Can Bunnings save Wesfarmers Ltd?

Photo credit: AS 1979

For well over a year now, investors have been focussed on the competitive pressures facing Woolworths Limited (ASX: WOW) largely on account of the growing competitive threat from Aldi.

A recent study by investment bank Credit Suisse (reported in the Australian Financial Review) has however alerted investors to the fact that Coles, owned by Wesfarmers Ltd (ASX: WES) is also a potential loser from Aldi’s increasing market share and sway within the domestic supermarket sector.

According to the research, a basket of groceries is now slightly cheaper at Woolworths than Coles but Aldi remains the clear leader when it comes to purchasing a similar basket.

While Aldi’s lower prices are already well known, the research did show that both Coles and Woolworths have reduced the premium of their respective baskets compared with Aldi. This suggests that they have both taken a hit in an attempt to remain competitive.

Bunnings provides a buffer

While Woolworths’ business is primarily exposed to its supermarket operations, Wesfarmers operates a conglomerate structure with numerous businesses under its umbrella.

This diversification has arguably been a major factor in Wesfarmers’ significant outperformance over the past year compared with its peer Woolworths.

In the last 12 months, the share price of Woolworths has slumped around 19%, in comparison Wesfarmers’ shares are down 5.5% which is roughly in line with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

While Coles has been benefiting from a multi-year turnaround strategy further cost savings and efficiency gains will become harder to realise. In fact, many of the “easy” benefits have most likely largely now been captured and the supermarket group could face a more difficult future as it is forced to focus its attention on the growing market share of Aldi.

If this scenario plays out for Coles much as it has for Woolworths, then Wesfarmers’ Bunnings business will need to play an ever-increasing role in providing overall growth for the group. This would suggest that a successful execution of the company’s UK expansion plans for the Bunnings brand could be critical to the company’s future prospects.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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