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Why Woolworths Limited is under threat

Supermarket retailer Woolworths Limited (ASX: WOW) could be facing a number of headwinds in future.

Woolworths, along with rival Coles – owned by Wesfarmers Ltd (ASX: WES) – dominate grocery sales in Australia, but both face increased competition for pure online plays and packaged goods suppliers according to management accountant A. T. Kearney.

Unless Woolworths and Coles can maintain their dominance over online grocery sales, they could risk losing market share and revenue to smaller niche rivals as well as a host on online retailers. A.T. Kearney’s Michael Brown says these pure-play online sellers, which offer a wide range of products from pet food, health and beauty supplies, toilet paper, nappies and cleaning products directly to consumers, will take sales from the major chains.

Currently online grocery sales represent just 1% or 2% of the total Australian market, compared with 8% in the US and 12% in Britain, according to the Australian Financial Review (AFR). A.T. Kearney expects online sales to disrupt existing players when they reach 12%.

Mr Brown says Woolworths and Coles could face the same issues as traditional electronics, books, homewares and toy retailers have experienced in the US in recent years. He cites US online pet care business Pet Flow as an example, which has gone from zero to US$1 billion in sales in just five years.

A Pet Flow type business in Australia would also have implications for Greencross Limited (ASX: GXL), which owns vet practices but has acquired the Petbarn retail business.

One tiny company investors may want to watch is Mnemon Ltd (ASX: MNZ). Mnemon recently acquired pure-play online retailer DealsDirect. DealsDirect generated $67.8 million in revenue in the 2013 financial year, and sells everything from white and brown goods to electronics, toys, garden sheds to wine, beer and spirits.

I own Woolworths and am confident the retailer can continue its dominance in its various markets, but there’s no doubt a number of threats are rising to challenge management. While Woolworths’ shares may look expensive at the moment, here’s another great idea for you, offering a value price tag, growth and BIG dividends.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Greencross. You can follow Mike on Twitter @TMFKinga

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