Metcash’s (ASX.MTS) group sales increased 4% in the first 18 weeks of fiscal 2027, underpinned by growth in hardware and new supply contracts to petrol stations with tobacco. However, its costs are rising too and are weighing on near-term profits.

Why it matters: Group sales growth is tracking only slightly ahead of our prior forecast. In the core food segment, accounting for close to half of its earnings, sales momentum is picking up. New tobacco supply contracts are boosting convenience sales, but are less profitable and slightly margin dilutive.

  • Supermarket sales momentum is improving slightly in recent months, up 1% for the first 18 weeks. We estimate its IGA banner network is maintaining its market share of the in-store grocery channel, growing at low single digits.
  • However, it is losing share in the overall grocery market due to its relatively low online penetration in rapidly growing e-commerce. In hardware, Metcash is outperforming Bunnings, growing sales at 6% compared with Bunnings at 4%, and we expect margin improvement here to offset headwinds in food.

The bottom line: Our estimates are largely unchanged, and we maintain our fair value estimate of $3.80 for no-moat Metcash. Shares are undervalued. We believe the market is more concerned than we are about weak residential construction activity and the timing and extent of a margin recovery.

  • While the current trading environment is challenging, we forecast profits in hardware and liquor to improve as their respective markets recover cyclically. We expect group EBIT margins to rebound to 3.1% by fiscal 2028, from a trough of around 2.9% in fiscal 2027.
  • However, we expect independents to largely miss the grocery e-commerce boom. No-moat Coles and wide-moat Woolworths increased online supermarket sales by 26% and 19% in fiscal 2026, respectively, and we expect IGA to gradually lose market share over the next decade.

Metcash’s supermarket sales momentum improving slightly

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 about $3.7 billion in fiscal 2026. 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.

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