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Amazon begins assault on Woolworths Group Ltd (ASX:WOW) and Coles

US shopping giant Amazon.com has fired its first shot at the supermarket sector by launching its pantry food and drink category on its Australian website that will give consumers access to more than 400 brands.

Investors aren’t fazed with the share price of Woolworths Group Ltd (ASX: WOW) jumping 0.7% to $27.99 although Coles owner Wesfarmers Ltd (ASX: WES) slipped 0.6% into the red to $47.26 when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index lost 0.3% in morning trade.

I am not surprised that the market is overlooking this development as Amazon Australia is a slow-moving beast. The range is fairly limited and the pricing doesn’t scream of value – at least not yet.

This essentially describes the first 10 months of Amazon Australia’s existence although it is finally addressing the issue of price and range in the more established product category.

I suspect it will take another 6 to 12-months before Amazon.com poses a real threat to Woolies, Coles or the independent grocery network under the Metcash Limited (ASX: MTS) umbrella.

Morgan Stanley compared 10 food and drink items sold on Amazon and found that only one to be cheaper than Woolies while two items were more expensive and the rest of the seven were the same price.

But the price differences on the three items were very significant. The cheaper Amazon item was 22% below Woolies but the other two more expensive items cost between 100% and 20% more.

However, it’s not so straightforward to make direct comparisons between Amazon and Woolies as Amazon tends to sell in bulk (multipacks). Selling in bulk suits the online delivery channel better due to courier costs.

The brands sold by Amazon include several household names like Arnott’s, Milo, Uncle Tobys, Masterfoods, Oreo, Powerade, and M&Ms.

“We think it’s interesting that leading global FMCG brands like Coca-Cola, Nestle, Mars, Arnotts, and Mondelez along with leading Australian brand Sanitarium have elected to use Amazon to distribute their products,” said Morgan Stanley.

“If the largest suppliers in Australia are willing to use Amazon, then why wouldn’t more follow? We think it’s an emerging issue that confronts the Australian supermarkets.”

There’s speculation that it’s only a matter of time before Amazon moves into fresh food as well given that it’s already doing that in the US through its acquisition of Whole Foods.

It’s good news to our local incumbents that they have time to plan and react – particularly for Coles as it prepares to start life standing on its own two feet as Wesfarmers is spinning-off the business into a newly listed entity.

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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.

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