The Wesfarmers Ltd (ASX: WES) share price slumped over 4% during the course of the week and is down a hefty 9% since a month ago.
Whilst a 9% drop in share price over a month would be considered normal for "growth" blue-chips like BHP Billiton Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL) and Rio Tinto Limited (ASX: RIO), the fact that Wesfarmers – a consumer staples business – has slumped raises serious eyebrows. This is especially the case when fellow competitor Woolworths Limited's (ASX: WOW) share price has paced the S&P/ASX 200 Index (ASX: XJO) over the same period.
In my view, this underperformance warrants closer inspection.
Wesfarmers' businesses
Let me make one thing clear – unlike Woolworths (which is predominantly dominated by its flagship Woolworths supermarket business) Wesfarmers is an industrial, retail and financial services conglomerate.
Whilst most will associate Wesfarmers as the owner of Coles supermarkets, the Perth-based conglomerate also owns consumer staple brands Vintage Cellars, FirstChoice Liquor, Bi-Lo and Liquorland. In addition, its retail division houses the mighty Bunnings Warehouse and Officeworks businesses alongside Target and discount department store leader Kmart.
Finally, it's industrial division plays host to a number of chemical, resources and mining business like Wesfarmers Curragh, Wesfarmers Chemicals and Kleenheat (to name a few).
The point of this is that Wesfarmers isn't just a supermarket giant. It therefore has more to lose from Amazon's arrival when compared to Woolworths.
Diversification
Although the benefits of diversification means any single aspect of the group should be insulated from the other, unfortunately for Wesfarmers, the group appears to be caught in a perfect storm of weak consumer sentiment, an ongoing price war with Woolworths, stagnant commodity prices and the threat of American retail powerhouse – Amazon, Inc. – destroying its market leading position at Bunnings, Kmart and Officeworks.
Although weak commodity prices will continue to plague Wesfarmers, Amazon also isn't immune from weak consumer sentiment and thus I regard these as cyclical risks rather than fundamental flaws in Wesfarmers' business. Therefore, if and when, these trends reverse, Wesfarmers should regain momentum and do well.
A buying opportunity?
Admittedly, the arrival of Amazon is likely to affect Wesfarmers just as much as any other business, given the company's three (of four) star performers in Bunnings, Kmart and Officeworks sell homogenous goods that a prior conscious customer would be happy to buy online.
Further, the ongoing price war with Woolworths (and management's resolve to reinvest in cheaper prices) is not going to help profit margins at Coles – the business which revived Wesfarmers' fortunes in the early 2010's. Accordingly, it's clear to see why the company is losing investor confidence.
Nevertheless, I think Wesfarmers' current share price presents a good buying opportunity for investors willing to take a long-term view of the group.
Foolish takeaway
What investors needs to remember is that any entrant into an established market is always going to face teething issues because that company will need to break consumer traditions and ingrain new habits. Whilst Apple is one success story of this (by releasing natural iterations of its devices to create new products like the iPad), I believe the gap for Amazon is too large to bridge.
In my mind, for Amazon to succeed, it will need to lure tradies away from their daily sausage sizzle at Bunnings or Australian customers away from the ability to touch and feel fresh homegrown fruit and vegetables at Coles to have a serious impact on Wesfarmers' overall business.
Whilst businesses like Kmart, Target and Officeworks will be impacted by Amazon, I still feel the "Australian way" is to buy and support local businesses, thus Amazon's threat to these businesses may also be overdone.
Accordingly, if I'm right, I believe Wesfarmers' current share price represents solid long-term value.
