Australian wholesaler Metcash will champion branded suppliers and “sustainable” independent retail businesses as the country’s largest retailers drive down prices through a focus on own label.

Earlier today (24 July), Metcash booked a drop in full-year sales and earnings at its food and grocery business. Revenue was down 2.3% while EBITA fell 5% during the 12-month period, the company revealed.

Commenting on the result during a conference call with analysts, Silvesto Morabito, COO of Metcash’s food and grocery business said the decline was “primarily driven” by store closures. During the year, the company closed under-performing stores across the Campbells, Cornetts and Walters banners.

Sales were also hit by the deflationary environment in Australian retail. Moving forward, incoming CEO Ian Morrice said the company expects deflation to continue.

Lower prices are being driven by the heightened focus Australia’s largest retailers, Woolworths Ltd and Coles, are placing on developing their own-label lines, as well as a sustained “attack” the retailers are putting on pricing in particular categories, Morrice suggested.

“Price deflation is primarily being driven by two things: one is the chains’ relentless drive down the private-label route, which puts branded suppliers under pressure, as well [two] a distinct attack on specific categories and really taking the retail value out of some of those categories on the way through,” Morrice, who will take the helm at Metcash at the end of the month, said.

He continued: “In a sense private label and category pricing is fair competition if you like, that’s just people flexing their muscles in the market place.”

Metcash expects the deflationary environment to intensify as competition in the market steps up, Morrice said. “We are expecting a continual increase in competitive activity. That has been signalled by a lot of the footprint growth in a lot of the markets that we operate in.”

Metcash is therefore looking to address how it can compete as prices continue to be driven down. A significant part of the answer, management suggested, will rely on driving higher volumes.

“One of the priorities is to review food and grocery opoerations to ensure we can compete in an ongoing deflationary environment. We are expecting – and planning for – continiued deflationary environment in that sector,” Morrice emphasised. “Some of the elements we are going to look at are focusing on sales and volume growth… that is really about understanding if we can do more to drive consumer demand in our customers stores.”

Central to driving volumes will be Metcash’s ability to offer competitive prices and promotions. “We are going to need supplier support if we are going to bring about any change in that area,” Morrice suggested.

Morrice stressed higher volumes would be beneficial to Metcash, its retail customers and its suppliers. “This is a three-way exercise…. ultimately though, our model is about sales and volumes. We have to make sure that whatever we do is going to put in place something that drives more volumes… and that is good for all three parties.”

While Australia’s retail majors have invested heavily in developing their own-label lines in recent years – putting pressure on branded manufacturers – Metcash was keen to position itself as the “champion” of branded sales.

“We are the place for brands, we are the champion of the brands. We are working closely with our supplier base to drive the brands as the chains focus on private label activity,” Morabito said.

Metcash seems to be gearing up to ask its branded suppliers to drop prices in order to increase volumes. But management emphasised it does not expect suppliers to bear the burden of cost reduction alone.

The company will look to strip costs out of its own business – and help its retailers cut costs through improved stock management. Metcash will work to lower costs through productivity improvements and investments being made in improved distribution.