This outperforming supermarket stock comes under pressure as the grocery war becomes a rebellion

Credit: Scott Lewis

The share price of Metcash Limited (ASX: MTS) may come under some strain in the short-term following a report that key franchisees are threatening to rebel against the company’s plans to boost profit and productivity.

While there are few questioning if the Metcash’s strategy will work, the real question is whose profit?

Some franchisees believe Metcash will benefit at the expense of IGA supermarkets that are under the Metcash umbrella.

If you were under the impression that Woolworths Group Ltd (ASX: WOW) is the hero of the sector, you’d be wrong by a wide margin. Metcash’s share price is up close to 40% over the past year while Woolies is barely in the black and Coles supermarket owner Wesfarmers Ltd (ASX: WES) has lost nearly 7% of its value.

The outperformance of Metcash is even more impressive if you contrast it to the 2.3% loss by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, although the report in the Australian Financial Review on the backlash from some IGA franchisees could take the wind out of its sails.

The article reports that a core group of franchisees, including Ritchies and Drakes Supermarkets, are particularly unhappy with Metcash’s Indie Direct program. This is a website run by Metcash that franchisees will use to purchase around $1 billion of stock.

Metcash wants to charge a commission on each transaction without having to provide distribution or warehousing services.

Currently, franchisees are buying direct from these suppliers and Metcash says Indi Direct will give it the scale to negotiate better prices from suppliers. I guess not all franchisees are buying that argument and are worried that their direct relationship with suppliers will be hijacked by Metcash.

The other part of Metcash’s program will see around 4,000 products stocked at the franchisor’s warehouse dropped altogether.

But some of these products are important to the group of protesting franchisees who accuse Metcash of not undertaking proper analysis before making the cull and for only looking out of its own interests.

The good news for Metcash shareholders is that the rebellion may not cause as much financial harm to the company as it may have once. The stock has outperformed because of Metcash’s efforts to expand into other areas, such as hardware retailing.

These expansion efforts have offset the drop in the supermarkets/grocery distribution side of its business.

More importantly, the market is expecting further weakness in this division, so unless the rebellion escalates much further, analysts are unlikely to downgrade their forecast for the stock in any meaningful way.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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