Fund manager Hamish Douglass recently told financial planners that Metcash Limited (ASX: MTS) "might not exist in 10 years' time".
But as much as I respect Mr Douglass, on that count he's wrong.
For sure grocery wholesaler and distributor Metcash is facing the squeeze from Coles – owned by Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) as the two supermarket giants try to protect their dominant market share. German retailer Aldi and US shopping giant Costco are also infringing on Metcash's IGA supermarkets. Aldi, in particular, is about to expand into Southern and Western Australia where it has very few stores, which will exert even more pressure on Metcash.
Metcash's CEO Ian Morrice says that investors are over-simplifying the problems facing the company in SA and WA – by automatically assuming the experience in the Eastern states will be repeated.
Aldi currently has around 8% of the total supermarket share, with Metcash on 11%, but the German discounter could increase its share to 15% – as Mr Douglass warned. That looks highly possible, but some of that market share is likely to come from the big two as well, not to mention independent supermarket operators who are rapidly dwindling.
Metcash has already begun a 'price match' marketing campaign, and there's little reason why its IGA franchises can't match Coles and Woolies on price. Price isn't everything though. The biggest discounter will always win on price, so IGA, Coles and Woolworths need to focus on other factors that influence people. Woolworths once referred to itself as 'the fresh food people'.
The number one reason influencing where people shop is location and convenience. If there's an IGA supermarket 1km away, most people are hardly going to drive 5km to their nearest Coles, Aldi or Woolworths. Aldi's struggle in SA and WA is trying to find ideal locations close to neighbourhoods that haven't already been snapped up by Metcash, Coles and Woolworths. That's not going to be an easy task.
Additionally, a large number of people aren't loyal shoppers (particularly Aldi), and may visit two or more different supermarkets each week.
Price, value and quality are secondary considerations for many shoppers. Which means Coles, Woolies and IGA stores can focus on other factors besides price to attract customers.
Foolish takeaway
I tend to agree with Metcash CEO Ian Morrice – Metcash is still in the game and its demise is highly exaggerated. Yes, it may lose more market share, but the wholesaler could also gain market share if new management are on the ball. And don't forget that Metcash has one of the largest liquor distribution businesses in Australia, not to mention hardware store Mitre 10, which is rapidly growing revenues.
