Is it time to sell Woolworths Limited and Wesfarmers Ltd shares?

Credit: James Arboghast

In 2013 and 2014 I wrote extensively about my view that Metcash Limited (ASX: MTS) had a limited lifespan, or at least would cease to be competitive, in the face of actions that both Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES) – were taking.

I noted at the time that the entry of Aldi and Costo could also compound these problems, leading to Metcash’s IGA stores becoming too uncompetitive. Note that at the time they were already uncompetitive but their convenience, especially in SA and WA proved enough to maintain sales.

Did you pick it?

It seems obvious enough in hindsight but major analyst groups were still forecasting EPS and DPS growth through early 2015… before the extent of the group’s woes were revealed.

Who’s Next?

Our job as investors is to buy companies that we believe can control their market or their product over the long term.

While Woolworths and Coles have benefitted from Metcash’s decline, and certainly Aldi and Costco have grabbed small, but meaningful market share, there’s a challenge on the horizon that I believe we’re underestimating.

Decline of the grocery store

I read on the weekend that Amazon makes $5.4 billion per year in revenue from its Amazon Prime subscribers. These customers pay $99 per year for unlimited 1-day home delivery.

I also read that Amazon, which is actually in the business of supply chain management more than the sale of traditionally non-perishable goods, is expanding its product offering in the UK to include farm-fresh groceries.

Amazon is banking on its ability to get customers their produce faster and cheaper than them going to the shops!

Woolworths and Coles Already Deliver and Amazon is barely in Australia

The fact that Woolworths and Coles deliver isn’t even a consideration. Amazon’s Prime subscription has a track record. That track record shows that if a customer is a Prime member (which many Australians will jump at when given the chance), they want to get as much value out of that $99 per year as possible.

What does this mean for investors?

It means that all those Australians that already order from Amazon will be incentivised to order from Amazon’s grocery store because they’ve essentially pre-paid the delivery! Amazon knows this. They also know that if they can capture the grocery market they will have the market cornered and it will become THE one-stop shop for PURCHASES. Of anything.

What should we do?

Amazon Prime isn’t even in Australia yet so I guess there’s no immediate rush to take drastic action, but I’m not making any purchases of companies that rely on capital-intensive physical storefronts.

Instead, I'm listening to my expert colleagues! The Motley Fool's renowned dividend investing guru recently revealed his newest dividend buy recommendation and short list of 3 Best Dividend Buys Now. Which means if you're reading this message right now, you're not on the list to uncover their names before they potentially go gangbusters. Simply click here to learn more about these shares.

Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.