The supermarket war is intensifying…
…none are being spared.
The above chart shows the share price of Wesfarmers Ltd (ASX: WES) – the owner of Coles, Bunnings Warehouse, Kmart and more – compared to its number one rival, Woolworths Limited (ASX: WOW), since the beginning of 2014.
The Coles and Woolies price war, coupled with ongoing growth of Aldi, Costco and the potential arrival of Lidl; has already wreaked havoc with the share price of Foodworks and IGA owner, Metcash Limited (ASX: MTS) whose share price is down 68%.
But fears are now growing the two supermarket giants will enter an all-out price war.
Indeed, Woolies shares have been punished by the market on the back of two profit downgrades, a CEO resignation and ongoing losses from its Masters Home Improvement business.
Upon recently announcing a 12.5% fall in profit for its 2015 financial year, Woolies flagged lower profit margins in the near future. That comes despite the business announcing a significant cost-cutting strategy.
Therefore, its profit margin must now narrow as a result of lower prices on products. That in turn could mean another profit reduction is on its way.
Buy, Hold or Sell
Along with the departure of CEO Grant O'Brien, falls to Woolworths' profit margins could further pressure the share price of Australia's largest supermarket operator. Who knows, it may even go close to hitting $20 per share.
In my opinion, however, if it did drop towards $20 savvy investors should strongly consider running the ruler over the business.
