Metcash’s Franklins buy provides a golden opportunity

My dad was always clear that where there was change there was opportunity. Change is scary, but those who think through the changing situation, look at track records, look very, very clearly at the people involved, and ultimately trust their own intuition, can capitalise upon change to create significant opportunities.

There is a significant opportunity available to about 50 people over the coming months; some of these people currently work for Metcash, some own IGA stores, some work in IGA stores and others are going through their own change of job and/or country. A proportion will have just emigrated from South Africa or are about to.

With Andrew Reizer’s Metcash buying the 85 supermarkets in the Franklins chain from South African retailer Pick’n’Pay, the IGA brand becomes an even more dominant third player in the Australian grocery sector.

Pik’n’Pay is a good retailer; I’ve visited many of their stores in and around Cape Town and Stellenbosch in South Africa. However, the uniqueness of the Australian marketplace has meant that it couldn’t make money out of these 85 stores, and its accompanying high costs of warehousing.

So why would any right-minded business person wish to buy some ex-Franklins stores, which will be re-branded to IGA, when Franklins as a company wasn’t making money?

Firstly, because IGA/Metcash are a much better retailer in Australia. Secondly, because Franklins was trying to run its own warehousing operation with insufficient scale to make it pay; the stores were making some money, but the warehouse was making a large loss.

First point: the IGA/Metcash’s leadership team has effectively been together for a decade. They came in from South Africa to take over a broken retailer/distributor/cash and carry, and looked over the brink. It was touch and go whether they would make it. Real clarity of vision, and a phenomenal, some would say aggressive, implementation of that plan, has seen the group grow in revenue and profit for a decade.

Second point: the smaller Franklins warehousing structure will be closed down, and most of the approximate $500 million of products that were previously delivered to the 85 stores, many in NSW, will now pass through the Metcash warehousing. This will lower the distribution cost of the products and increase Metcash’s overall ability to lower buy prices from suppliers. Double win.

Back to the opportunity. Of the 85 Franklins grocery stores, 77 are owned by the company itself, the rest by owner operators. So most of these 77 company grocery stores will be re-branded to IGA and sold to independent retailers. This allows the IGA formula to be applied to these poor performing stores, and makes the purchase price for Metcash lower, thereby reducing the cost of the transaction.

If you have some money to back you, are starting a new life outside of a corporation or in Australia, then these stores are a golden opportunity.
If you’ve worked in retail, or held senior roles in sales and marketing in a manufacturer, you can buy into a solidly performing brand and company and make considerable amounts of money. The retail owner/operator/franchise model, when run well, makes lots of people wealthy.

Talk to a multi-franchise owner of a couple of Maccas restaurant outlets in Australia, a New World storeowner in New Zealand or an IGA store owner and they’ll tell you. Better still, visit their home or look in their garage and you’ll see it.

In his role as CEO of CROSSMARK, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, NZ, the US and Europe. His international career in sales and marketing has seen him responsible for business in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands. CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.