Australian wholesaler and distributor of groceries and hardware products Metcash Limited (Metcash) has announced a drop in its Underlying Profit after Tax of 9 per cent, to $101.7 million, which it said was due to “ongoing operating deleverage” and the commencement of its investment strategy for its Food and Grocery division.
The Company’s sales revenue increased by 1 per cent on the prior comparable period.
Slow progress in strategic changes
The result shows progress is slow for Metcash, whose brand portfolio includes IGA, Mitre 10, Cellarbrations and Autobarn.
Metcash Chief Executive Officer Ian Morrice, who took over from long-time chief executive Andrew Reitzer in July 2013, has not found it easy to implement a market-winning strategy for the Metcash group. Under his predecessor, the market capitalisation of Metcash grew over 15 years from $130 Million to $3.1 Billion despite sales growing from $4.5 Billion to $13 Billion in the same period.
Australian Food News reported in June 2014 that Metcash had reported a profit decrease of 10.9 per cent to $250.1 million for the 2014 financial year.
In his latest statement, Mr Morrice said he was encouraged by the progress against Metcash’s strategic initiatives, set out to the market in March 2014.
“Whilst it is early days, the Diamond Store Accelerator pilot stores have driven increased customer transactions and basket size for stores; and the introduction of the Competitive Pricing strategy, Price Match, has reversed the negative sales trajectory in the 425 participating IGA stores who have enrolled since the start of October,” Mr Morrice said.
Mr Morrice said retailer support for the programs was strong and continued to grow.
“In September, 900 stores joined the new competitive pricing program for Private Label, and their support has returned Black & Gold to sales growth with recent warehouse volumes up double digits on the same period last year,” Mr Morrice said. “These are positive signs in the early stages of the five year transformation of Metcash,” he said.
“We have retained a tight control on our cost of doing business throughout the Group,” Mr Morrice said. “Our automated full-case pick system, Mustang, is now finally deployed in NSW for the Australian Liquor Marketers business. We should see the full benefits of warehouse efficiencies and cost control flow through for Food and Grocery in the 2016 financial year,” he said.
Australian Liquor Marketers
Metcash reported that its Australian Liquor Marketers (ALM) business had seen “robust retail sales performance” in Metcash’s retail bannered independent groups. This influenced operating leverage by increasing EBIT by 6.9 per cent to $24.9 million.
Sales to wholesale contract independent groups decreased as these stores lost market share to organised groups and the self-supply chains. Metcash said continued decline in liquor consumption contributed to lower overall volumes, resulting in a 3.6 per cent decline in ALM’s total sales.
Hardware and Automotive
Within its Hardware and Automotive businesses, Metcash reported that continued strong performance in the trade sector had increased Hardware sales by 16.5 per cent on the previous year, or 3.9 per cent on a like-for-like basis. Metcash said growth in EBIT was slower due to the higher trade sales mix.
Network growth through conversion of stores to the M10 banner continued with the addition of G.Gay & Co. and the Yenkens Group stores.
Metcash reported that its Automotive business increased 21 per cent on the previous year, with the core Automotive Brands Group (ABG) retail business performing solidly, supplemented by growth through acquisition.
Automotive extended its service offer with the acquisition of Midas and Metcash said the business was repositioning and realigning the ABS/Midas service and value offers. The division also had success in converting 11 other independents to the Autopro and Carparts brands, and is poised to open six new Autobarn stores by the end of the 2015 financial year.
The Morrice Transformation Plan
Mr Morrice said that six months into the Transformation Plan, “Metcash was in a better position to provide guidance on earnings for the 2015 financial year, given the now likely timing of the initiatives and investment”. He said FY15 Group EBIT is anticipated to be $315-330 million.
“There is no doubt challenges remain but we are encouraged by the progress made since March, with significant capability added to the Group,” Mr Morrice said. “The general trading environment continues to be highly competitive with price deflation expected to continue and consumers remaining value conscious,” he said.
“Recent trading, with additional stores transitioning to Diamond, shows signs of a sales-led recover,” Mr Morrice said. “Positive momentum is encouraging to see as we lead into Christmas,” he said.Metcash CEO Ian Morrice has had previous experience as CEO in a difficult environment. He served as CEO of The Warehouse Limited in New Zealand from August 2004 until May 2011at a time of great upheaval in the New Zealand retailing environment.
