Supermarket wholesaler Metcash's move to lower food and grocery prices is paying off.
The group, which supplies IGA, Foodland and Foodworks supermarkets, says its food and grocery sales rose 0.7 per cent to $4.54 billion in the first half of fiscal 2016.
Like-for-like sales in IGA supermarkets rose 0.6 per cent in a sign customers are responding well to Metcash's campaign to match the major supermarkets on price, chief executive Ian Morrice said.
"It's encouraging progress and reflects the impact of price match," he told analysts on Monday.
"It's important to look at the health of the retailer and the IGA network and despite the competitive environment being intense, they continue to lift sales in the half."
Despite a strong slide in underlying earnings, shares in Metcash have risen substantially following the results.
Morningstar analyst Daniel Mueller said the half year results were not as bad as the market had expected.
"There is probably a bit of short covering but, I think the sales momentum is better than what the market had expected which is why Metcash's shares have rallied," he said.
"In the longer term, the headwinds are very much there with Woolworths investing $500 million in price and Aldi rolling out into South Australia and West Australia."
Metcash's investment into lowering prices is slicing into the group's profit margins, offsetting gains from its liquor and hardware businesses.
The group's underlying earnings before interest and tax from continuing operations dropped to $133.7 million in the six months to October 31, down from $153.2 million a year ago.
Underlying net profit also fell 6.1 per cent to $86.9 million from $92.5 million.
The fall was driven by a 23 per cent slide in food and grocery earnings.
The group's liquor division, which includes the Bottle-O and Cellarbrations, lifted earnings by four per cent to $25.9 million. And its hardware division, which includes Mitre 10, lifted earnings 22.1 per cent to $11.6 million.
Mr Morrice said in addition to the price match campaign and store refurbishments, Metcash will now also find $100 million is cost savings by fiscal 2019.
He said the cost reductions will come from simplifying and improving the efficiency of the group's operations, including the supply chain and transport.
Shares in Metcash jumped 12 per cent, or 16.0 cents, to $1.48.
METCASH ENJOYS PROFIT RISE
* Revenue up 1.4pct to $6.6b
* Net profit up 20pct to $122m
* Interim dividend nil, down from 6.5 cents a share
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