Overhaul to take Metcash upmarket

Metcash, taken private in a management buyout in 2004 that left it severely undercapitalised, would give debt holders Old Mutual, Nedbank and Investec 86% of equity in exchange for clearing outstanding debts and raise a further R300m in a rights issue to the same banks, CEO Peter Dodson said Tuesday.

Conversions and rebranding

Mirroring a strategy Dodson executed at his former cash-and-carry business, ICC Group, Metcash will over the next 18 months convert about 50 of its 138 corporate-owned Cash 'n Carry and Trade Centre stores into a hybrid model serving wholesale and retailer customers, with the addition of bakeries, meat counters and fresh produce.

Stores in locations with insufficient foot traffic to sustain a hybrid model, will move closer to taxi ranks and train stations. All stores, including the 243 Family and 7/11 franchises, will be rebranded as Metro, with variants such as Express.

Tapping into retail market

"Now the store network in SA is becoming more widespread. As a result, the straight wholesale or cash-and-carry business, if it doesn't start catering to the retail consumer, is going to have a smaller and smaller market," Dodson said.

"We need to get into the retail market more quickly. We can penetrate that market quite well."

As consumers in Africa become wealthier, retailers have to move upmarket. The number of African households with an income above $5000, at which point people spend roughly half their income on food, was likely to surge from 59-million, or 35%, in 2000, to 128-million, or 52%, by 2020, a McKinsey Global Institute report said last week.

'First true discounter'

"He's setting himself up as the first true discounter, in a Wal-Mart type of environment, with everyday low prices on everything," Absa analyst Chris Gilmour said. "This could lend quite an aggressive new dynamic to the whole equation here."

Metcash's outlets will be tidied up. "I don't offer porcelain tiles on the floor ... but I will make it just as spotlessly clean. I will present foodstuffs as well as anybody else in market," Dodson said.

Metcash will convert its 12 Trade Store warehouses, with an area of about 15000m², into hypermarket style shopping centres.

The Cash 'n Carry area will be halved and tenants introduced. Metcash already has an agreement with Dis-Chem in one location.

Metcash hopes to grow its 6% of a retail market it values at about R250bn in the next three years.

"We think we will get at least 35% growth in sales in less than 50% of the space," he said.

Competition

Setting up in middle-class areas such as Boksburg already served by established operators would pitch it squarely against established upmarket rivals such as Checkers and Pick n Pay, Dodson said.

"I am able to operate my business at much lower margins. The supermarket chains in SA operate on 21% 24% total margin, including confidential discounts. My margins, including everything, operate at 14%." A move to centralised distribution will cut warehousing and distribution costs to 4% of sales from 10%.

Source: Business Day