlying earnings grew 4 per cent, there’s no doubt Metcash is finding conditions in its core food and grocery wholesaling business increasingly tough.

While food and grocery division sales rose 0.4 per cent, aided by the Franklins acquisition, earnings before interest, tax and amortisation fell 5.4 per cent and Metcash’s EBITA margin was again eroded, from 4.08 per cent to 3.84 per cent, as its cost of doing business rose and it experienced deflation in its packaged grocery sales.

As Woolworths could attest, the grocery sector is as fiercely contested today as it has been for decades as a consequence of the newfound competitiveness and confidence of Coles. The continuing momentum of the Coles turnaround has even forced the once-dominant Woolworths to rethink its strategies and tactics and sharpen its own competitiveness.

The heavy discounting of key staples by the two giant chains has been particularly difficult and disruptive for the independents that Metcash supports.

That war between the supermarket heavyweights is spreading steadily into other sectors, with Coles seeking to improve its liquor offering to challenge Woolworths' continuing dominance of that sector, while Woolworths is steadily rolling out its Masters hardware joint venture with Lowe’s of the US to attack Coles’ sibling Bunnings.

Metcash’s Australian Liquor Marketers business had a good half, with sales up 14.9 per cent and EBITA 26.7 per cent, while its hardware and automotive business, which includes the recently-acquired Automotive Brands Group, increased sales 6.3 per cent and EBITA 72.4 per cent, to $15 million.

As Coles focuses harder on its liquor business and the hardware battle between the big retailer heats up there is a risk that Metcash could again find itself caught in the cross-fires despite Reitzer’s efforts to carve into its cost base and diversify the range of independent retailer segments it services.

Metcash is looking at more acquisitions to leverage its core wholesaling and retailing competencies and to create some insulation for the group from the pressure on its traditional grocery and liquor wholesaling operations. But ultimately it is those operations that have to be able to compete broadly with the chains if the independent sector, and Metcash, are to halt the erosion of their market shares and profitability.

Reitzer remains optimistic that the evolving Metcash business model can, with some further tweaking, do that and that this year’s misfiring is just a glitch in what has otherwise been a near decade and a half of growth and success during his tenure as chief executive.

It is his yet-to-be-named successor, however, who will have to continue that evolution and find a way for Metcash and the independent grocery sector to regain competitiveness and survive the fallout from the clashes of the giants.

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