Is the Woolworths share price a buy?

The Woolworths Group Ltd (ASX: WOW) share price has increased by 11% in the past year. The Woolworths share price gain has significantly outperformed the S&P/ASX 200 Index (ASX: XJO), which has seen a 11% fall over the same period.

Woolworths Group owns the largest supermarket in Australia by market share, along with a number of other businesses including Big W, ALH Group and Endeavour Group Limited, which consists of Dan Murphy’s, BWS, Cellarmasters and Langton’s. 

Here’s a closer look at the current supermarket landscape, and whether the Woolworths share price is a buy.

The rise of Aldi

According to Roy Morgan’s Fresh Food and Grocery Report, Woolworths has a 32.9% market share compared to Coles Group Ltd (ASX: COL)‘s 26.6% share. However, Aldi’s market share is rapidly rising.

Commenting on the breakdown, Roy Morgan CEO Michele Levine stated:

Aldi has increased its market share from 6.7% in 2011, to 12.4% today. While it is still a fair way behind Australia’s two supermarket giants, to put this growth in perspective, Aldi is now approaching half of the market share held by Coles Group.

Aldi’s 12.4% market share puts it at a approximately a third of Woolworths’ market share – growth that must be concerning for Woolworths and Coles.

Financial performance

In its recent trading update released 23 June 2020, Woolworths announced Q4 sales growth to date in its supermarkets in Australia and NZ was up 8.6% and 15.1%, respectively. At that time, Big W and Endeavour drinks sales growth in Q4 had also risen by 27.8% and 21.4%, respectively. In addition, Woolworths highlighted it expects to report earnings before interest and tax of between $3,200 million and $3,250 million, however, this is subject to finalisation and before significant items are taken into account.

The strong sales growth has helped give the share price a boost. However, the sales growth experienced this year could be from the panic buying that is taking place and only be over the short term.   

Furthermore, the group is looking to decrease supply chain costs in the business by developing automated distribution centres in Moorebank Logistics Park, Sydney. This is expected to cost $700–$780 million in technology and fitout over the next 4 years. While this addresses costs in the business, my concern is around whether the sales growth Woolworths has experienced is sustainable over the long term, in what is a very competitive landscape.

Foolish takeaway 

In my view, Woolworths’ market-leading position in the supermarket space could be eroded by the likes of retail giant Aldi over the long term. While groceries are essential items, consumers are offered many choices.

At the current Woolworths share price of $38.21, I personally believe that an investment in the tech space could offer more income and growth over the long term.

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Motley Fool contributor Matthew Donald has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. 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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