Metcash is in negotiations with one of its biggest customers, convenience chain 7-Eleven, to salvage long-term supply contracts, just weeks after losing its $270 million a year agreement with Drakes Supermarkets.

7-Eleven, which has 700 stores around Australia and annual sales of more than $3.4 billion, is changing its supply chain to support the company’s growth and focus on fresh food, and has put contracts for the supply of food and groceries up for tender.

As a result of the first tender, 7-Eleven decided to source the majority of the products for its eastern seaboard stores directly from suppliers. As a result, 7-Eleven said its current contract with Metcash will expire in August 2020.

7-Eleven is seeking tenders for the balance of the products it needs for eastern seaboard stores. Metcash is participating in the request for proposal and is also in discussions to supply 7-Eleven’s stores in Western Australia.

A Metcash spokesman confirmed on Wednesday that negotiations were still underway.

“Metcash is in discussion with 7-Eleven with regard to retaining the volumes for the products we currently supply,” the spokesman said.

“We are aware that 7-Eleven is changing its supply model which will include the daily supply of fresh products to their stores. Metcash is not currently, nor will it be, the supplier of fresh items to 7-Eleven.”

Metcash’s contract with 7-Eleven is estimated to be worth more than $350 million in annual sales, larger than the $270 million a year Drakes supply contract.

However, the margin on sales is lower so the loss of the contract will have less impact on Metcash’s earnings. Citigroup analyst Bryan Raymond has estimated the contract could cost Metcash about $14 million in lost earnings, while the loss of the Drakes contract is expected to crimp earnings by about $16 million.

Metcash has been supplying 7-Eleven since 2005, when the convenience store chain had about 350 franchised stores. The initial contract, worth about $200 million a year, was extended in 2011 when 7-Eleven bought about 230 Mobil outlets, which boosted the agreement by about $140 million a year.

7-Eleven, which is owned by the Withers and Barlow families, has grown significantly in recent years and now has the scale to negotiate more competitive trading terms with food and grocery suppliers.

According to the most recent accounts filed with ASIC, 7-Eleven’s sales rose 21 per cent to $3.4 billion in the 12 months ending June 2018, boosted by new store openings and strong same-store sales growth in merchandise and fuel.

“7-Eleven is growing strongly, and while our industry leading supply chain has served us well, it needs to evolve to enable our future growth,” said chief executive Angus McKay.

“Our new supply chain eco-system will enable us to expand to meet our projected volumes and store network growth, and will reduce complexity for our stores,” he said.

Metcash is under growing pressure to reduce prices to stop independent retail customers and convenience chains from sourcing directly from suppliers or moving to self-supply.

As reported in The Australian Financial Review last month, Metcash’s second-largest independent retail customer, Drakes Supermarkets, plans to go into competition with Metcash by supplying other independent supermarkets once it has bedded down a $125 million state-of-the-art automated distribution centre it opened this month in Adelaide.

Metcash has attempted to stop further independent retailers from leaving by signing long-term (10 year and five year) supply contracts and investing in stores, distribution centres, range and prices.

Extracted from AFR