Metcash says Food and Grocery Code not appropriate for its business model

Posted by AFN Staff Writers on 4th December 2013

The CEO of Australian wholesale distributor Metcash has said the deal struck by supermarkets Coles and Woolworths with the Australian Food and Grocery Council (AFGC) is not appropriate for the Metcash business model.

“There are a number of aspects of the Code that don’t apply to the wholesale model or to other chains such as Aldi, which mainly has house brands,” said Ian Morrice, Metcash CEO.

He said the Food and Grocery Code of Conduct was not made with Metcash’s business model in mind. Mr Morrice’s comments followed comments from Woolworths CEO Grant O’Brien last week that there was “no logical reason” for Metcash, Aldi and Costco to exempt themselves from the Code.

Metcash half yearly results see growth, despite “tough conditions”

Meanwhile, Metcash has announced a growth of 4.9 per cent to $6.64 billion in reported revenue and 4.8 per cent growth to $6.58 billion in wholesale sales for the first half of the 2014 financial year. Earnings Before Interest, Tax and Amortisation (EBITA), however, declined 6.3 per cent to $193.3 million.

Metcash has attributed the decline in EBITA to several factors: continuing price deflation that “exacerbated operating deleverage”; greater investment in advertising and building marketing capability; and “intense competition” — particularly the impact on independent retailers of “excessive fuel discounts being offered by the self supply chains”. Metcash said this resulted in a 1.9 per cent decline in underlying PAT and a 6.9 per cent decline in underlying earnings per share after allowing for the 5 per cent dilutionary effect of extra shares on issue following last year’s equity raising.

“We continue to experience very tough trading conditions and have announced results in line with the guidance we gave the market at our AGM,” Mr Morrice said. “We have seen further food price deflation, which has a significant deleveraging impact on us as a wholesaler,” he said.

“The major supermarket chains have persisted to distort the market with cross subsidisation through their domination in grocery and fuel,” Mr Morrice said. “The use of market distortive devices such as fuel shopper dockets, particularly at excessively high predatory levels, makes it very difficult for independent retailers to compete on a level playing field. In order to combat these conditions, we have invested more heavily in advertising and associated marketing capabilities,” he said.

Reported profit after tax rose 20.6 per cent, which Metcash said reflected the reduction in discounted operation costs as the exit from grocery chain Franklins retail operations was completed. This result also included a “very strong” performance in liquor and the earnings accretions flowing from acquisitions undertaken in the new automotive division, according to Metcash. Accordingly, reported earnings per share for the first half of 2014 was up 14.3 per cent to 11.2 cents.

Metcash reported that operating cash flow rose 58.5 per cent to $229.3 million as a result of a “continued focus on working capital management”, in particular inventory control in the Food and Grocery division.

“Revenue growth reflects the addition of new business to the group and strong cashflow reflects prudent working capital management,” Mr Morrice said. “Our liquor business delivered another great result, Mitre 10 continues to strengthen its network and the Automotive business has doubled in size with the acquisition of ATAP during the first half of 2014,” he said.

The Board of Directors announced an interim dividend of 9.5 cents per share fully franked, with a record date of 3 January 2014 and payable on 24 January 2014. Metcash said this dividend represented a payout ratio of 70.4 per cent of underlying EPS from continuing operations. Metcash said the Board’s intention “remains to return earnings to shareholders whilst ensuring adequate funds are available to invest in the business and in growth opportunities”.

The Board also announced that Metcash will reinstate the Dividend Reinvestment Plan (DRP). The DROP provides investors with the opportunity to reinvest their dividend in additional Metcash shares at a 1 per cent discount.

Metcash also provided an update on its Strategic Review, which it said was “well advanced” with “clear conclusions” on how to ensure long-term growth in the business.

“A key part of this review is focussed on how we turn around our Food and Grocery business and make the significant model changes necessary,” Mr Morrice said. “Once we have completed the final stages of our planning and ensure that we have alignment with our Retailers and Suppliers, we will provide the market with more details at an Investor Strategy Day planned for March 2014,” he said.

Business pillars’ performance

Food and Grocery

Metcash said its Food and Grocery division’s sales decreased by 1.5 per cent with like-for-like wholesale sales falling 1.3 per cent. Price deflation of 1.3 per cent continued to impact the food and grocery business, particularly in fruit and vegetables, which saw deflation of 13.9 per cent.

The Company said its Food and Grocery division responded to the market conditions with a significant investment in marketing (up 12.6 per cent on pcp) and the promotional cycle was realigned to run from Wednesdays to improve retail execution.

During the first quarter of the 2014 financial year, 21 new stores were added to the IGA network, with another 24 due to be completed by the end of the financial year. Metcash said that when conversions and extensions to existing IGA stores were taken into account this meant an additional 27,151 square metres of floor space was added during the first quarter of the 2014 financial year.

The disposal of Franklins stores was completed with 67 stores now having been integrated into the IGA network and 23 stores being closed. The BP and Spotless contracts were successfully merged into the existing convenience supply chain.

Metcash said more Harvest Market ‘fresh’ franchise stores were opened during the first quarter, with eight stores in operation and another six scheduled to be operating by the end of the financial year. Each fruit and vegetable store that converts to Harvest Market is seeing an uplift in sales of over 50 per cent, according to Metcash.

The Company said investment in its distribution centres continued during the first wuarter, with the KNAPP mini loader being commissioned at Huntingwood. ‘Project Mustang’ is progressing, with preparations to receive and install the new robot automation in 2014.

Australian Liquor Marketers  

Metcash said Australian Liquor Marketers (ALM) continued to perform strongly with EBITA growing 45.2 per cent to $24.1 million, with sales up 20.9 per cent. The LMG contract continued to perform well growing overall sales by 18.8 per cent over the first quarter (six months versus one month of LMG in the pcp). Metcash said the improved result was also due to the Key Retail Program driving organic volumes.

IBA sales grew 3 per cent, and ALM’s on-Premise wholesale business grew 9 per cent on the previous year. Club Partners (retail group for clubs) increased members and provided a 6 per cent growth in sales. The IBA Retailer Support Program produced net growth of 37 stores in the first quarter. Metcash said plans are in place for a further 26 new stores by end of the financial year.

Hardware and Automotive

Metcash said Hardware sales had increased 6.7 per cent on the previous year’s results, with the uplift driven by “strong trade performance”. This represents growth of 2 per cent on a like-for-like basis.

Conversions to Mitre 10 from competitors continued over the first quarter, with 65 stores added to the network over the last 3.5 years. Two new trade-focussed joint ventures, Dahlsens and Banner groups were completed and the Natbuild alliance continued to develop in line with expectations.

The Block sponsorship program again proved to be very successful and will be continued in 2014. New initiatives such as ‘click-and-collect’ continue to be rolled out with 55 stores now offering ‘click-and-collect’ and yielding over $1.1 million in sales.

Metcash Automotive continued to perform well with strong like-for-like revenue growth augmented by the new ATAP business. Sales increased by 229.8 per cent to $107.5 million.

While there was a slight compression in margins due to adverse currency movements and change of business mix, Metcash said the cost of doing business improved as initial synergies were leveraged.

The network continued to expand in the first quarter, with three new Autobarn stores being opened and three conversions from competitors. The automotive business also began the integration of the ATAP business including buying and cross-ranging opportunities.

The future

Metcash said trading conditions in food and grocery will continue to remain challenging. The Company said it has developed a clear plan to adapt the food and grocery business to the increasingly competitive deflationary environment. While it will take time to restore food and grocery to sustainable growth, Metcash said it remained confident that the strategic plan will “better leverage the underlying strength of the independent channel”. The liquor, hardware and auto pillars remain well positioned for growth.

The Board confirmed guidance for the full year of underlying EPS dilution to be in the high single digits.

Metcash sees modest growth in "tough times"