Grocers supplied by Metcash (ASX: MTS) are underperforming the two major chains, which are seeing much stronger growth online than in-store. Metcash’s independents have limited exposure to this fast-growing channel. On the flip side, Metcash’s sales are over-exposed to the shrinking legal tobacco market.

Why it matters: We downgrade our estimates for Metcash’s supermarket sales, which account for about a third of its EBIT. We now expect Metcash’s supermarket customers, most notably the IGA banner group, to gradually lose market share over the next decade.

  • While we expect independent grocers to maintain their share of the offline channel, we think they are unlikely to close the gap to the majors in online sales. Online penetration at Woolworths and Coles supermarkets is in the mid-teens, while we estimate the IGA network’s is low single digits.
  • Despite Metcash’s aspirational target for IGAs to sell 5% to 10% online, we expect independents to largely miss out on the boom in grocery e-commerce. The majors’ scale, which independents can’t match, is key to profitably offering and fulfilling a broad range of groceries online.

The bottom line: We lower our fair value for no-moat Metcash by 7% to $3.80 per share, largely due to less supermarket sales. We also trim liquor sales estimates, in line with our revised industry outlook. Drinking behaviors are changing with younger people moderating their intake.

  • In hardware, we expect Metcash to grow in line with the market. Independents face stiff competition from Bunnings for DIY customers, who account for about a third of Metcash’s sales. However, in trade it has a strong footing, bolstered by its trade-focused Total Tools network.
  • Shares look cheap. We believe the market is concerned about the timing and extent of a recovery in margins. We forecast hardware will improve with a cyclical recovery in construction, underpinning a rebound in group EBIT margins to 3.1% by fiscal 2028, from a cyclical low of 2.8% in fiscal 2026.

Independent grocers structurally losing share to majors

Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From the small corner shop to the local independent supermarket, Metcash acts as a co-operative, funneling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the grocery industry, with around 10% market share via its IGA banner network, while Woolworths and Coles combined account for about two thirds of Australian food retailing, and Aldi also commands a comparable market share of around 10%.

The vertically integrated supermarkets Coles, Woolworths, and Aldi own and operate their own distribution infrastructure that is not accessible to independent retailers. The fierce competitive tension between these groups, which capture about 75% of supermarket sales, means independent retailers need to differentiate to remain competitive. Independent retailers are commonly run by locals catering to the local demands of a community, with stores tailored to match specific demographic tastes.

Some independents have been protected by their exposure to smaller catchment areas which are too small to support a big box supermarket. However, we expect the rapidly growing e-commerce capabilities of Woolworths and Coles to allow them to effectively service smaller catchment areas and gradually erode the independents’ advantage of a physical store presence.

Australian hardware and home improvement records about AUD 80 billion in annualized sales. Bunnings, which is owned by Wesfarmers, holds the largest market share at around 20% of sales. Metcash’s revenue in hardware, including charge-through sales, was over 3 billion in fiscal 2025. About 65% of the hardware customer base consists of tradespeople, with whom independents have strong relationships and compete effectively with market leader Bunnings. The acquisition of a majority stake in Total Tools in 2020 further strengthened Metcash’s position in the trade segment of the hardware market.

Bulls say

  • As the predominant supplier of packaged groceries to independent retailers, Metcash has a quasi-monopolistic market position and can maintain returns on capital.
  • Metcash’s acquisitive expansion of its hardware business has diversified the company’s earnings and cash flows away from the lower profit margins generated by its food and liquor businesses.
  • Strategic and cost-cutting initiatives undertaken by Metcash have been successful. Further, independent supermarket operators are investing in stores renewals and upgrades.

Bears say

  • Intense competition between Coles, Woolworths, and Aldi is likely reduce sales volumes of the independent channel and could make it increasingly hard for Metcash to support its customers in matching shelf prices of the majors.
  • Metcash’s independent retail customers effectively compete through product differentiation, convenience, and service. These points of difference are likely to become marginalized during economic downturns.
  • Metcash is at market maturity in wholesale grocery in Australia and there is little opportunity to grow the business domestically.