Supermarket Wars Wound Metcash

What happened to the Metcash share price?

Shares of Metcash [ASX:MTS] lost over 3.7% today as it announced it will launch a new price matching program to stop share market loss.

Why did MTS shares drop?

Last February, the global financial firm UBS surveyed 1063 Australian grocery shoppers to gather information for their latest nationwide grocery shopper survey. The survey looks for new trends and strengths and weaknesses in Australia’s supermarkets.

UBS ‘uncovered’ three surprises. Aldi’s impressive growth is peaking, IGA (Metcash) is losing market share to Woolworths [ASX:WOW], Aldi and Coles [ASX;WES], and Woolworths is behind Coles in shopper penetration.

As reported by The Australian:

“The rate of decline in IGA is accelerating faster than we thought, suggesting downside risk,” UBS said as it reiterated its sell on Metcash with a view the market share and margins will fall as Aldi steps up its presence in South Australia and Western Australia.

According to Fred Harrison, who runs about 82 IGA stores, Metcash is also falling behind because they have not opened new stores like Aldi and Woolworths have. Metcash has instead concentrated on refurbishing existing stores.

Metcash is now preparing to launch Price Match II, the second version of the program it unveiled in 2014. The program cut prices to match them with those at Coles and Woolworths.

According to the Australian Financial Review, Metcash is looking to invest another $40 to $50 million into reducing grocery prices under the program. Metcash will be launching Price Match II by the middle of this year.

What now for Metcash?

UBS expects the supermarket sales to rise 3.2% this year and 3.7% next year, compared to 2.8% in 2016 in expectation of higher prices.

Competitors hiking up prices this year could mean that IGA’s Price Match II campaign pays off. Yet investors need to decide if Metcash’s strategy will be enough to lift sales, especially in the wake of cyclone Debbie, which will translate to higher prices in fresh food and narrower margins.

By Selva Freigedo

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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