IGA to lose $87m a year to Aldi: UBS

WINTER is coming for IGA. The risk of a price war is growing and Metcash is the “most likely to lose”, investment bank UBS has warned.

IGA has the most to lose in a price war. Picture: Richard Walker @rdwphotography

WINTER is coming for IGA.

The risk of a price war is growing and Metcash is the “most likely to lose”, investment bank UBS has warned in a grim assessment of the prospects for the struggling supermarket wholesaler.

In a note to investors on Monday, retail analyst Ben Gilbert predicts Metcash stands to lose around $87 million a year in sales over the next three years as German discounter Aldi expands into its home territory of South Australia and WA.

That figure could be as high as $127 million in the worst case and as low as $34 million in the best-case scenario. “Metcash has the most to lose given its high 25-30 per cent share in SA/WA,” Mr Gilbert writes.

“While the Metcash strategy appears sound, we believe execution risk is high, particularly given increased competitive pressures from the likes of Aldi,” Mr Gilbert writes.

“We believe Metcash is structurally challenged and is facing significant headwinds despite measures taken to level the playing field via price match. We expect long-term share and margins to fall in grocery, creating earnings and share price pressure, not reflected in the current price.”

Financial results released earlier this week revealed Metcash has taken a huge earnings hit to its core food and grocery business as it struggles to compete with Coles, Woolworths and Aldi.

The 17 per cent decline in the supermarket division’s earnings was offset by a growth in hardware and liquor, pushing the group back to an annual net profit of $216.5 million after a $384.2 million loss a year ago.

UBS is predicting a further 2 per cent decline in grocery revenue in the current financial year and an 11 per cent decline in earnings. It is also forecasting Metcash’s total group earnings to decline 5 per cent, which is below market consensus.

A price war in the Australian grocery market in the next two years is a “growing risk”, UBS says. It puts the probability of a price war in which “all listed retailers lose” at 25 per cent.

“No listed retailer wants a price war. If one occurred it would likely be initiated by Woolworths, the result of the current strategy proving ineffective,” Mr Gilbert writes.

“We have assessed four likely paths and the earnings implications. Our conclusion is earnings risk is weighted to the downside and that Metcash, Woolworths and Coles (in order) are most at risk.”

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