AFR Article

Two articles in the weekend AFR (7-8 March) concerning MTS. I’ll only summary the first which deals with the current state of the various supermarket chains: Woolworths, Coles, Aldi and IGA/Metcash.

It paints a grim picture.

‘Now a real [price war] is about to rumble through the supermarket aisles, and the big winners will be the shoppers in a market where many experts believe there are too many supermarkets. Just after Christmas, Harrison, who owns 68 Ritchies IGA supermarkets along the east coast, sensed a disturbing change in the behaviour of Coles and Woolworths.’

‘Harrison believes Australia is facing a full blown price war akin to that in Britain as Coles and Woolworths battle it out with upstart discounter Aldi against the backdrop of a saturated market, where many believe there are now too many super markets to service the population.’

‘The more Coles and Woolworths cut prices the more Metcash will have to invest. And with margins of about 2.6 per cent in food and grocery, Metcash does not have much room to move.’

In terms of cold numbers: ‘In 2011 there were 2305 full line supermarkets (Woolworths, Coles, Supa IGA, Aldi and Costco) servicing 22.3 million people….each full-line supermarket serviced about 9700 people. By June 2014 the major chains have added 246 net new stores, but the population grew by only 1.2 million people’ Meaning ‘each new store only services about 4900 people, well below the 2011 average.’

Equally concerning is that ‘Supermarket market share (%)’ in the last 6 years has declined 4 years in a row and has been flat in the last 2 years for ‘Metcash and other’ [smaller chains and independents].

I was seriously thinking of investing in MTS. I have had an order in since last week. But now I wonder if the MTS stock price is a value trap given the grim outlook described in the AFR article. I might pull the order and see how the next couple of months pan out.

What do long term MTS investors think? Does management have the smarts to know how to turn a profit in the years ahead?