METCASH TO RESTRUCTURE FOLLOWING DIMINISHING MARGINS

Metcash CEO Andrew Reitzer has announced the results of a strategic review into the company.

“At our Half Year Results in November this year, I announced Metcash would undertake a strategic review of all company activities to ensure the business remained optimally positioned to meet the ongoing difficult trading conditions. These difficult conditions result from continued deflation that is pushing prices and margins down, and a value-conscious consumer who increasingly purchases on discount,” Mr Reitzer said.

“Fifteen project groups were established to look at every aspect of our business. Each has made recommendations on how we can improve and work more effectively. The establishment of Metcash Food and Grocery, combining IGA Distribution, Merchandising, Fresh and Campbells, has identified further opportunities to end the duplication of many processes. We will also combine the different business pillars’ property functions in order to better identify and bring to fruition new site opportunities to achieve maximum leverage across our portfolio of brands and our customers’ retail offers. The centralisation and expansion of marketing will ensure improved execution and greater ‘share of voice’ in the marketplace,’ he said.

Mr Reitzer said the changes would unfortunately result in people leaving the business from Campbells, Merchandising, Fresh and from other functions across the business. In all 478 positions are expected to be made redundant.

“We will close 15 regional Campbells Cash & Carry branches. This recognises the changing dynamic in the convenience sector as our mix of business swings more heavily towards the organised petrol and convenience sector and away from the accelerating decline of traditional convenience stores. This strategy is aimed at further reducing the fixed cost base of Campbells while replacing it with the latest technological single-pick distribution solution and a network of optimally situated branches. Further potential exists for establishing strategic franchise arrangements in some areas. As a result, 315 positions will become redundant in the Campbells business.

“The other 163 positions being abolished are in our corporate offices. We will incur a one-off restructuring charge of $34 – $43 million that will result in an improved operating income of $25 – $30 million for FY13 and a further $10 – $15 million per annum for FY14. This equates to a payback of approximately 1.3 years,” Mr Reitzer said.

Sale of Foodlink

Mr Reitzer said that the strategic review also examined what businesses were core to the future of Metcash.

“We no longer believe that our specialist food service business Foodlink is core to our business. We have decided as a result to sell the business to Bidvest Australia. The terms of the sale agreement are confidential to the two parties at this stage and contracts are in the final stages of preparation and the strategic review restructuring charge includes the net profit on the sale of the business. The 90 staff currently employed by Foodlink will be offered employment by Bidvest as part of the sale agreement,” Mr Reitzer said.

Queensland downturn hits two joint ventures

Mr Reitzer also announced changes to the Cornetts and Walters joint ventures following a jointly initiated review of their operations.

“The two joint ventures have been hit hard not only by deflation but also by the environmental and economic difficulties specific to the Queensland market. The series of natural disasters experienced over the last 12 months together with the fact that many of the stores are in tourist areas and tourism numbers have fallen dramatically has particularly hurt these businesses. Both companies have taken on many new stores in recent years and the current trading environment has stifled their ability to develop these stores to acceptable levels of profitability,” Mr Reitzer said.

“Metcash has assisted both management teams to develop a work out plan and will assist in restructuring each of the businesses. The expected restructuring will see some unprofitable stores close. In view of the particularly difficult trading environment in Queensland we believe it is necessary for Metcash to take a prudent view of its exposures to these two joint ventures and will therefore book a largely non-cash impairment charge of approximately $75 – $90 million after tax.

“By taking this action now and assisting our joint venture partners to restructure their operations we believe these businesses will be in a much stronger position and better able to cope with the market conditions,” Mr Reitzer said.

Mr Reitzer concluded by saying that the loss of Metcash employees was regrettable but the reality of the trading environment meant Metcash had to focus on ensuring the business is structured optimally for the future.

“Across the broader business our customers are holding market share and remain resilient in a challenging trading environment. We will continue to support them and champion their interests. Metcash itself will be focussed on securing the savings identified from the Strategic Review over the next two years. The one-off charges will be reported as non-recurring and significant in FY12 and excluding these, the board has  reiterated its existing guidance of low to mid single digit growth in underlying EPS,” Mr Reitzer said.