Supermarket battle heats up

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After opening its doors just four years ago in Australia, the giant American supermarket chain Costco Wholesale (COST) has announced its maiden Australian profit. With only three warehouse-style stores currently operating Down Under, Costco has managed to achieve sales of over $600 million.

The grocery market in Australia has undergone significant change in the last decade. The privately owned German grocer, Aldi, which entered the Aussie market in 2001 is estimated to have snared 5% of the market via its 300 stores. Meanwhile, Costco plans to soon double its store numbers. With the increasing competition from global chains, you can understand why Woolworths (WOW.AX) and Coles are battling so hard to retain their dominant positions. They are attacking the competition in a number of ways, including through advertising, lower pricing, and fuel discounting.

While the battle for market share means increased costs for grocers, the mixture of a warm summer, which helps to lift beverage, fruit, and salad item sales, and less deflationary food price pressure, could mean investors are in line for some good profit results. Coles supermarket owner Wesfarmers (WES.AX), recently released quarterly sales figures for December showing solid sales growth.. It will be interesting to see how Woolworths and IGA supplier and franchiser Metcash (MTS.AX) are performing when they release their next trading results.

Meanwhile, food producers such as Bega Cheese (BGA.AX), Goodman Fielder (GFF.AX) and Patties Foods (PFL.AX) may not have fared so well when they report next. The ever-increasing might of the major supermarkets and the battle for market share could leave suppliers bruised and should be of concern to investors in these stocks.

Foolish takeaway

Many investors are rightly attracted to the defensive nature of grocery retailers and the food and beverage sector. However, irrational pricing, which can occur during a battle for market share, can be very painful for investors. That’s why at The Motley Fool, we always consider the quality of management running a company, as management can play a big part in protecting shareholders from costly, ill-planned strategies.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur doesn’t own shares in any companies mentioned.

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