Little appetite for groceries war

There has been plenty of talk about a possible price war in the grocery business. There are new competitors such as Kaufland and Amazon but Ben Gilbert, analyst with UBS, believes a war is unlikely.

“While we lift our ‘probability measure’ of a price war to 25% (from 20%), we view the market as rational and expect industry margins to bottom in the 2017 financial year. We believe the outlook for grocery is improving following the lowest growth in more than 30 years over the 2016 financial year.” He says a resurgent Aldi is the key earnings risk, with Amazon’s entry some way off.

Of the three listed Australian grocery businesses, Gilbert likes Woolworths. “We believe Woolworths remains the greatest beneficiary of a rational market and improved growth as improved execution drives share gains and margin improvement.” He has a “buy” on Woolworths with a price target of $28.80, is neutral on Wesfarmers at $41.30 and recommends selling Metcash at $1.85.