Metcash in radical remake of independent supermarket sector

Posted by AFN Staff Writers on 24th March 2014

Metcash Limited, Australia’s leading wholesaler to independently owned supermarkets in Australia, has announced plans for a major corporate restructuring that aims to make IGAs and other independents highly competitive against Woolworths and Coles.

Metcash will reduce its dividend payouts to fund a major capital investment for a five-year transformation plan of the independent supermarket supply group.

Five year transformation plan

Metcash CEO Ian Morrice said the five year plan called “Project Diamond” was a long-term plan to transform Metcash Food and Grocery that will “reignite top line growth within the food and grocery channel”.

Morrice believed that recent moves by the ACCC to cap fuel discount dockets would assist competition against the two major groups but more importantly, Metcash is planning to generate further growth through inventory replanning, re-structuring of private labels and various price reductions due to the introduction of a “Price Match” pilot.

Prices on 2500 items have been cut in 34 pilot stores to see impacts on sales growth. A reduction on inventory has occurred to make room for new products.

Independent retailers

Metcash aims to convert more independent retailers into its liquor, hardware and automotive banners. Additionally, better support to independent retailers is being offered.

“We plan to do this by expanding our digital platform by introducing competitive omni-channel solutions locally tailored for retailers and providing enhanced analytics and insights capabilities. In addition we will provide programs through a Retail Academy, part of attracting and training new retailers to the independent network; developing existing retailers’ skills and capabilities and provide greater value-adding services to members,” Morrice stated.

Financial impacts

A decline in earnings per share has been predicted for FY14 of between 13 to 15%, and Metcash’s Food and Grocery operating de-leverage has continued, due to lower warehouse sales volumes than previous years and ongoing deflation, states CEO Ian Morrice.

Total capex estimated to peak at between $150m to $180m in 2015 – reducing to $130m -$150m in 2016 and 2017.

Costs of transformation plan include:

  • $100m-$125m for the Metcash Food and Grocery transformation.

  • $160m-$180m for supply chain.

  • $15m-$20m towards digital

  • $85m-$130m for other discretionary capex.

Funding for the plans will be generated through further working capital improvements, a reduction of Dividend Payout Ratio to 60% from 90%; and the continued offering of its dividend reinvestment plan to shareholders.