Amazon's competition could decimate the Woolworths Limited share price

The latest traffic data from Whole Foods in the US bodes poorly for our biggest supermarket operators. Here's why…

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Shareholders in our nation's largest supermarkets can't afford to be complacent about the threat Amazon.com poses if the latest data on the online shopping giant's latest acquisition, Whole Foods, is anything to go by.

Bloomberg reports that customer traffic surged by a quarter since Amazon.com bought Whole Foods and slashed prices at the organic and upmarket grocer.

The data was compiled by Foursquare Labs using location information in the first two days of Amazon.com's ownership of the grocery chain, compared with the same period in the prior week.

This tells me that traffic growth is probably stronger than the headline figures from Foursquare Labs, as the benefits from the price cuts implemented by Whole Foods' new owner have not fully kicked in.

Amazon.com bought Whole Foods for US$13.7 billion last month and has cut prices as much as 43% on a number of items. Amazon.com has deep pockets and is not afraid to spend to win market share. Turning a buck is not the priority here.

That is bad news for our incumbents Woolworths Limited (ASX: WOW), Coles supermarket owner Wesfarmers Ltd (ASX: WES) and Metcash Limited (ASX: MTS) as "irrational" competition will throw any sector into turmoil.

You only have to look at the fear created by TPG Telecom Ltd's (ASX: TPM) impending entry into the mobile market and the impact that has had on industry giant Telstra Corporation Ltd (ASX: TLS) to see what I mean.

It will be worse for supermarkets given the financial muscle, infrastructure, and expertise Amazon.com will bring to the market.

This is why investors should pay close attention to the success (or otherwise) of Amazon.com's Whole Foods strategy as it will provide a good indication of what to expect here.

What is perhaps just as alarming in my view is that Amazon.com is bringing premium products to the mass market when organic grocers were catering exclusively to the high-end market. That is a potential game changer that many investors have yet to fully appreciate – at least not if you are looking at today's share price movements.

Woolworths' share price only slipped 4 cents, or 0.2%, to $25.32 in early trade, while Metcash lost 0.4% to $2.77.

Wesfarmers is bucking the trend and is up 0.3% at $42.55 – perhaps because it has less to lose given it has a more diversified business.

If you feel uneasy about the outlook for the sector, you should click on the link below to find out what quality high-yielding stock the experts at the Motley Fool are recommending as a buy right now.

Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited. The Motley Fool Australia owns shares of TPG Telecom Limited and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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