Pick n Pay’s Australian exit helps Metcash play catch up

Australian grocer Metcash has agreed to acquire the 85-strong Franklins supermarket chain from South Africa-based Pick n Pay. The deal marks a complete exit by Pick n Pay from its only non-African operating market.

Australia already has one of the most concentrated grocery retail markets in the world. It is dominated by two giants: Woolworths and the Wesfarmers-owned Coles Group, which together control more than 60% of the market. Metcash trails some way behind in third place, but this underdog position may be proving useful to Metcash as it plans for growth.

The Australian Competition and Consumer Commission has clamped down on Woolworths and Coles, and particularly on their desire for expansion by acquisition, leaving Metcash free to snap up the Franklins chain. In recent years Metcash has acquired large stakes in various distributors and a number of retailers, including hardware chain Mitre 10 in March this year.

Metcash has experience of turning around underperforming stores in Australia. One such is Action, which it purchased from Foodland Associated Limited.

The Franklins stores are all located in New South Wales, Australia’s most populous state and also home to Sydney - an area where Metcash has not previously had a significant presence. Following the acquisition - which is expected to be formally completed at the end of September after approval by the Australian competition authorities - Metcash is planning to sell the stores on to Independent Grocers Alliance (IGA) retailers, which it will supply as a wholesaler. The 85 stores are expected to bring in more than Aus$500m (£290m) a year.

The deal doesn’t come entirely as a surprise. Rumours have been circulating for years that Pick n Pay would dispose of its struggling chain. Despite embarking on a refurbishment campaign, Pick n Pay found it difficult to stem losses in Australia right up until the second half of 2008, when Franklins turned narrowly profitable, remaining so in 2009.

In hindsight, Pick n Pay should have given up on Australia a long time ago in order to focus on its continental African activities.

The acquisition is unlikely to trouble Woolworths and Coles too much as Metcash will still lag behind the big two. However, the move sees yet another sizeable player leaving the market and limits the room to expand in the grocery sector even further. Moving into non-food, such as home improvement, now seems the next step for growth.

Robert Gregory is research director of Planet Retail.