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Woolworths and Coles locked in another battle front

Young man in supermarket

The supermarket wars may be expanding to a new front as our largest supermarket chains are reported to be locked in a dispute with a handful of leading suppliers.

This doesn’t seem to have really hurt the Woolworths Group Ltd (ASX: WOW) share price or Coles Group Ltd (ASX: COL) share price – at least not yet – even though some leading products have disappeared off their shelves.

Global manufacturers Nestle and Mars Petcare have stopped supplying Woolies and Coles as the supermarkets have refused to allow them to increase prices on their goods by 6%, according to the Australian Financial Review.

Why worry mate?

Some of the brands that are in short supply at these supermarkets include Uncle Tobys, Whiskas, Pedigree, My Dog and Dine.

It’s understandable why investors are not worried, although there are implications for shareholders which I will explain later.

But for now, the number of products affected are fairly small – so no real cause of concern to earning.

The suppliers and supermarkets have both said they are working hard to resolve the issue and Coles is believed to have struck an agreement with Mars Petcare that will see its brands of pet food returned to its shelves.

Potential impact from rising prices

So why should investors care? This could mark a turning point for grocery prices and we are likely to see more suppliers demanding price increases in the near-term as Coles and Woolworths have been putting downward pressure on prices over the past number of years as costs were escalating.

It isn’t only households that are feeling rising cost of living pressures. Manufacturers are also grappling with higher energy and other costs, and it seems things may be reaching a boiling point.

The well documented impact of droughts and floods across Australia is already driving up prices of fresh food. Inflation could be rebounding soon enough, which will complicate the Reserve Bank of Australia’s task to lower rates to stimulate the economy.

There goes the government’s efforts to stimulate consumption through a tax offset that was announced on Tuesday!

But rising supplier costs could also create headaches for our supermarkets, including Metcash Limited (ASX: MTS). They can either absorb the costs into their wafer-thin margins to protect market share or pass it on to consumers.

Shareholders would welcome higher grocery prices as it will lift supermarket sales, but management would be wary about giving the competition an opening to steal market share.

I believe they will have to use a mix of both strategies and this could trigger another supermarket war among the supermarkets, including the foreign owned ones like Aldi.

In other words, rising supplier costs could break the relative peace in the sector over the past year or so.

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Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. The Motley Fool Australia owns shares of and has recommended 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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