AUSTRALIA: Metcash Is “Structurally Challenged” – UBS

A new report by analysts at UBS has termed Metcash as “structurally challenged”, and said the group may struggle in the long term against rival grocers.

The report said Metcash is “facing significant headwinds, despite measures taken to level the playing field via price match. We expect long-term share and margins to fall in grocery, creating earnings and share price pressure, not reflected in the current price.”

UBS said Metcash’s revival strategy of matching prices with the Big Two on a core basket of goods would deliver results in the short-term, but added: “The risks around the long-term sustainability of Metcash’s food and grocery business create a high degree of uncertainty”.  The analysts added Metcash had the most to lose from Aldi’s expansion.

However, CEO Ian Morrice has dismissed those fears, telling The Australian Financial Review: “The question of new competitors in this sector arises all the time, we do have active competitors already in all the sectors we operate in, it’s nothing new from our perspective. What we are doing is focusing on ensuring independent [retailers] are successful – if independent retailers are successful we’ll be successful,”

The comments came even as Metcash saw its full-year operating profit fall 7.4% to A$275.4m, with its supermarket business recording a 17% drop in underlying operating profit.  However, the group also reported net profit of A$216.5m, reversing last year’s loss of A$384.2m (caused due to a write-down). Overall sales were up 1.3%, with IGA like-for-like sales up 1.4%.

Morrice however admitted that the supermarket business will continue to face challenges from increased competition, deflation and a rising cost base.