The Motley Fool

Should Wesfarmers Ltd and Woolworths Limited shareholders be worried by a revitalised Metcash Limited?

This week investors had the opportunity to assess the plans of the beleaguered grocery wholesaler Metcash Limited (ASX: MTS) which owns the IGA-banner utilised by many independent supermarket operators.

It has certainly been a disappointing run for Metcash’s shareholders with the stock down around 60% over the past 12 months and a staggering 75% over the past five and 10 years!

Metcash’s management appears to be taking the bull by the horns and is attempting to instigate a significant turnaround in the group’s fortunes, however, the task ahead of the company should not be underestimated by investors.

Here are some of the key strategies that Metcash plans to implement to arrest the declines and set the group on a path to profitable growth.

  • Improve the competitive pricing position of its supermarkets including via the launch of the ‘Price Match’ initiative
  • Provide a compelling fresh food offering
  • Make sure the range and availability of products is better managed
  • Make the local IGA store the “heart and soul” of the community and with an “individual character” that includes a localised range unique to each store

To implement these strategic initiatives Metcash is utilising its Diamond Store Accelerator (DSA) Program which has seen the group build an operations team to help with the in-store execution of the upgrade plans

Importantly, the initial feedback on the DSA has been positive with management stating that a sample of stores which have already implemented the strategic changes are reporting an increase in the average basket size, an increase in the average number of baskets, a 20% increase in retail fresh sales and a 15% increase in total sales.

This data is indeed impressive and could suggest that Metcash is on the right path to reversing the down trend. However there are still big reasons for concern…

Those concerns include:

  • Firstly, what Metcash is doing in nothing short of what it should be doing anyway.
  • Secondly, the giant Woolworths Limited (ASX: WOW) is busy doing all the basic things which it appears to have not been doing too. This means Metcash faces renewed pressure from a potentially revitalised Woolworths. Meanwhile, Wesfarmers Ltd (ASX: WES) which owns Coles, continues to improve after years of underperformance and underinvestment prior to Wesfarmers’ ownership.
  • Thirdly, there is the well televised increasing competition from new entrants such as Aldi.

In short, all established supermarket chains look like they will have to run quickly just to stand still but Metcash’s market position means it remains the most exposed to the competitive threat from Aldi.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Related Articles...