Metcash attempts to match it

Metcash believes “If you can’t beat ‘em, join ‘em” as IGA launches a new advertising campaign to win back value-focused consumers.

Metcash (ASX: MTS)-backed supermarket chain IGA is the latest industry player to launch a major advertising offensive. IGA stores will adjust their prices every week on hundreds of branded products to match the lowest prices offered by Coles, owned by Wesfarmers (ASX: WES), and Woolworths (ASX: WOW).

Price matching is not new to IGA; it has been in place in some stores since late 2014 but customers don’t appear to have noticed. Metcash/IGA hopes that the new campaign will change the perception that IGA is expensive compared to its competitors.

According to figures published by Roy Morgan on Monday, IGA is placed fourth in the grocery market, with a market share of 9.5%, behind Woolworths (38.5%), Coles (31.8%) and Aldi (11.6%). Competition has never been more intense and Aldi continues to grow rapidly.

The German discounter has tripled its market share in 10 years, mainly on the East Coast, and has now set up the infrastructure to make a big impact in South and Western Australia. Rumours also continue to filter through about fellow German discount retailer Lidl entering the market. If true, this will no doubt result in even more aggressive price cuts across the board.

A quick look at Metcash’s 2015 results presentation illustrates the highly competitive environment. Operating profit for the group’s food and grocery division fell by more than 20% resulting in a decrease in operating margin from 3.2% to 2.3%. This was accompanied by the writedown of $422m of goodwill relating to the food and grocery division.

Desperate times call for desperate measures as they say. Metcash lacks the store network and scale of its competitors and already has the lowest margins in the sector; it has been forced to act or risk losing more customers. These are defensive rather than offensive measures. Metcash/IGA lacks the artillery of its larger competitors to cause damage in a price war. With food prices forecast to drop further, the question is how far can IGA go?

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