Doug Jones, the new chief executive of grocery wholesaler Metcash, says he has a lot of experience in tackling high-inflation environments after 14 years in South African retail with Massmart Wholesale, and the group aims to build on market share gains as more shoppers shift to local neighbourhood outlets in the IGA network.
Mr Jones says the company won’t be spooked by rising inflation in Australia and will be methodical in working closely with grocery suppliers to ensure they are able to recover costs, but still maintain keen pricing and the broad choice of products at the 1341 IGA stores to retain customers.
He says the pandemic has led to a permanent shoppers’ shift towards neighbourhood and local supermarkets, which helps IGA stores claw away market share from big rivals Coles and Woolworths.
Mr Jones in February took the helm of Metcash, which also runs a large hardware business with brands such as Mitre 10 and Total Tools. He is battle-hardened after grappling with consistently high inflation rates in South Africa over many years in a country where inflation was running at 5.2 per cent in 2017 and 4.5 per cent in 2018 well before the spike in global inflation of the past year in many countries.
“Maybe I have quite a thick skin about it,” he said. “I’m certainly not dismissive of it by any means,” he said.
Being a grocery wholesaler, Metcash tended to generally grant the price increases sought by suppliers, provided the on-shelf price was still competitive using the “price-match” promise against larger rivals as a benchmark. “We will generally give it to them,” he said.
Second round of price rises
Food inflation is on the rise across most categories, and some suppliers are coming back asking for a second round of price rises, he said.
“We’re seeing increases across many categories,” he said. It wasn’t just limited to fresh produce and meat. The soaring cost of an iceberg lettuce, which jumped to $12 for many Australian shoppers, has been in the spotlight.
Mr Jones said food sales were gaining even more momentum in the group in the first seven weeks of the company’s new financial year, reinforcing a sustained trend where shoppers go to local shops, having first been tempted to try close-by outlets amid COVID-19 restrictions, and then had kept returning.
“We certainly think that looking back, shoppers have developed new habits,” Mr Jones said.
Earnings before interest and tax jumped 17.7 per cent to $472 million in the year ended April 30 from the year-earlier period, Metcash told the ASX on Monday. Net profit climbed 2.7 per cent to $245.4 million when one-offs were included.
Metcash lifted its final dividend to 11¢ per share, to be paid on August 10. Total dividends for the 12 months rose 23 per cent on a year ago. Metcash shares closed 4.1 per cent higher at $4.30 on Monday, with investors generally applauding the strong results.
The two big supermarket rivals have been reporting rising inflation, with Woolworths revealing in May inflation of 2.7 per cent for the March quarter, while Coles said inflation was running at 3.3 per cent for the same period.
In the second half of the Metcash financial year, inflation was up 1.9 per cent. Mr Jones said inflation was at its highest in April, when it was 5.3 per cent on a measure used by the group for when products left the distribution warehouse and before discounts were applied. That then slipped to 4.5 per cent in May.
About 60 per cent of the supplier base had asked for price increases in the second half, and some were returning for a second bout. “We are seeing suppliers that are coming back for a second increase,” Mr Jones said.
The group also said it would build a new 115,000 square metre distribution centre with Goodman Group at Truganina in outer Melbourne to service the Victorian market. Metcash will pay $70 million for fit-out and set-up costs in a long-term lease, with the new distribution centre up and running by mid-2024.
As well as supplying the IGA supermarkets and other independent players such as Foodworks, Metcash also operates the Independent Hardware Group, which owns the Mitre 10 and Home Timber & Hardware brands and also has an 85 per cent stake in the Total Tools chain.
Earnings in the hardware operations rose 41 per cent to $191 million in the year ended April 30. Mr Jones said Total Tools now had 100 outlets and was in a strong position to withstand competition in the power tools market from rivals such as Bunnings, which is rolling out a new brand called Tool Kit Depot, built upon the framework of the Adelaide Tools business it acquired in 2020.
Former chief executive Jeff Adams surprised investors in October by stepping down to make way for Mr Jones, who was CEO and senior vice-president of South Africa’s Massmart Wholesale. Mr Jones paid tribute to Mr Adams on Monday for putting in place the cornerstones of the success which Metcash is having.
MST Marquee analyst Craig Woolford said it was a strong result from Metcash, which showed that the IGA network was holding on to the gains in market share made early in the pandemic.
“The strength of the result was across all divisions with improving second-half sales trends and a stronger margin result in food,” he said.
Jarden analyst Ben Gilbert also lauded the strong performance and said investors would become increasingly confident that the IGA stores would hold on to a large portion of the market share they had captured in the past two years.
Extracted from AFR