Sigma sues over switch

The revelation sparked a rout in Sigma shares, which plunged 30.8 per cent yesterday, wiping almost $400 million from the group’s market value.

In a statement to the stockmarket, Sigma said My Chemist Retail – which owns the My Chemist and Chemist Warehouse chains – was not entitled to use another wholesaler for those products under their existing contract.

It also warned that if My Chemist and Chemist Warehouse 2018 COMMONWEALTH GAMES HOST CITY shopped elsewhere, it could strip $5 million to $10 million from Sigma’s full-year earnings on an underlying basis, which strips out one-off items.

Sigma said it was “confident of its position”, but warned the loss of such a marquee client – on top of a slow start to its financial year – could weigh heavily on its results.

Underlying earnings before interest and tax could fall up to 5 per cent from last year’s $100.2 million result, the group said. Melbourne-based Sigma said its offers of mediation were rejected by My Chemist Retail.

“As a satisfactory resolution has not been reached, Sigma has now decided to commence legal proceedings against My Chemist/Chemist Warehouse Group,” it said.

Sigma, whose supply agreement with My Chemist runs until June 2019, said it “values the relationship” with the retailer. One of the retail pharmacy industry’s biggest players, My Chemist Retail has grown from a band of independent pharmacies in the 1970s to more than 300 stores and 10,000 staff.

Founded by Melbourne’s Gance family, the group relies on a big-box aggressive discounting model and has successfully branched out into perfumes and cosmetics.

It commands more than 23 per cent of the $16 billion industry, while Sigma controls about 19 per cent via its chains.

Morningstar analyst Chris Kallos said while the development was a surprise, My Chemist represented a “key customer risk” for Sigma given its substantial industry clout.

“It (the legal action) has come out of the blue but it highlights the shift in the bargaining powers of different groups,” Mr Kallos said.

My Chemist was likely seeking to acquire products from either Priceline owner Australian Pharmaceutical Industries or Symbion owner Ebos Group, he said.