The rise of German supermarket giant Aldi has the alarm bells ringing for the future of many of local stores and their major supplier Metcash.

It was not that long ago that it seemed like there was a corner store in every suburb.

Woolworths and Coles put an end to that, but thousands of local supermarkets have survived under banners such as IGA and Foodworks.

Now, the rise of Aldi puts the future of many of those stores, and their supplier Metcash, at risk.

Aldi may play the underdog in Australia, but in global terms it is anything but.

The German supermarket powerhouse has annual sales of around $80 billion — more than Woolworths, Coles and Metcash combined.

“I think it’s the first time they have had competition that is a serious threat to their business and that they have had to adapt their business to,” Magnolia Solutions retail consultant Nancy Georges said.

While the big two are battling it out with Aldi, squarely in the firing line is wholesaler Metcash, which supplies 1,500 IGA stores.

According to Roy Morgan Research, IGA stores have lost nearly a third of their market share in the last decade, and now sit in fourth spot on the supermarket ladder.

I think they have an incredibly challenging road ahead … they’re going to need an aggressive distribution network to compete.

Brian Walker, Retail Doctor chief executive

Aldi has gone from zero to 12 per cent — and third place — in just over a decade.

“Aldi are a global player. If they aim their guns hard enough they will hit,” retail advisory firm Retail Doctor’s chief executive Brian Walker said.

And Aldi is aiming at the big cities where IGA has its most profitable stores, the Super IGAs, which take the fight up to Coles and Woolworths.

“Can we support this many supermarkets, can we support this many big businesses that are vying for the same dollar? I don’t think so,” Ms Georges said.

One leading fund manager is already predicting that Metcash will not survive.

Mr Walker did not go that far, but said the jury was definitely out.

“I think they have an incredibly challenging road ahead. They’re going to need capital, they’re going to need an aggressive distribution network to compete and they are facing increasing competition,” he said.

The man in the hotseat at Metcash is chief executive Ian Morrice.

While he acknowledged the threat from Aldi, he told the ABC it was a challenge he was confident Metcash would meet.

“They are very good retailers and they have a particular offer, which appeals to some of the customers, and what we’ve got to focus on is our strengths and our strengths are very different to theirs,” he said.

Metcash shares down more than 70 per cent

As for all the predictions of doom and gloom around Metcash’s future, Mr Morrice said change was required.

“Well, the thing about any business is that you’ve got to be prepared to change to address the needs of the future,” he said.

“We’re investing for a long-term sustainable future, not just for Metcash, but importantly for independent retailers across Australia and we’ve put a plan in place.

“We’re just over a year into that plan and that plan is making very good headway in moving us towards that sustainable future,” Mr Morrice said.

And Metcash will need its plan to work.

Aldi is expanding aggressively in the eastern states and is now planning an assault on South Australia and Western Australia — two states where the IGA brand has its biggest presence.

Joseph Romeo owns 25 IGA stores in Adelaide and, like Mr Morrice, is confident the IGA brand can weather the Aldi storm.

“The independents from South Australia, with the brand Foodland-IGA and IGA, have been very successful competing against Coles and Woolworths for a number of years,” he said.

“Their market share is very, very strong, if not the biggest in the country when it comes to market share for independents.”

Investors are not so confident though.

Metcash shares are down more than 70 per cent from their high of $5.19 in May 2007.

Notwithstanding that, Mr Morrice does not think the market has given up on Metcash.

“No, I don’t think the market’s given up at all. I think what it’s saying is, ‘you’ve put a big investment plan in place, and we want to see the fruits of that plan come through before we’ll reward you with a share price that reflects that’,” he said.

To get that share price though, Metcash is going to have to win the biggest battle of its corporate life.

 

First published online through the ABC on 21/10/15