Amazon: why you shouldn't expect a grocery price war

There has been plenty of commentary about the growing risk of a price war between grocery companies.

There are new entrants such as Kaufland and the speculated Amazon entrance but Ben Gilbert, analyst with UBS, believes a price 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 risk to sector earnings, with Amazon's entry in Australia and New Zealand 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 recommendation on Woolworths with a price target of $28.80 while he is neutral on Wesfarmers at $41.30 and recommends selling Metcash at $1.85.

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