The pressure is on for Metcash

Published on Wed, 01/12/2010, 03:30:09

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By Aimee Chanthadavong

Speaking little about the Metcash and ACCC situation at the half year 2011 results briefing, Metcash’s CEO Andrew Reitzer has warned that despite record profits there are tough trading conditions ahead.

The company saw its wholesale sales rise 5.8 per cent to $5.94 billion while its earnings before interest, tax and amortisation (EBITA) grow 7.7 per cent to $199.4 million for the six months to October 31 2010. Further to this, its EBITA margin extended to 3.36 per cent.

According to Reitzer, the results were within the company’s guidance despite tough company trading.

“It’s the first time I’ve worked in this industry in over 15 years that we’ve been faced with this sort of situation and the primary situation that we face is deflation,” Reitzer said..

“For this half you’ll see the inflation in our setting prices for packaged groceries was 1.7 per cent and our deflation price on our fresh produce was 11 per cent. On top of that, in the last two months this all decreased by 3 per cent. So yes, consumers are paying less for their food, which is a good thing but aren’t necessarily buying enough to make up for that,

“So it’s a very difficult situation for the business to be in and the first time we’ve faced that deflation on setting prices and cost push increases, but despite that I think the business has done exceptionally well.”

Metcash’s grocery distribution business, IGA Distribution, increased sales 4 per cent from $3.48 billion to $3.62 billion, while EBITA grew 6 per cent to $173.2 million.

“The good sales growth is really as a result of the increasing promotion activity under the ‘How the locals like it’ program, as well as the ’Locked down low price’ program, which has about 35,000 items that are at a reduced price locked down prices across the network,” Retizer said.

He also noted that for the first time, IGA implemented its ‘Buy Back’ program, which the company aims to continue. 

“The way buy back works is that we identify stores that we think could get into better hands of independent retailers. So far, we’ve identified 60 stores and we’ve completed 11 buy backs. One retailer, for example, went through a $2 million refurbishment and his purchases have gone up 50 per cent and his sales have gone up 60 per cent.”

Also, for the first time, Mitre 10 has been included in the results since Metcash acquired the hardware chain in March 2010. The company consolidated the results of the hardware business for the half year, with sales of $401.2 million and EBIT of $6.8 million.

When asked how Metcash will maintain competitiveness against other hardware chains, such as Bunnings and the soon-to-be opened Woolworths-owned hardware stores, Reitzer said Mitre 10 will focus on providing localised retail stores instead of big boxed warehouses. 

Commenting on the company’s future outlook, the Board has expressed concerts that there will be extremely tight trading conditions throughout the first half onwards into the second half will exert pressure on the group’s ability to achieve its guidance.

“Looking forward, our feeling is that the environment is only going to get worst with further deflation, more pressure on costs and what the Board is saying is that we’d like our shareholders to exercise caution because the guidance is at risk,” Reitzer said.

Nevertheless, Metcash strategies are in place to ensure the company survives the tough period, Reitzer said.

“As a business there are only two things you can do. First thing is to grow your volumes by improving marketing, more promotions, more products on locked down prices, more stores, more refurbishments, giving members from other banners the chance to join us, more of the buy back strategy and that will give us more volume. The second you have to do is be very, very clever with your customary business so we have a program of continuous customer building.”


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