Metcash's (ASX:MTS) Returns Have Hit A Wall: Time for a Turnaround

As an investor, it's always disheartening to see a company's returns stagnate or decline. Metcash Limited (ASX:MTS), a wholesale distribution and marketing company in Australia, has been facing such a situation. The company's share price has been on a downward trajectory, and its earnings growth outlook lacks momentum. In this article, we'll explore the factors contributing to Metcash's recent performance decline, its current valuation compared to historical averages and industry peers, and strategic initiatives the company can implement to reignite growth and improve returns.

Factors contributing to Metcash's recent performance decline

Metcash's recent performance decline can be attributed to several specific factors:

1. Increasing use of online ordering/e-commerce: Both Woolworths and Coles have a better online offering, which is increasingly eroding IGA's value proposition (Goldman Sachs, 2024).
2. Bunnings' dominance in hardware: Bunnings is winning in the hardware sector, and this trend is unlikely to change due to its size and range (Goldman Sachs, 2024).
3. Acquisition-led growth strategy: Metcash's acquisition-led growth strategy has reduced the return on invested capital (Goldman Sachs, 2024).
4. Intense competition in the retail landscape: Metcash faces intense competition from major supermarkets like Woolworths and Coles, as well as the growing threat from discount rival Aldi (Metcash, 2019).
5. Slowdown in construction activity: The slowdown in construction activity has negatively impacted Metcash's hardware sales (Metcash, 2019).
6. Food price deflation and tougher economic conditions: Metcash has faced challenges in the supermarket sector due to food price deflation and tougher economic conditions, particularly in WA (Metcash, 2019).
7. Disappointing financial results: Metcash has reported a loss of $384 million in its 2015 Full Year Results, down from a profit of $169 million in FY 2014, which has contributed to its performance decline (Metcash, 2015).

Metcash's current valuation compared to historical averages and industry peers

Metcash's current valuation is relatively low compared to its historical averages and industry peers. As of 2025, Metcash's enterprise value is 0.31 times its sales, which is significantly lower than its historical average. Additionally, Metcash is one of the best yield companies with high dividend expectations, indicating that it is undervalued compared to its peers in the consumer non-cyclicals sector.

Strategic initiatives to reignite growth and improve returns

To reignite growth and improve returns, Metcash can implement the following strategic initiatives:

1. Cost-cutting and efficiency improvements: Metcash can focus on reducing costs and improving operational efficiency to enhance profit margins. The company has already shown progress in this area, with EBIT margins increasing from 2.1% in FY2017 to 2.9% in FY2022. By continuing to optimize costs and streamline operations, Metcash can improve its financial performance.
2. Digital transformation: As a wholesaler, Metcash can invest in digital technologies to enhance its supply chain, inventory management, and customer engagement. This can help the company better serve its independent retail partners and improve overall efficiency. For example, Metcash can implement advanced analytics, automation, and AI to optimize its operations and provide better insights to its customers.
3. Expansion and new business ventures: Metcash can explore new business opportunities and expand its reach through acquisitions, partnerships, or organic growth. For instance, the company's acquisition of the Greengrocer Supplies business in FY2020 expanded its presence in the independent grocery market. By pursuing strategic acquisitions and partnerships, Metcash can diversify its revenue streams and tap into new growth opportunities.
4. Diversification: Metcash can diversify its business by entering new markets or product categories. In FY2021, the company entered into a partnership with Medlab Clinical to develop and distribute cannabis-based products, demonstrating its willingness to explore new opportunities. By diversifying its business, Metcash can reduce its reliance on traditional wholesale distribution and tap into new revenue streams.
5. Improving the IGA brand and retail operations: Metcash can invest in revitalizing its IGA brand and improving the performance of its retail chains. This can involve delivering channel clarity, aligning shopper experience with format, and being more competitive on everyday pricing. By focusing on these aspects, Metcash can enhance the appeal of its retail brands and drive growth in its retail operations.
6. Enhancing private label offerings: Metcash can grow its private label offerings to better compete with discount rivals like Aldi. By expanding its private label range and improving the quality and variety of its products, Metcash can differentiate itself from competitors and attract price-sensitive consumers.

In conclusion, Metcash Limited has faced several challenges in recent years, leading to a decline in its share price and earnings growth outlook. However, the company's current valuation is relatively low compared to its historical averages and industry peers, indicating that it may be an attractive investment opportunity. By implementing strategic initiatives focused on cost-cutting, digital transformation, expansion, diversification, and improving its retail operations, Metcash can reignite growth and improve returns for its shareholders. As an investor, it's essential to stay informed about the company's progress and adapt your investment strategy accordingly.