Could there be an early ray of sunshine for embattled grocery distributor Metcash Limited (ASX: MTS)?
The company's largest supermarket franchisee, Ritchies Stores, is set to post its first profit growth in four years, according to the Australian Financial Review.
This is an important early win for Metcash as it embarks on a five-year turnaround plan to combat intense competition from Woolworths Limited (ASX: WOW), Wesfarmers Ltd's (ASX:WES) Coles supermarkets and well capitalised offshore rivals.
Metcash has arguably the weakest hand due to its size and business model that supplies groceries to a network of independent supermarkets trading under the IGA brand.
IGA's market share has fallen to 14% from 19.9% since 2010 and Metcash's earnings from its food and grocery division have collapsed 43% in three years.
Having no direct control over the supermarket network will make it harder for Metcash to implement its fight-back plan as it needs the co-operation of franchisees who need to be convinced to follow Metcash's plan of price cuts and store investments.
Ritchies forecast that it will deliver the first profit increase since 2011 on the back of Metcash's initiative's will go a long way in convincing other franchisees to follow in its footsteps.
Ritchies' chairman Fred Harrison said the business has enjoyed stronger gross margins and same-store-sales for the 12 months to end June. Ritchies is a private company and it will lodge its earnings with the Australian Securities and Investments Commission (ASIC) in December.
Besides making a $40 million a year investment in matching prices with Woolies and Coles, Metcash is also encouraging franchisees to spend on store refurbishments and expand its fresh food selection.
Limited fresh food is one of the key weaknesses in the IGA business and is a category that fetches bigger margins. There's speculation that Metcash might make an acquisition to bolster its offering in this area.
Shares in Metcash have recovered from early losses to trade 0.5%, or 0.5 cents, higher at $1.05 in afternoon trade.
However, I think it is still too early to buy the stock despite the encouraging signs. The fact is, it will probably take two years before we start to see any real sign of a turnaround in the business and there's plenty of time to buy Metcash.
Further, the thing that worries me more is the wounded Woolies. A desperate and far larger rival is unpredictable and can act irrationally.
There are plenty more battles to go through before the supermarket war will be decided.
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