In 2013 and 2014 I wrote extensively about my view that Metcash Limited (ASX: MTS) had a limited lifespan, or at least would cease to be competitive, in the face of actions that both Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES) – were taking.
I noted at the time that the entry of Aldi and Costo could also compound these problems, leading to Metcash's IGA stores becoming too uncompetitive. Note that at the time they were already uncompetitive but their convenience, especially in SA and WA proved enough to maintain sales.
Did you pick it?
It seems obvious enough in hindsight but major analyst groups were still forecasting EPS and DPS growth through early 2015… before the extent of the group's woes were revealed.
Who's Next?
Our job as investors is to buy companies that we believe can control their market or their product over the long term.
While Woolworths and Coles have benefitted from Metcash's decline, and certainly Aldi and Costco have grabbed small, but meaningful market share, there's a challenge on the horizon that I believe we're underestimating.
Decline of the grocery store
I read on the weekend that Amazon makes $5.4 billion per year in revenue from its Amazon Prime subscribers. These customers pay $99 per year for unlimited 1-day home delivery.
I also read that Amazon, which is actually in the business of supply chain management more than the sale of traditionally non-perishable goods, is expanding its product offering in the UK to include farm-fresh groceries.
Amazon is banking on its ability to get customers their produce faster and cheaper than them going to the shops!
Woolworths and Coles Already Deliver and Amazon is barely in Australia
The fact that Woolworths and Coles deliver isn't even a consideration. Amazon's Prime subscription has a track record. That track record shows that if a customer is a Prime member (which many Australians will jump at when given the chance), they want to get as much value out of that $99 per year as possible.
What does this mean for investors?
It means that all those Australians that already order from Amazon will be incentivised to order from Amazon's grocery store because they've essentially pre-paid the delivery! Amazon knows this. They also know that if they can capture the grocery market they will have the market cornered and it will become THE one-stop shop for PURCHASES. Of anything.
What should we do?
Amazon Prime isn't even in Australia yet so I guess there's no immediate rush to take drastic action, but I'm not making any purchases of companies that rely on capital-intensive physical storefronts.
