Metcash says it is closing the price gap with majors, Coles and Woolworths, as it wins over shoppers to neighbourhood stores

The nation’s largest wholesaler to independent supermarkets, including IGA and Ritchies, is taking advantage of the pivot to local shopping.

Metcash says it is focusing on closing the price gap between its stores and major competitors Coles and Woolworths as it warns of accelerating food and grocery inflation.

The wholesaler, which also operates IGA and Foodland brands, said prices were up 4.9 per cent for the first quarter of a financial year ending April 30, and 7.4 per cent in the second quarter. However, annualised growth accelerated to some 8.8 per cent in November.

The company’s chief executive, Doug Jones, said that despite increased costs of food and groceries Metcash had recently cut 150 basis points from the price differential with its larger rivals and was now flagging a further 60bp reduction.

“And we are essentially saying that price gap is so small, that we think it’s almost unnoticeable. We are achieving that in a couple of different ways,” Mr Jones said. “One of them is that our suppliers are working with us and are benefiting from the returns that they’ve had on that ­investment.

“We have run a very good price-match campaign and program. And of course, we have become more efficient ourselves and as we grow and as the core of our business spins faster we are able to operate at lower net costs.”

On Monday, Metcash posted an 8.2 per cent rise in interim sales to $7.75bn for the six months to October 31. Net profits, however, fell 2.4 per cent to $125.7m. Underlying profit rose 9.1 per cent to $159.9m, with this measure of profitability excluding items such as adjustment of a put option valuation for its Total Tools joint venture of $21.3m and digital acceleration project costs of $12.8m.

Metcash warned of accelerating inflation, with its own measurement of wholesale food cost increases hitting 6.2 per cent for the six months to October 31.

The Metcash wholesale inflation figure excludes tobacco and fresh food, which means recent falls in the prices of some fresh food, such as lettuce, are not showing up in its wholesale pricing.

Mr Jones said the wholesaler had recorded another pleasing half, with strong sales and earnings growth in the face of higher inflation, while cycling the impact of extensive lockdowns in the first half of 2022. He added that Metcash was continuing to win over customers who were shopping locally more than ever before.

“The increased preference for local neighbourhood shopping continues to be seen in our strong sales performance, with shoppers recognising and enjoying the increased competitiveness, differentiated offer and relevance of our network of independent stores. Feedback from our retailers is that many shoppers have now changed their shopping habits to include local grocery, liquor and hardware stores,” he said. “Overall network health continued to strengthen, and retailers are operating with a high level of confidence and reinvesting to further improve the quality of their stores and offer.”

Total food sales increased 3.1 per cent to $4.7bn. Excluding tobacco, total food sales were up 6.5 per cent. Supermarket sales increased 2 per cent, while food earnings rose 3.2 per cent to $98.2m. At its liquor wholesaling arm, which includes retail banners such as Cellarbrations, The Bottle-O and IGA Liquor, sales rose 11.6 per cent to $252.4m as earnings lifted 11.3 per cent to $49.3m.

Metcash’s hardware business – led by the Mitre 10 brand, booked sales growth of 16.8 per cent to $1.7bn, while earnings rose 17.9 per cent to $116.6m. The increase in sales was driven by strong underlying demand in both the trade and DIY segments, a high level of inflation and a $134m contribution from new joint venture or company-owned stores.

Metcash increased its interim dividend by 9.5 per cent to 11.5c a share, payable on January 30.

Mr Jones said – for the first four weeks of the second half of the company’s financial year – food sales were up 4 per cent, liquor up 8.9 per cent and hardware sales increased 8 per cent compared with the prior corresponding period.

The underlying interim earnings were ahead of market and analyst expectations, led by a strong performance by its liquor and hardware pillars, and analysts noted the strong start to the second half for the company.

“First-half EBIT were above UBS expectations, led by margins in hardware,” wrote UBS analyst Shaun Cousins in a note.

“Trading started the second half of 2023 better than expected, hardware slowed due to external (weather) conditions in NSW and Victoria with underlying demand robust, while food remains resilient supported by inflation.”

An Ord Minnett note to clients said the result was characterised by the strong Total Tools and liquor results and the flowthrough of inflation across each of the pillars. “The trading update indicates momentum has continued into the second half of 2023.”

Metcash shares rose 1c, or 0.24 per cent, to close at $4.24. They are down 5.2 per cent this year.