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The price war is over: Time to buy Wesfarmers and Woolworths shares?

Much to the relief of shareholders of Metcash Limited (ASX: MTS), Wesfarmers Ltd (ASX: WES), and Woolworths Group Ltd (ASX: WOW), one Wall Street analyst believes there are signs that the supermarket price war is over.

According to a report in the News Limited press, David Errington from Bank of America Merrill Lynch has pointed to the price of cooked chickens as an indication that the supermarkets have called a ceasefire on their price war.

Errington noted that Coles supermarkets had been testing $1.00 price increases on cooked chicken in a number of regional stores over the last few weeks. This led to Woolies also following suit in a few regional stores of its own.

It appears the experiment was a success for Coles, so the supermarket chain recently rolled out the price increases nationwide, with Woolies then doing likewise.

Bank of America Merrill Lynch is interpreting this as a hugely positive move and believes the 12% price increase in cooked chickens could be an “industry-changing event” that brings to an end the crippling price wars that Australia’s supermarkets have been struggling with for some time.

Errington stated that: “We believe the margins in the Australian supermarket industry have fallen too aggressively in the past two years, and that all participants are likely to allow price inflation to modestly return after a lengthy period of deflation.’’

The analyst estimates that Coles sells 40 million chickens each year and Woolworths sells 50 million. Yet neither are believed to be making a profit on them prior to the price increase, which makes this a material move.

Should you invest?

If the supermarket price war is indeed over then it certainly would make Woolworths, Wesfarmers (or its Coles spin-off), and Metcash a lot more attractive.

While I think investors ought to look out for further signs that the price war is over before investing, I have a feeling that Bank of America Merrill Lynch has made a great call here.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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