Any investor in Australia is well aware of the hugely competitive environment that is the Australian supermarket sector. Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) owned Coles have virtually operated as a comfortable duopoly for many years.
Metcash Limited (ASX: MTS) was always the clear third force in the Australian supermarket sector, and a profitable one at that. But the entrance of German discounter, Aldi, and US warehouse operation Costco have squeezed Metcash much harder than the larger players, and it has had to reset its strategy as a result.
Will its latest multi-million dollar strategy shift make it a buy?
$700 million investment
The strength of Metcash was always its ties to local communities through the IGA brand. Despite being a national operator, IGA stores still benefit from the local appeal and "grassroots" connection.
It is this grassroots appeal that Metcash is hoping to leverage with its $700 million investment. The war chest is being used to fortify the position of IGA stores in South Australian and Western Australia against the impending entrance of Aldi into those markets.
Clever locally tailored appeals to customer loyalty like live events at the Royal Adelaide show and cheaper tickets to local AFL events really tie the brand to the community in a way that the majors can not match easily.
Too little?
Unfortunately, the foothold that Aldi has in the eastern states has given it valuable experience and knowledge of how to expand in Australia. Although it has only hit the headlines of the mainstream press in recent years, Aldi has been operating in Australia for over a decade, and is undoubtedly one of the most successful international entrants to the country ever.
This prior knowledge and success is a huge problem for Metcash, as South Australia and Western Australia are its fortress, with almost a third of group stores there. Brand loyalty in these states is higher than in the eastern states, which is the reason that the battle for the south and the west will be critical for Metcash.
Competitive forces
The problem for Metcash is that over time, some shoppers will trial and switch to Aldi. Until this time, Metcash has experienced a "free kick" in these two markets, while its east coast stores were badly bruised by fierce competition.
Despite the $700 million investment in matching prices, a better private label range and a huge store refurbishment program, it is difficult to see how Metcash can grow its market share, or even maintain its current level of market share as its stronghold states come under attack.
Strategy shifts can signal future changes in a companies fortunes, but the difference between strategy and success is execution, and even if Metcash executes its strategy perfectly, its competitors are not standing still, and that is why it remains an avoid for investors for now.
