Australian supermarket industry has long being dominated by Woolworths, Coles which is owned by Wesfarmers and to extent Metcash. The industry is seeing a period of change where new market entrants like Aldi and soon Lidl, discount super market chains which focuses on value segment of the market are taking market share at expense of Woolworths and Coles.
Metcash is perhaps the most pronounced victim of Aldi market expansion. Discount retailers has been assaulting full service super markets around the globe. We use UK market as a primary guidance on precedence and market impact. As full line super markets like Tesco are still struggling with a long term response.
It is on our shares to watch as a proxy for our Woolworth position.
The key issue is that the cost structure of these business are too high to compete directly. Naturally this means the produce are priced more competitively. CHOICE survey shows Aldi still leading and driving industry fall in margins.
Metcash has cut dividend and sold core divisions to conserve cash and reduce debt. While sales trend has stopped declining. We still it being challenged in the near term until Woolworth decide how it will respond to Aldi expansion. Any potential price war means that Metcash will be caught in the middle.
Current EBIT margin of the core super market business is 1.9%. It is a key industry measurement of business profitability. For comparison, Woolworth while struggling is expected to have EBIT margin of 4 – 5% which is one its weakest number in awhile but still at twice the profitability of MTS.
Food & Grocery division is the core division that moves the needle hence its profitability is critical for the broader group. It is 4 times the size of the Liquer business and 9 times the hardware business.
The business has deleveraged where gearing is only 16.8% verses 36.6% in the previous corresponding period. Interest coverage is at 9.2 times.
Metcash share price fall has been primarily driven by profit downgrades increasing uncertainty in its future market share. Decline in sales primarily in the supermarket division look to have stabilized. This is followed by recovery in MTS ASX share price and we are kicking our selves by not buying the shares when it was near $1.
The closure of Masters and participation of the Home Timber & Hardware business with ACCC approval is opening up future growth story for the group.
The recovery in the underlying business means that it has recommenced half yearly dividend payments.