ge. Reitzer made some major acquisitions in his 16 year tenure as CEO including the Foodland and Franklins supermarket chains, a brace of automotive and food service businesses, the formidable Foodland Associated in Western Australia and Mitre 10 Hardware. What eluded Reitzer were the Sigma Pharmaceutical Company and the Home Timber and Hardware group, which remained with the Danks wholesale system when Woolworths snapped it up as a platform for the ill-fated Masters Home Improvement. Morrice, a former CEO of the New Zealand discount chain, Warehouse Group, was appointed as a non-executive director of Metcash in June 2012 and stepped into the CEO role the following year when Reitzer retired. Morrice didn’t enjoy the rollicking expansion of the Reitzer years and, in fact, was forced to unpick some of his predecessor’s decisions, most notably an exit from the automotive businesses that had been expected to provide a new revenue and earnings stream drawing on Metcash’s logistics capability. The grocery wholesaler was forced to write down goodwill and restructure its operations, incurring substantial losses and suffering an undignified fall in its market value as investors marked down its share price. Announcing his retirement as group CEO following the completion of a transition to his successor in early 2018, Morrice is handing over a business with significant challenges ahead but a much sounder financial base notwithstanding a potentially weak outlook for earnings growth. Morrice is gifting a strong balance sheet and operating cashflows, the number two position in the retail hardware market with the now combined Mitre 10 and Home Timber and Hardware businesses and net debt of just $80.8 million, down from $767 million three years ago. He also hands over a more battle-hardened and smarter food business, the core Metcash business that is caught in the crossfire of the Woolworths and Coles fight for the hearts and minds of shoppers, as well as the expansion of Aldi and Costco. A new leader Taking up the challenges ahead of Metcash is Jeff Adams, a former supermarkets executive with Tesco in the United Kingdom. Of particular interest in the Adams appointment is the fact that all three major Australian supermarket businesses are now headed by former UK executives. Claire Peters, who was Tesco’s chief operating officer in Thailand, has started this month as managing director of Woolworths, a role the company’s CEO, Brad Banducci has filled. John Durkan, Coles managing director, was recruited from the British Sainsbury’s chain. In appointing Adams, Metcash overlooked another internal executive in Steven Cain, CEO supermarkets and convenience, who originally ventured to Australia as managing director for Coles after a senior role in the UK with ASDA. Adams comes well-equipped for the challenges ahead following executive roles with Tesco, included postings in Turkey, Thailand and the United States, as well as director of operations for Tesco Express in the UK, Metcash. Adams left Tesco in 2015 and has been working as a business consultant. He will join Metcash in September and work with Morrice on the management transition that will see him formerly in the CEO chair in December. Announcing the new CEO, Metcash chairman, Rob Murray, said Adams has deep international experience, including a strong track record in difficult retail market conditions, which made him a standout candidate for the role. Adams has independent retailing in the family genes and supports the strategic plan crafted by Morrice’s management team after the financial mea culpa of the 2015 financial year. Adams has acknowledged the sound financial position of the wholesaler and is keen to further develop the initiatives implemented in the past two years to stabilise the business and position it for future growth. A taste for growth While Metcash has consolidated its position and has been boosted by the acquisition of the 368 Home Timber & Hardware and 67 True Value Hardware stores, the critical food business is struggling for growth. Metcash recently reported its food sales increased just 0.6 per cent to $9.18 billion in FY17, but revenues would actually have declined by 1.3 per cent if the company had not had the benefit of a 53rd week in FY17 compared to last year. Overall sales for FY17 were up 5.4 per cent to $14.12 billion, boosted by $253.5 million for that extra week’s trading and $521.5 million in part year sales from the Home Timber & Hardware business. The food division’s earnings before interest and tax were barely ahead of last year, with a 0.1 percent lift to $180 million, while the expanded hardware division posted a 48 per cent EBIT increase to $48.5 million and liquor a 7.9 per cent EBIT lift to $67 million. Metcash’s after tax result was $171.9 million, down 21 per cent on FY16, albeit Morrice told investors the company achieved an underlying profit after tax of $194.8 million, up 9.3 per cent on the $178.3 million last year, if non-recurring items such as the Home Timber & Hardware acquisition costs were considered. The challenge for Metcash and Adams, however, is in generating earnings growth in the food business, which effectively accounts for two thirds of the wholesaler’s business. Morrice told investors in June the food business had encountered intense competition as Coles and Woolworths cut prices and Aldi expanded into South Australia and into Western Australia, where trading conditions were already difficult. To ensure independent supermarkets could compete against the rival chains, Metcash has been forced to invest more heavily in price reductions itself at a cost to the bottom line. To offset the investment in price, Metcash has been implementing cost savings initiatives across the business and, while not in the food business, the company is expecting a $15 million to $18 million boost from synergy benefits derived from the expanded hardware operations, a sum proposed to be shared with retailers. Metcash has been able to bolster margins in its independent supermarkets after upgraded store operating programs. Metcash added 32 new stores in FY17, although the net gain was only five stores due to closures. The company expects to add another 35 new supermarkets in the current financial year along with upgrades to a significant number of stores. The newer stores are invariably posting much higher sales than the stores that are closing because many are being opened by experienced multi-store owners and are delivering what Morrice calls “differentiated new formats”. The markedly varied sizes and configuration of independent stores is arguably a positive given that the IGA supermarkets, Mitre 10 and Home Timber and Hardware stores have a point of difference to cookie cutter chain stores. However, they also create extra costs for Metcash and store owners as they require different layouts and shelf plans and sometimes quite significant variation in product ranging. Morrice noted like-for-like sales across the IGA store network increased 0.1 per cent in the latest financial year, resulting in continuous sales growth over the past three financial years, despite significant external challenges. The problem for Metcash and Adams is that the external challenges are not going to disappear in the future and, in fact, are likely to become greater with Aldi and Costco continuing to expand and the possibility of another German discounter, Lidl, entering the Australian market. Amazon has been tipped as a potential new contender in food in the future, but Morrice doesn’t believe independent retailers should lose sleep over that possibility. While food will be the priority for Adams, given the proportion of the business it represents, the new CEO will also need to draw on his experience to address the company’s struggling convenience store business. Convenience sales for Metcash declined 2.7 percent to $1.53 billion in FY17 and were actually 4.5 per cent lower if the extra 53rd trading week was excluded. Adams will have a little more cheer in the performance of Metcash’s $3.3 billion liquor business and the hardware business, which in a full 12-month period should generate sales of around $2 billion. However, sustainable growth will not be an easy task for Metcash against Bunnings, the market leader in hardware, and the strong Woolworths and improving Coles liquor divisions. Morrice can be pleased with his work, consolidating Metcash and making some tough decisions to ensure debt is not a problem or a constraint on operational initiatives to pursue growth. Adams is taking over at a company with a reasonably clean bill of health financially but one that could face an uphill battle to maintain market share and sales and earnings momentum in the future.