Woolworths Limited (ASX: WOW) shares have fallen from nearly $38 in 2014 to just $23 today. It's been a tough run for Australia's largest supermarket operator.
Most recently the company flagged a half-year loss of $972.7 following a wave of impairment charges related to inventory and store closures, primarily a result of its Masters Home Improvement business.
But since its inception, Masters was a loss-making business and never a large contributor to group sales. In fact, the primary revenue and profit generator of Woolworths is its Australian, Food, Liquor and Petrol business, which houses the important Woolworths Supermarkets and Dan Murphy's businesses.
The supermarkets business is under pressure.
Competition is mounting from a resurgent Coles, owned by Wesfarmers Ltd (ASX: WES), and foreign giants such as Aldi and – to a lesser extent – Costco.
Indeed, Woolworths may have complacently chosen to grow profits and dividends for shareholders at the expense of consumers, who now perceive it as offering a second-rate service.
The problem is that retail is a tough business, and consumers don't forget easily. As the saying goes, a happy customer tells three people but an unhappy customer tells 10!
With its Big W business also being challenged by the likes of Kmart and Target, the company isn't offering many green shoots. Especially with — arguably — Woolworths' top growth prospect (Home Improvement) due to be sold-off there doesn't appear to be much investor support for its share price in the short term.
Unfortunately, the reality is the grocery space is more competitive. And by choosing to corrupt the brand power of reputable goods (think tinned foods, cereals and more) the consumer is no longer compelled to pay premium prices at Australia's biggest supermarket. They can instead go to another – cheaper – outlet for an equivalent product. An all-out price war is very likely.
Foolish takeaway
Woolworths is a reputable business which in recent years has had extreme difficulty dealing with changing industry conditions. Therefore, for long-term investors, there appears little incentive to rush out and buy the stock. In my opinion, investors could consider waiting on the sideline until the dust settles.
