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Amazon’s new threat to Woolworths and Coles

Just when you thought things were looking up for our two largest ASX-listed supermarket chains, lobs another grenade.

The Woolworths Group Ltd (ASX: WOW) share price and Coles Group Ltd (ASX: COL) share price will be under the spotlight on news that the US online shopping giant is starting a discount subscription service for a range of everyday grocery items.

Up to this point, both stocks are outperforming the broader market and are trading at or close to their highest level this calendar year. The Woolworths share price and Coles share price have jumped 28%.

In contrast, grocery distributor Metcash Limited (ASX: MTS) and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index have gained around 20% each.

Amazon eating Coles’ and Woolies’ pie

Investors will be wondering if the golden run for Woolies and Coles might be coming to an end as Amazon is trying to take away a big reason why shoppers go into their stores.

The online only retailer launched Subscribe & Save a year after introducing Amazon Pantry offering of non-fresh food grocery items.

The new subscription service will offer customers an extra 10% savings and free delivery on a range of products from toilet paper, pet food and nappies if they commit to purchasing these items regularly, according to the Australian Financial Review.

Amazon claims there are thousands of eligible items under Subscribe & Save and it believes the service would be a hit because it customers save both time and money.

How the subscription service can hurt

There isn’t a subscription fee for the service. Shoppers choose the products that they often buy and choose a deliver frequency. Orders can be changed or skipped, and while prices of individual items can change, shoppers will get a 10% discount off the total.

Coles and Woolworths will be watching closely as the service can undermine their “one-stop” strategy and cut the all-important foot traffic in their stores. Supermarkets lure shoppers through the doors by selling some essential everyday items at a loss. The idea is to get shoppers to buy other profitable items while their browsing.

Same store sales at these supermarkets have been inching up in recent times, thanks in no small part to grocery price inflation. If Subscribe & Save proved to be successful, this key performance metric will come under pressure.

Both supermarket giants have been ramping up their online offering to combat the rise of Amazon and are counting on their fresh food offering to give them an edge.

However, other rivals like Aldi are attacking Coles and Woolies on that front. The Supermarket Wars aren’t about to come to an end anytime soon.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. 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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