Should you buy Coles or Woolworths shares?

The Coles Group Ltd (ASX: COL) share price and the Woolworths Group Ltd (ASX: WOW) share price have come under pressure this week after German supermarket giant Kaufland announced plans to enter the Australian market.

Should you be concerned by Kaufland’s entry?

Whilst increasing competition in a supermarket industry which is already incredibly competitive is never good, I feel it will be a number of years until there is a notable impact in the industry.

After researching the possible impact of the arrival of Kaufland, Goldman Sachs agrees that the impact will be limited in the near term. However, it does have concerns that it could increase the threat of discounting over the long term and put downward pressure on supermarket profits.

According to the note, the broker expects Kaufland to open 26 sites by 2025, but sees opportunities for the opening of up to 48 stores if it is able to take advantage of the Discounted Department Store (DDS) oversupply.

Due to closures, Goldman has forecast excess space in the DDS sector in the coming years, providing Kaufland with an expansion opportunity.

Under its base case, Goldman estimates that Kaufland could command a market share of 1.7% by 2025, which equates to sales in the region of $2.7 billion. This is expected to be taken away from the likes of Coles, Woolworths, and Metcash Limited (ASX: MTS).

Should you invest?

Despite its forecasts, Goldman Sachs remains positive on both Coles and Metcash and has retained its buy ratings on their shares. The broker has a buy rating and $13.10 price target on Coles and a conviction buy rating and $3.30 price target on Metcash’s shares. Goldman remains neutral on Woolworths.

Whilst I’m not a big fan of Metcash, I would certainly be a buyer of Coles at the current level.

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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 COLESGROUP DEF SET. 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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