Approximately one year ago the share price of Australia's largest retailer, Woolworths Limited (ASX: WOW) was riding high as one of the most sought after "blue-chip" stocks on the ASX. In fact the stock touched $38 which marked an all-time high. Fast forward one year and the share price has fallen nearly 25% and trades in the $28 range.
Seen it all before
A recent investment presentation by Wilson Asset Management which runs listed investment company WAM Capital Limited (ASX: WAM) has highlighted why shareholders and investors shouldn't take the headwinds facing Woolworths lightly.
The point made by the fund manager is that the industry-leading margins of both Woolworths and Coles, which is owned by Wesfarmers Ltd (ASX: WES) are under threat due the entry of competitors Aldi, Costco and Lidl, who offer lower prices for everyday products.
While this scenario may be new in the context of the Australian supermarket industry, it's not new to the UK where high-margin supermarket chain Tesco has suffered a huge fall from grace as a result of new entrants.
Buckle up – further falls ahead?
Wilson Asset Management also highlighted the fact that the headwinds buffeting Tesco have led to its share price falling 50% over the past five years.
Falls of that magnitude (another 25%) could certainly be possible in the case of Woolworths' share price too. In fact, as recently as late 2011 the stock was trading under $24 which would represent a decline of nearly 40% from its recent 52-week high of $38. While there is of course no guarantee that a "Tesco situation" will develop within the Australian supermarket industry, it is also almost certain that this scenario has not been fully priced into the current Woolworths' share price.
