05/10/2015 - 14:18

Metcash crunched by the big boys

05/10/2015 - 14:18


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The wholesale supplier has lost a huge chunk of its stock market value as it battles the grocery giants.

LOCAL: Metcash’s financial woes may increase pressure on the 1,365 IGA stores, which rely on it for their goods.

The wholesale supplier has lost a huge chunk of its stock market value as it battles the grocery giants.

It is not every day shoppers find themselves exposed to an emerging national business crisis, but next time you visit an IGA supermarket spare a thought for the pressure brewing behind the counter.

The problem has little to do with the people who own your local IGA; they’re doing the best they can to satisfy customer demands.

It’s in the background that the danger lies because the chances are that the business which supplies your IGA with most of its goods is being pushed to the brink by intense competition from its traditional rivals, Coles and Woolworths, and the new player in the grocery game, Germany-based Aldi.

Born out of the historic concept of the cooperative movement, which traces its roots back more than 500 years, the business model on which IGA is based – along with a number of other well-known retail brands – is struggling to survive.

Hardware chain Mitre 10, liquor merchant Cellarbrations, IGA, and Foodland in South Australia are all supplied by the stock exchange-listed wholesaler Metcash, a business that once marketed itself as ‘the third force’ in Australian retail.

Until July, Metcash was also the owner of the Autobarn and Midas car parts retailers, but sold out to Burson Group in an exit that raised $275 million.

Unfortunately for Metcash, being third in any business is never quite good enough, especially in Australia, which has a tradition of creating duopolies – business structures dominated by two principal players. Aviation is one example, retail another.

The last time Metcash used the ‘third force’ slogan was on the cover of its 2006 annual report, with a switch made recently to a catchphrase of ‘successful independents’.

Under the business model, Metcash acts as a central buying hub, using the collective power of 2,400 shops around Australia to achieve the lower prices, which come with big buying orders.

No-one has yet pinned down what’s caused the crisis at Metcash. It could be the difficulties that come from too many independent owner-operators of the retail outlets, such as the 1,365 IGA-branded stores around the country, or it could be a management structure stuck in a co-op time warp.

Whatever has gone wrong, the problem can be seen in the falling profits of Metcash as it rushes to rectify its structure while trying to beat the cut-price challenge from Aldi, which has, in turn, forced Coles and Woolworths to up their game.

Intensifying competition caused Metcash’s profit last financial year to fall 16.7 per cent to $325.1 million. Another measure of the rising level of competition was a lowly 1.7 per cent increase in group sales to $13.6 billion – a growth rate less than inflation.

Metcash’s share price has fallen sharply over the past 12 months in what looks like an equal but opposite reaction to the entry of Aldi, a supreme price discounter with a no-frills offering of its own branded products targeted at the price-conscious shopper – and there are lot of them about in the current economic climate.

From a high of $2.94 late last year, Metcash shares fell to a 12-month low of 96.5 cents last week. It has recovered some of that lost ground to trade more recently around $1.06, though that price only values the business at $981 million, down 65 per cent on the $2.7 billion of 10 months ago.

Some investment banks smell blood in the water around Metcash. Others are not so sure, prepared to give the business a chance to repair its business model. They see the low share price as a possible entry point into what could become a recovery situation.

Morgan Stanley and JP Morgan are two of the banks tipping a revival in Metcash, thanks to its efforts to repair its stretched balance sheet and, overall, its management structure. Significantly, however, neither bank is saying buy Metcash, simply upgrading it from a ‘sell’ to ‘hold’.

UBS, another bank, is far less kind, maintaining a ‘sell’ on the stock, while prominent fund manager Hamish Douglass from Magellan Financial reckons Metcash is doomed and could disappear within 10 years.

The gloom enveloping Metcash, and its potential overflow into those 1,365 IGA stores (plus 117 Foodland shops, 484 Foodworks and 245 Lucky 7 convenience stores) has made Metcash the most heavily short-sold stock on the ASX, with an estimated 22 per cent of its issued shares shorted by traders (who believe they will be able to buy the stock cheaper in the future).

The short sellers might be right, but 22 per cent of Metcash’s issued capital represents a whopping 204 million shares and it wouldn’t be surprising to see some of the shorters closing out their positions for fear of being caught in a crush at the exit.

Meanwhile, in the real world of the grocery trade, Metcash is trying to re-invent itself, albeit in a rather amateurish way with the first aim for the current financial year being to ‘offer competitive prices and promotions’ – as though that’s something new in retail.

But the simplistic opening statement for this year is nothing alongside the rather silly aim for the 2017-18 financial year, which is to ‘make every store famous as a local shopper destination’– as if a shop could ever be called famous, even if those independent owners would like to believe that’s possible.

Exports on up

Amid the latest setback for the local mining sector, which has overflowed from the crisis gripping the Swiss-based commodity trader Glencore, there was a whiff of optimism last week from HSBC Bank.

While noting the tough times caused by low commodity prices, HSBC also pointed out that Australia’s exports were continuing to rise thanks to new projects coming on line and because most of Australia’s mines are among the lowest-cost producers.

In other words, as the resources world adjusts to a period of prices being lower for longer, it is likely many of Australia’s mining and oil projects will have the distinction of being the last man standing in their particular field.

Further slippage in the exchange rate would help the Australian producers become even more competitive, and that could come when the US starts to raise its interest rates, lifting the US dollar and pushing other currencies, including the Australian dollar, down.


A thief passes for a gentleman when stealing has made him rich – Thomas Fuller


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