Metcash chief executive Jeff Adams told investors on Wednesday that sales have continued to improve in the two months since the retailer announced its $149.5 million statutory loss in FY18, due to the $352 million impairment it booked after South Australian Drakes Supermarkets declined to sign on to the its new distribution centre (DC).
Adams noted a slow down in the rate of decline of non-tobacco sales so far in FY19, with strong sales in the liquor business, thanks to the addition of new contract customers, and sales growth in the hardware business, albeit at a slower pace to the first half of FY18.
Adams said food sales in FY19 will be impacted by IGA’s $10 million investment in growth opportunities, but expects this to deliver earnings benefits beyond this fiscal year. He also said cost savings achieved through the Working Smarter program will help mitigate difficult market conditions that are expected to continue through FY19.
Metcash does not expect the Drakes decision to have an impact on its supermarket earnings in FY19. The retailer on Tuesday announced that it has signed a legally binding heads of agreement with Foodland Supermarket in South Australia, which will see Foodland retailers being supplied from Metcash’s new DC for 10 years, conditional on Metcash agreeing to a lease by no later than December 21, 2018.
Long-term supply agreements have now also been signed with Foodland multiple store owners, such as Romeo’s and Chapley’s, as well as the remaining members of the Foodland Supermarket board, who are owners of Foodland supermarkets in South Australia.
Together with existing fixed-term supply agreements with Foodland and IGA supermarket retailers in South Australia, Metcash now has long-term supply agreements in place with retailers representing the majority of its supermarket sales in the state.
Next five years
Adams also outlined a five-year plan to investors on Wednesday, which will see the retailer focus on accelerating existing transformation initiatives and improving infrastructure to drive growth and embedding a cost saving mentality across the business.
Dubbed Mfuture, the five-year plan involves growing the IGA grocery business through continued investment in store upgrades. The retailer has now upgraded 325 stores, resulting on average in a 10 per cent increase in sales and 5 per cent increase in basket size.
The supermarket retailer plans to continue to expand its Community Co private label range, having added around 80 products in FY18, bringing the total range to 180 products, and increase its focus on fresh, having noted strong sales growth in ‘ready meals’. The retailer successfully trialled in-store bakery and deli offerings and plans to expand these in future.
Metcash also revealed plans to improve its IBA network of liquor stores – which includes Cellarbrations, The Bottle-O, IGA Liquor, Duncans, Thirsty Camel, Big Bargain and Porters – through cool room upgrades and store refreshes. It will continue to focus on converting existing wholesale customers to its network and expanding its premium offering through the rollout of 100 Porters Liquor stores nationally. A loyalty program and e-commerce site are also in the works.
The retailer is targeting continued growth in its Mitre 10 and Home Timber & Hardware (HTH) businesses through store upgrades. It has upgraded 30 stores so far, resulting on average in a 15 per cent increase in sales, and plans to transform 200 stores by 2022. It plans to roll out more store-in-store concepts with brands such as Stihl, Weber and Hardings Plumbing, expand its click-and-collect offering and grow its trade business.
Metcash noted the integration of HTH is largely complete, with synergy benefits reaching an annualised amount of around $34 million, exceeding the target. It expects the full synergy benefits to be realised in FY19.