Metcash seems to have sorted out its problematic South Australian operations by signing the head of an agreement for a long-term supply arrangement with Foodland Supermarket, the governing body for independent Foodland supermarket retailers in South Australia.
Metcash said this includes the proposed form of a long-term supply agreement whereby Foodland retailers will commit to being supplied from Metcash’s proposed new distribution centre in South Australia for a period of ten years.
The supply agreement is conditional on Metcash entering into an agreement for lease for the new distribution centre by no later than December 21 this year2018.
The agreement does not include Drakes Foodland supermarkets in South Australia (its biggest customer in the state) and its $270 million a year of sales, the loss of which forced Metcash to write down the value of its food business by a total of $352 million on June 6 this year.
The shares though eased by 2.5% to $2.75.
Metcash did not say whether it had replaced the lost sales from Drakes decision in South Australia or what volumes would now be processed through the new centre.
Metcash said the latest agreement means long-term supply agreements have now been signed with Foodland multiple store owners such as the Romeo’s and the Chapley’s, as well as the remaining members of the Foodland Supermarket Board who are owners of Foodland supermarkets in South Australia.
"Together with other existing fixed term supply agreements with Foodland and IGA supermarket retailers in South Australia, Metcash now has long-term supply agreements in place with retailers representing the majority of its Supermarket sales in that state (excluding sales to Drakes Foodland supermarkets),” the company said yesterday.
Metcash said on May 28 that it has an agreement with Drakes Supermarkets in South Australia to supply its stores through to June next year, and said in may it had not been advised of any intention to change the current supply arrangement with Drakes’ Queensland supermarkets.
Metcash said it and Foodland Supermarket will now progress the execution of the 10-year supply agreement with the remaining Foodland retailers in South Australia, who are predominantly single store owners.
The June 6 impairment announcement said the impairment review "has taken into account the information contained in Metcash’s ASX release on 28 May 2018 concerning Drakes Supermarkets in South Australia, as well as weakness in the Western Australian economy and the ongoing intensity of competition in the sector.”
"The impairment charge comprises $318 million of goodwill and other intangibles, and $34 million of other net assets in the Supermarkets & Convenience pillar. These impairments are non-cash in nature, have no impact on the company’s debt facilities, compliance with banking covenants, or its ability to undertake capital management initiatives.The total impairment charge of $352 million will be disclosed separately as a significant item in the company’s FY18 financial statements.” Metcash explained at the time.