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Warning: Amazon is set to take on Woolworths Limited and Wesfarmers Ltd

Credit: Amazon.com

The Australian Financial Review is reporting that the research sleuths at UBS believe that U.S. online retail giant Amazon may be planning to launch its “Amazon Pantry” online packaged food and household products supply business in Australia soon enough.

Admittedly the evidence for this theory is far from watertight with it being based on a survey of Australian food suppliers and their interactions with Amazon. However, Amazon itself has recently confirmed its intention to move physically into Australian markets without letting its competitors know exactly which retail segments it intends to target.

It does seems likely though that the fat profit margins enjoyed by supermarket businesses Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) may be prime targets for the U.S. shopping giant.

It also seems almost certain that the online food delivery market is set to grow in Australia over the decades ahead and Amazon’s potential arrival in this space is a negative for investors in the local supermarket giants.

It’s also important to note that the biggest threat to Woolworths and Coles may not be Amazon, but German supermarket discount specialist Aldi, which continues to grow market share with its low-cost, no frills, supermarkets.

Woolies shares are up 10% over the last six months after the group restored robust same-store sales growth to its supermarket sales, with the quarter ending March 31 2017 delivering 4.5% adjusted same-store sales growth for its supermarkets business.

This is a decent result that is likely being supported by the supermarket chain encouraging shoppers by slashing prices, but in fairness it seems as though the group could be back on the right track under its changed management team.

The problem with Woolworths shares is the outlandish valuation, despite the poor track record, margin pressures and rising competition. At $25.93 the shares change hands for 22x analysts’ estimates for full year earnings per share of $1.16. Clearly at this level the market is pricing in a return to decent earnings growth in FY 2018 and beyond, but I’m not so sure and would steer clear of Woolies given its valuation.

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The Motley Fool Australia owns shares of Wesfarmers Limited. Motley Fool contributor Tom Richardson owns shares in Amazon Inc.

You can find Tom on Twitter @tommyr345

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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