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Here’s why Woolworths Limited is still a better bet than Metcash Limited

News that grocery wholesaler Metcash Limited (ASX: MTS) has teamed up with a guru of the liquor retailing industry was no doubt a factor in Wednesday’s 2.7% share price gain.

According to a report in the Australian Financial Review (AFR), Mr Tony Leon who was credited with building up Woolworths Limited’s (ASX: WOW) Dan Murphy’s liquor chain as well as running Coles’ liquor business is said to have teamed up his private liquor chain with Metcash’s wholesaling liquor business and its Bottle-O brand.

It sounds like a clever move. Metcash’s liquor business is already the second largest player in the market behind Woolworths and liquor is big business so having a proven operator heading up the group’s strategy makes plenty of sense.

However, the problem for Metcash is that liquor is a mature sector and revenue growth will be hard to come by. Perhaps there are efficiency gains to be made. If that’s the case it could arguably be a poor reflection on current management.

The seemingly low growth opportunity in liquor retailing suggests that this potential development – whilst positive – won’t be the saviour that Metcash’s shareholders need.

The wholesaler’s share price is down 16.4% over the past 12 months and a whopping 40.3% in the last five years. Despite the lower share price, Morningstar doesn’t see value in the company yet with the research house slapping a “reduce” recommendation on the stock and a target price of $2.50 which is below the current price of $2.67.

In contrast to the problems facing Metcash, Woolworths’ share price is up 19.2% over the last half decade and the outlook for Australia’s largest retailer remains positive. The group continues to grow market share at the expense of independents and is still finding new areas for potentially substantial growth such as in financial services and hardware.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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