Drakes throws a $270 million spanner into Metcash’s plans

Metcash-buildingDrakes Supermarkets has put a spanner in grocery wholesaler Metcash’s plan to bolster fulfilment in South Australia, refusing to agree to a deal that would see its supermarkets supplied by a new purpose-built distribution centre.

The decision signals further trouble in Metcash’s relationship with Drakes and throws a cloud over its supply arrangement with the chain in South Australia, which will expire in June next year.

Metcash will lose around $270 million from the loss of Drakes as a customer in South Australia and could lose more if the plug is pulled on its supply deal in Queensland.

Metcash said in a market statement on Monday morning that it was “well advanced” in its preparations for the construction of a new purpose-built DC in South Australia and had received support from other major clients in the state.

“Disappointingly, Drakes has advised that it will not be making a commitment to have its supermarkets in South Australia supplied from Metcash’s proposed new DC,” Metcash said.

Drakes, which has more than 50 stores in South Australia and Queensland, has yet to advise Metcash of any changes to its supply agreement in QLD.

The independent supermarket chain dropped Metcash’s IGA banner from its Queensland stores late last year, and owner Roger Drake has reportedly been considering a new supply deal for some time.

Metcash said on Monday that it was still assessing the implications of the advice it had received from Drakes, which it signalled could impact the value of its business.

“Metcash is assessing the implications of this advice from Drakes Supermarkets, which will be taken into account in the company’s FY18 year-end review of the carrying value of its goodwill and other assets,” Metcash said.

Metcash also delivered a trading update on Monday which dashed any hopes that its supermarkets and convenience division would reverse FY17 declines.

Metcash said its supermarkets and convenience division is expected to report a 1.2 per cent decline in total sales in FY18, while its wholesale business (excluding tobacco) is slated to fall 3.6 per cent.

Wholesale sales declined 4.3 per cent in FY17, while its supermarkets and convenience business posted a 0.6 per cent increase in sales to $9.1 billion.

FY19 earnings for the supermarket and convenience arm are not expected to be impacted by Drakes’ decision.

Metcash said it expects that the new DC will enable “significant operational efficiencies” and provide its partners with access to a wider range of products.

Metcash shares declined 10 per cent to $3.30 in early Monday trading.

UPDATED – 13:24 AEST

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