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Here’s why the Woolworths Limited share price is on the nose with investors

Credit: Scott Lewis

The Woolworths Limited (ASX: WOW) share price has come under fire this week, slipping 3.5% on Monday and a further 0.1% today. The Woolworths share price is now at $25.30, down from a 52-week high of $27.72.

What’s happened?

Late last week, it was announced that ecommerce giant Amazon.com (NASDAQ: AMZN) had made a bid to acquire Whole Foods Market (NASDAQ: WFM), a U.S. based organic-grocer, in a multi-billion dollar deal. Although a tie-up of Amazon and Whole Foods Market wouldn’t have a direct impact on Woolworths, it does highlight the threat posed by Amazon when it expands into Australia.

Indeed, Amazon’s pending arrival in Australia has sparked plenty of debate regarding the impact it will have on the local retail industry. For instance, companies such as JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) are thought to be particularly vulnerable due to their focus on consumer electronic goods.

It is also believed that Amazon will look to take some of the market share in the grocery space, which would likely come at the expense of Woolworths and its rivals, including Wesfarmers Ltd (ASX: WES) and Metcash Limited (ASX: MTS). News that Amazon is looking to acquire Whole Foods Market comes as a very real indication of its global intentions to grow its revenue base, which would no doubt spell trouble for the sector.

What happens now?

Woolworths has seen a lot of improvements across its business more recently, including the return to growth in like-for-like sales across its Australian grocery channel. However, the Woolworths share price has also shot higher, and is sitting 24.6% above its 52-week low ($20.30). The company is also facing margin pressures and rising competition.

That doesn’t automatically make the company a ‘sell’, by the way. What it does mean, however, is that investors should consider whether or not they think Woolworths can overcome those challenges and still deliver reasonable returns to shareholders in the coming years. If the answer is ‘no’, then it may be best to avoid buying Woolworths’ shares.

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John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Amazon and Whole Foods Market. Motley Fool contributor Ryan Newman owns shares of Amazon. The Motley Fool Australia owns shares of 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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