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New battlefront in supermarket wars

Coles has taken the price war to convenience stores and petrol stations, rolling out $1 milk and discount bread to more than 620 Coles Express outlets across Australia.

Metcash Limited (ASX: MTS) has been the innocent bystander in the price war between Coles – owned by Wesfarmers Limited (ASX: WES), and Woolworths Limited (ASX: WOW). Until now that is, with analysts claiming that the move directly targets Metcash customers, who generally shop at IGA branded supermarkets. Metcash supplies around 3,100 independent stores including those trading under the Independent Grocers of Australia (IGA) brand.

Now those customers can buy cheap bread and milk from their local Coles Express and Coles branded services stations, according to The Herald Sun. This brings the prices in line with those in larger supermarkets, after customers queried the higher costs.

Related: Supermarket wars – Coles slashes prices again

Coles has also not ruled out lowering prices on other staple items, and plans to run the promotion indefinitely. In 2003, Coles entered a joint venture with oil company, Shell, in which many of its petrol stations were rebranded as Coles Express outlets.

Metcash has seen its supermarket profit margins decline since Coles and Woolworths launched cheaper price campaigns three years ago. Suppliers and manufacturers of consumer staples have also felt the effect, as well as smaller competitors. Chocolate retailer, Darrell Lea was forced out of business last year, while Heinz, the maker of tomato sauce, was forced to close a factory in 2011, and now sells some of its products through online only sites.

Then in November 2012, Gourmet Food Holdings, owner of the iconic tomato sauce brand, Rosella, was placed into receivership, another casualty of the ongoing price war and rise of private label products.

The Foolish bottom line

Woolies may be forced to respond with lower prices in its branded petrol stations and convenience stores, but it seems the most pressure is coming to bear on our third largest food and staples retailer, Metcash.

If you only invest in one company this year, make it our “Top Stock for 2012-13.” Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool’s purpose is to help the world invest, better. Take Stock is 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. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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