Woolworths Limited (ASX: WOW) will still play a key role in Australia's multi-billion dollar grocery market in 10 years' time, but Metcash Limited (ASX: MTS) mightn't be so lucky.
That's the view of one leading fund manager, Hamish Douglass, from Magellan Financial Group, who was quoted by The Australian Financial Review as saying Aldi, Woolworths and Coles – owned by Wesfarmers Ltd (ASX: WES) – would be the dominant players in the industry over the next decade.
Indeed, Metcash is best known for its wholesale connections with independently owned supermarkets such as IGA and Foodworks. The company has struggled with falling volumes as a result of its inability to compete with its larger rivals on price or service.
To combat this, a much-needed strategic review has been implemented by the company's management team. This included the sale of its automotive division to Burson Group Ltd (ASX: BAP) in order to free up cash to invest in the core business, but Douglass doesn't believe that will be enough to help it remain relevant in the supermarket space over the next 10 years.
Instead, he believes its current market share is likely to be divvied up between the three key players highlighted above, while Costco could also command a small portion of the market. Metcash's shares have fallen 62% over the last 12 months, and remain a risky bet for investors going forward.
Having said that, Woolworths could also struggle for the foreseeable future as it desperately tries to regain favour with consumers. In what Douglass described as "the perfect storm of mismanagement" (as quoted by The AFR), Woolworths has spent the last few years pumping money into its loss-making Masters Home Improvement business whilst losing customers in its supermarkets due to its inability to compete with Coles and Aldi on prices.
It is currently investing more than $500 million into reducing prices and improving the customers' in-store experience, but it certainly has some catching up to do with its rivals. This will have an impact on margins – the company has said so itself – while its earnings will likely take a hit as well in the near term.
This could result in a rather volatile share price for the foreseeable future, with the stock already hovering near a three-year low. Encouragingly, Douglass is confident in the company's new management team which I also believe will help the company transition through this tough time to ultimately reward investors in the long run.
As Scott Phillips, lead advisor for Motley Fool Share Advisor, recently said: "As a competitor or investor, you write off Woolworths at your peril." The shares are trading at $24.86 today, down from almost $40 in early 2014.
