Costco’s gains spell trouble for Woolworths Limited investors


News reports in the Fairfax press that low-cost food and grocery retailer Costco saw its Australian sales revenues jump 50% in 2015 to $1,323 billion as same-store sales grew are another ominous sign for investors in Woolworths Limited (ASX: WOW) and IGA wholesaler and operator Metcash Limited (ASX: MTS).

Costco is a US-owned discount wholesale supermarket retailer that sells popular brands at large discounts to the prices charged by supermarkets like Woolworths or Coles on individual goods.

Costco can offer large discounts as it sells goods on a wholesale basis so will commonly be used by small hospitality business owners for example, however, it’s also increasingly popular with budget-conscious suburban families and the like looking to make big savings on their weekly grocery bills.

An annual membership at Costco currently costs $60 online for an individual, although this amount could probably be saved in a single shop or two for a big-spending family versus shopping at Woolworths for example.

Costco now has eight operating stores in Australia all strategically situated in the suburban heartlands and likely has plans to keep expanding, with plenty of cash to fund that expansion given it just posted a net income of US$480 million for the quarter ending November 22 2015.

Indeed the margin gouging duopoly nature of Australia’s supermarket sector operated by Coles and Woolworths is likely to face serious structural pressure in the decade ahead, with Woolworths’ share price particularly vulnerable to more heavy falls if it cannot reverse its same-store sales slide.

Sliding same-store sales combined with falling margins should set alarm bells ringing for Woolworths investors as competition from the likes of Costco and Aldi intensifies over time.

Given Woolworths has seemingly made little progress in appointing a new CEO who will presumably be responsible for a comprehensive strategic review it appears the decisive action required to execute a turnaround could still be up to six months off or more. In my opinion Woolworths looks a sell given structural shifts in the supermarket sector and the group’s management problems among other factors.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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