Since its takeover by South Africa's Metro Cash & Carry, Australian wholesaler and retailer Metcash has turned itself around and is expected this month to post another year of growth. But in a market controlled by two retail giants, how does a wholesaler to independent supermarkets survive? David Robertson finds out.

When South Africa's Metro Cash & Carry announced five years ago that it was entering the Australian market as part of a move towards globalisation many doubted that its target, Metcash, was the right start.

At the time Metcash was haemorrhaging cash, losing A$240m (US$157.2m) that year, but since then the company has been resurrected, posting a 35.6% increase in pre-tax profits to $89.2m last year. The company is currently in its closed period ahead of a full-year results announcement on 22 May so it will not discuss financial data, but analysts predict that Metcash is on target to post another year of strong growth.

Metcash, which is 62% owned by MC&C, operates three divisions in Australia: the first is a wholesaler to Australia's independent supermarkets and grocery stores, supplying them with IGA-branded products. The second is the cash & carry division and the third is a liquor wholesaler.

A thriving sector

Given the dominance of Coles and Woolworths supermarkets, which control 80% of the Australian market, there had been fears that the independents - and by extension, Metcash - would be squeezed out of business. But Metcash chief executive officer Andrew Reitzer says the independent sector is thriving, despite the competition.

"The supermarkets are a concern every day, when I come to work I know I am in a competitive market," he says. "But we have found a niche that will survive because independent retailers will always beat the chains for flexibility. We have a chain of entrepreneurs who are building their businesses locally not just following a manual. We now have the buying power to be competitive and the IGA brand is being built well.

"In 1998 when we arrived the company was very distressed but we did what Metro Cash & Carry does, which is focus on what we know: being the best wholesaler and championing the retailer. That's our cause."

While the supermarkets are a constant threat to the independent sector, as a wholesaler Metcash has been able to explore other supply opportunities. Reitzer is particularly happy with the growth of convenience stores and petrol station stores - virtually all of which are supplied by Metcash. This sector has been growing at about 10% a year and because they tend to order in smaller quantities than grocery stores or supermarkets it is a higher margin business.

Surviving in a competitive market

Ever aware of keeping up with the supermarket chains, Metcash is currently negotiating with petrol companies with a view to offering the sort of discounts the supermarkets have arranged. Coles is still negotiating its partnership with Shell and Metcash's deal will have to wait until that is finalised but, when it is introduced, it is likely to give client stores, and their customers, discounts at local petrol stations.

The competitive pressure exerted by the supermarket chains had been expected to damage the liquor wholesaling business. Coles and Woolworths have been particularly aggressive in expanding in this area and, "in theory we should have been in trouble in this area," concedes Reitzer, but Metcash has been saved by the bullying tactics of its large rivals. In their constant quest to reduce costs, Coles and Woolworths have forced the wine makers and brewers to sell direct from the factory rather than through distributors or wine merchants. Metcash has taken advantage of this supermarket-imposed change of practice although, clearly, the company will have a fight on its hands to prevent a future erosion of its business.

There have been setbacks in the last year, particularly the aborted acquisition of Manila-based Suy Sing Commercial Corp. Metcash has been desperate to add a fourth division to its operation and had hoped that the Philippines would be its first overseas expansion. The $73m deal would have given Metcash 65% of Suy Sing, which is also a wholesaler, but it fell apart because the two parties "could not see eye to eye".

Future expansion plans

Reitzer says that Metcash remains determined to add the fourth unit, but that any new deal will have to wait another six months. The $38m that the company raised in a share issue last October is being invested in existing businesses.

Investors will have to wait until later this month to find out whether Metcash's performance in the last year has been damaged by the drought that devastated much of Australia's agricultural land. Prices for essential goods like bread, which are core products for Metcash's community-based retailers, have already risen by more than twice the rate of inflation and are expected to continue rising. Analysts are uncertain how bad the damage will be, or whether it will continue to effect business this year.

The performance of Metcash since the acquisition by Metro Cash & Carry has vindicated the South African's strategy of expanding out of its domestic market. MC&C believes it needs global buying power to match the selling clout of food manufacturers who are increasingly seeking to consolidate. Metcash appears to be the vehicle the South Africans will use to expand into Southern Asia, but the wholesaling business in Australia is by no means a secure base. The liquor business in particular is likely to take a battering in the next couple of years and Coles and Woolworths are unlikely to ever give the independent sector an easy ride.