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Top broker warns the next supermarket war to hit Woolworths Group Ltd is closer than you’d think

The positive sentiment that has returned to our supermarket stocks may have lulled investors back into a sense of complacency but this could be the calm before the storm.

The entry of yet another overseas discount supermarket, Kaufland, will have a bigger impact on the sector than what most investors are anticipating, according to Morgan Stanley.

The broker had flagged this more than a month ago but that hasn’t stopped the share prices of our three supermarket-linked stocks, Woolworths Group Ltd (ASX: WOW), Wesfarmers Ltd (ASX: WES) and Metcash Limited (ASX: MTS), from outperforming.

The three shares are up around 7.5% each in the past month when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up less than 5%.

It appears investors aren’t worried at all about the warning from Morgan Stanley as they think Kaufland’s entry into this market is too far away to impact on valuations in the sector and that the new German invader will struggle to find suitable locations to open outlets as it appears that Woolworths, Wesfarmers-owned Coles and Aldi have taken up all the good spots around the country.

The good growth in food sales reported by our two biggest supermarkets and the Australian Bureau of Statistics (ABS) has also prompted investors to buy into the sector.

“We think investors are underestimating Kaufland’s flexible store format approach, which enables a faster rollout vs. Aldi’s ‘cookie-cutter’ approach,” said Morgan Stanley.

“We note recent press reports that Kaufland has instructed suppliers to begin preparing for store openings in 2019, with store sizes of 4k sqm [4,000 square metres]. Our base case is for eight stores in FY20, with an average selling area of 12k sqm.”

Rising food prices that are bolstering sales growth will also be a double-edged sword. Morgan Stanley believes that households that are already under cost-of-living pressure will increasingly turn to discount supermarkets and Kaufland will provide these consumers with another option to Aldi and Costco.

“We also point to the UK experience, where food inflation since the EU Referendum has led to surging sales at Aldi and Lidl (+7.7% and +9.1% respectively in the 12 weeks ended April 22), whilst full-line supermarkets struggled to top 2% growth,” added Morgan Stanley.

The market isn’t pricing in any of these risks into the market and Kaufland’s entry is likely to trigger a sector de-rating and the potential for a new supermarket price war.

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Motley Fool contributor Brendon Lau 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.

Motley Fool contributor BrenLau 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.

Motley Fool contributor BrenLau 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.

Motley Fool contributor BrenLau 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.

Motley Fool contributor BrenLau 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.

Motley Fool contributor BrenLau 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.

Motley Fool contributor BrenLau 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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