AUSTRALIA'S largest independent grocery chain, Ritchies Stores, is forecasting its first profit growth in four years – an early sign that wholesaler Metcash's five-year survival plan for the struggling independent sector is starting to deliver results.
Ritchies Stores' net profit fell 20 per cent to $2.5 million in 2014 according to the most recent accounts lodged with ASIC, taking the drop in earnings since 2011, when profits peaked at $9.2 million, to 73 per cent.
Annual sales growth has stalled at $848 million and sales per store have been declining since the company bought nine Franklins supermarkets from Metcash, which owns 26 per cent of the company and is its largest supplier.
Ritchies' finances reflect the pressure on the independent grocery sector amid increasing competition between Woolworths, Coles and discounter Aldi; persistent grocery price deflation; and changing shopping habits including stronger demand for fresh food.
IGA retailers' market share has fallen from 19 per cent to 14 per cent since 2010 and earnings from Metcash's food and grocery business, which supplies about 1200 IGA retailers, have fallen 43 per cent since 2012, reflecting operating deleverage as sales and margins come under pressure.
Metcash is aiming to reinvigorate the independent sector by making IGA stores more price competitive – investing $40 million a year into matching everyday shelf prices at Coles and Woolworths on hundreds of products each week – and helping IGA retailers refurbish stores by adding higher-margin and faster-growing fresh foods such as meat, dairy and produce.
Ritchies is leading the way, installing Lenard's poultry shops, Maille mustard boutiques, cheese counters and an extensive range of fruit and vegetables into new and refurbished stores.
Ritchies chairman Fred Harrison said earnings for the 12 months ending June, which will be lodged with ASIC in December, had risen for the first time since 2011, underpinned by stronger same-store sales growth and better gross margins.
"I'd be comfortable in saying it will be our best result in four years – there's been a definite improvement in profitability," Mr Harrison said.
He attributed the turnaround to stronger sales of fresh foods, the closure of several loss-making stores in 2013 and Metcash's price matching and store refurbishment programs.
"We're seeing some positive signs in our stores," he said. "It's a good thing for our business but it's only part of a bigger and longer-term strategy."
"Had we done nothing or just kept going normally I think it would have been a hell of a lot worse for independents in the IGA network," he said. "It's given us a morale boost and bit of a bright light at the end of the tunnel."
Mr Harrison confirmed that Metcash's Price Match and Diamond Store refurbishment programs were driving volume growth and stronger sales of higher-margin fresh foods, countering the impact of price reductions.
Point of difference
At a meeting last month, Metcash chief executive Ian Morrice told grocery suppliers that the price match program had so far been gross dollar profit neutral for IGA retailers because higher volumes had offset price reductions of four to eight per cent.
In a recent report, Macquarie Securities analyst Bryan Raymond said the key to the success of the price matching and store refurbishment programs would be the financial impact on IGA retailers, who have been asked to fund about 50 per cent of the investment.
"Protecting the profitability of retailers is critical to achieving retailer buy-in," Mr Raymond said.
"This is critical for retailers with limited capacity to fund price investment for extended periods."
So far more than 800 Supa IGA and IGA stores, including Ritchies, have price matched about 2100 grocery lines such as Colgate toothpaste, Kraft peanut butter and SunRice rice. Another 200 IGA stores are expected to join Price Match over the next 12 months.
Metcash kicked off a $10 million television, print, outdoor and online advertising program last month to promote the price match program to consumers.
Mr Harrison said independent retailers needed to maintain their point of difference with the major supermarket chains but could no longer be uncompetitive on price.
"We tread a fine line," he said. "You don't want to be a mini-me Coles or a mini-me Woolies … but the consumer is telling us they want value."
"We have to get that balance right and that's where Price Match helps – we have to be true allrounders."