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Has Woolworths started a new supermarket war?

The Woolworths Group Ltd (ASX: WOW) share price has slumped this morning along with its rival on a report in the Australian Financial Review that Woolies is opening a new battle front in the supermarket wars.

The Woolworths share price fell 0.6% to $33.10 at the time of writing, while the Coles Group Ltd (ASX: COL) share price declined 0.8% to $12.55 on the news.

In contrast, grocery distributor Metcash Limited (ASX: MTS) is trading flat and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumped 0.3% higher.

New online price war?

Woolworths has cut the price of 1,000 items by as much as 50% in a two-day sale – sparking fears that competitors like Coles will be forced to undertake equally aggressive campaigns as well as the supermarket giants jostle for market share.

Woolies is trying to replicate the success of its online frozen food sale in March, which went viral on social media and help lift sales for that quarter, according to the AFR.

This latest online campaign will cover 1,100 products from health and beauty and pantry staples to household cleaners, chilled food and pet-care products.

It’s reported that most of these products will be offered at half price and this includes well known household brands from Nestle, Mainland, Harpic and Head and Shoulders.

Pre-emptive attack

The sale is a likely strategy to drive traffic to Woolworths’ online store in a pre-emptive move against new competitors like Amazon.com.

Online sales campaigns generate less profit due to the cost of picking and delivery but Woolies probably sees the online space as an important channel as it doesn’t want competitors to exploit this area to take market share.

It makes sense to me for Woolies (and even Coles) to sacrifice margin to build a loyal online following as such purchases will continue to grow in importance.

Foolish takeaway

What it won’t help is to address critics who complain about the expensive multiples that Woolworths is trading on. The stock is trading on a FY20 consensus price-earnings multiple of 23 times while 80% of the brokers who cover the stock rate it a “hold” or “sell”.

I agree that the stock is looking fully priced given its single digit growth forecast, but its worth paying a premium for quality during these uncertain times when the domestic and international economies are under pressure.

It’s hard to see Woolies underperform although bargain hunters might prefer to look at cheap stocks that the experts at the Motley Fool are rating a “buy”.

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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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