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Is Woolworths headed for a fall?

Woolworths Limited (ASX: WOW) is a staple stock in the portfolios of many long-term investors. It is there with good reason. The company has a solid history of strong cash flows, store growth across supermarket, petrol and retail lines, and an ever-reliable divided.

In the five years leading up to 2012, while many companies languished against the economic headwinds, Woolworths increased total group sales by 17% to $56.7 billion. In the same period the company also grew by 350 stores, increased earnings per share (EPS) from $1.35 to $1.80 and raised the annual dividend from $0.92 to $1.26.

The company’s most recent third-quarter earnings for FY13 look to continue the trend, with total sales up 3.8% and food and liquor sales up 5.7%. However the party enjoyed by Woolies’ shareholders for so long could be about to come to an end as privately owned German discount supermarket Aldi set significant expansion plans in motion. Aldi expects to invest up to $2 billion in South and Western Australia according to The Australian, opening two key distribution centres and 115 supermarkets.

Currently Woolworths, alongside Wesfarmers Limited (ASX: WES) owned Coles, controls 80% of Australia’s supermarket industry, with IGA operator Metcash Limited (ASX: MTS) making up a chunk of the remainder. In the 2012 financial year Woolworths opened 38 supermarkets, while Coles opened 19 supermarkets and 35 liquor stores. Aldi already has 300 stores across the eastern states, with plans to open 25 more this year.

Australian supermarket sales make 78% of Woolworth’s group sales. The expansion of Aldi may be good news for consumers and large suppliers like Coca Cola Amatil (ASX: CCL), but could spell an end the slow and steady growth which has been a mainstay for supermarket shareholders.

Foolish takeaway

For shareholders of both companies the new competition is a threat to growing future earnings.  It may take some time to happen, but Aldi’s aggressive expansion plans and low-cost strategy will undoubtedly attract customers and eat into the dominance the two supermarket giants have enjoyed for so long.

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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 Regan Pearson does not own shares in any of the companies mentioned in this article.

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