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Metcash: Feeling the retail pain

In an interview with the Australian Financial Review, Metcash chief Andrew Reitzer has warned that Metcash Limited (ASX: MTS), is facing its worst year in more than a decade.

Since the start of the year, Metcash shares are up 2%, Wesfarmers down 3% and Woolworths is roughly flat, compared to the S&P/ASX 200 index rise of around 2%.

Thanks to multiple headwinds such as double digit price deflation, a fierce price war between Coles, owned by Wesfarmers Limited (ASX: WES) and Woolworths Limited (ASX: WOW), weak consumer sentiment and the stronger Australian dollar, revenues have fallen 26%, despite opening a record 68 stores this year.

Suppliers made to feel the pain

On top of that, several suppliers to all three companies have complained to the ACCC about the “unconscionable conduct” and heavy handed tactics by the retailers, demanding discounts and better terms.

“This is a tough business and we’re in a market against two giants that have somewhere close to 80% market share, and there’s no place for nice guys and there’s no time,” he told the AFR.

When Metcash finally took control of Franklins last October, Metcash discovered that some suppliers were giving Franklins better discounts than the much larger Metcash. Metcash demanded that suppliers pay the difference and even went so far as to deduct disputed sums from payments for stock.

Price wars

Mr Reitzer denounced the price war between Coles and Woolworths, saying the retailers were placing too much pressure on suppliers, and could force more multinational manufacturers to quit the local market.  “Those that hold the power have to be careful with their power – they can be destructive,” he said.

Reitzer also said that there is a need for more transparency over supplier trading terms, but like Wesfarmers chief Richard Goyder, he does not support food industry calls for a grocery ombudsman.

Metcash has 15 projects underway looking at ways to do things smarter and faster, and Mr Reitzer believes that sooner or later inflation will return, and consumers will become less focused on price and value.

Here at the Motley Fool, we’re optimists and agree with Mr Reitzer. As he said “It was engraved on King David’s ring ‘it came to pass’ – it didn’t say it came to stay.”

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Motley Fool contributor Mike King owns shares in Woolworths.  The Motley Fool ’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  Click here  to be enlightened by The Motley Fool’s disclosure policy. 

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