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Are Woolworths Limited and Wesfarmers Ltd now seriously threatened by overseas competition?

Over the weekend the Australian Financial Review (AFR) published a story highlighting concerns over the growth outlook for Australia’s leading supermarket chains Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES). Both of which are now facing increased competition from foreign entrants.

Aldi and Costco in particular are increasing their market share across Australia with offerings that are resounding with consumers at least in part due to their discounted prices. This competition is limiting the ability to expand margins at both Woolies and Coles and is also affecting volume growth with Aldi recently overtaking IGA-supplier Metcash Limited (ASX: MTS) as the third-largest player in the Australian market. Aldi now has a 10% market share versus Metcash’s 9.5% according to the AFR article.

Investors re-assess

The headwinds faced by the incumbent supermarket chains from new, nimble overseas competition are a reminder that even stocks heralded as blue-chips are not without their risks. Given that these two blue-chips alone make up a significant proportion of many investors’ portfolios, their future performance is important to many investors.

The stable nature of Woolworths and Coles’ recurring earnings streams have in the past made them reliable dividend payers.

However as Hugh Dive, Head of Equities at Philo Capital Advisers was quoted as saying in the AFR : “These [supermarket] stocks are no longer stocks you can just put in the bottom draw.

The share price performance tells a similar story. Over the past 12 months Woolworths, Wesfarmers and Metcash have all underperformed the flat return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) with losses of 2.9%, 1.1% and 3.5% respectively.

Better opportunities elsewhere

Like bank shares, investors in Woolworths and Wesfarmers have enjoyed superb returns over the past few decades, however the best days may now be behind these lumbering industry giants.

For investors looking to outperform the market, these large blue-chips may not offer the best returns despite their seemingly attractive dividends.

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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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