by Scott Pape - July 30th 2010
My first job was as a deli boy at my local Woolies. I was 14, and as pimply as I was socially awkward. It didn’t help that each day after school I donned a paper hat and red bow tie and sliced cold cuts for less than ten bucks an hour.Being a teenager I was fortunate to know everything, so I dutifully took my minimum wage and invested it into a managed fund run by a bunch of bozos that turned out to have worse returns than Mark Philippoussis. However, had I tipped a thousand bucks into my employer’s shares (when it floated on the share market in 1993), it would be worth close to $20,000 today.
So let’s take a look at Woolies.
In 1924 a bunch of wags registered the name ‘Wallworths Bazaar Limited’ – an obvious play on the respected US retailer F. W. Woolworth. They soon changed their name to Woolworths (as the name wasn’t registered in Australia). Then they opened their first shop, in Sydney, and quickly expanded across the country. They opened their first supermarket in 1955, and the company is now a retailing powerhouse, running well-known brands such as Big W, Dick Smith Electronics, Tandy, and Dan Murphy’s and BWS liquor stores.
How do they make their dough?
They gouge their suppliers and pass on the savings to consumers. Okay, so that’s not exactly the version you’ll see on the Woolies website, but as the 800-pound gorilla in the retail jungle, it’s a fairly apt description. Together Coles and Woolies capture around 70 per cent of the packaged grocery segment – and for every dollar spent at retail outlets, 25 cents ends up in one of their tills, according to researchers IBISWorld. That’s one of the highest concentrations in the world (just ask the ACCC).
In addition, through the acquisition of pub baron Bruce Mathieson’s ALH Group, Woolies now owns 12,000 pokies. Jackpot! The company not only provides a strong return on shareholder capital, but those returns are steadfast. The company has defensive qualities – even if the economy tanks, people still need toilet paper and baked beans (though not necessarily in that order).
“Tell me the good stuff”
Legendary investor Warren Buffett says great companies have strong ‘economic moats’ around them that give them a competitive advantage and deliver consistently high profits. Woolworths’ economic moat is its size and scale. Over the years the company has picked off the very best locations around the country. Across the group Woolworths’ has about 2,800 stores and 195,000 employees.
Could you imagine a major competitor coming in and beating them?
Woolies has also invested in streamlining its supply chain (the process of delivering the corn from the cob, to the cash register) to word-class standards. This allows them to both cut costs and screw suppliers down on price – further
entrenching their competitive position.
Finally, all good companies have great leaders. The chief, Michael Luscombe, has been with Woolies for over 30 years. Despite running a diverse and complex business, he says he still primarily sees himself as a ‘shopkeeper’.
“Tell me the bad stuff”
For many years Woolworths got a free ride because Coles was a wonky shopping trolley. Coles’ former chief, John Fletcher, boasted that he hadn’t been in a supermarket in 20 years – and ran the company accordingly. Wesfamers have since taken over Coles and are ramping up competition – as are the independent IGA and the upstarts Aldi and Costco. The rise of internet retailing poses another threat to the group, with Aussies spending $36 billion online this year according to IBISWorld.
In addition, Woolies also bears the risk of rampant regulators and populist politicians trying to score votes – remember GroceryWatch?
Finally, they may be known as the ‘Fresh Food People’ but they’re also the ‘Pokie Pushing People’. Whether you want to invest in the gaming industry and risk peeling potatoes with Jamie Packer for eternity is a personal decision.
Bear in mind that the Government has just released a productivity report into gambling that recommends mandating a maximum $1 bet per spin so as to reduce the losses of problem gamblers (and apparently 40 per cent of profits come from problem gamblers).
Toes up or toes down?
You’ve only got to take a look at world leading retailers Tesco and Walmart to see where Woolworths is heading. Tesco is the biggest seller of petrol in the UK (a trick which Woolies have cut and pasted), and has expanded into financial products, telecommunications and pharmacies. It’s even revamped its stodgy old home-brand variety products into premium goods that compete against big brands.
Yet for all the upside, Woolies isn’t a stock that Gordon Gekko would buy. It’s not a fast trade but a solid investment in one of Australia’s best businesses. With dividends returning 4 per cent (fully-franked, company tax paid), and earnings growth of around 6 per cent, Woolworths is worthy of inclusion in a portfolio of solid Barefoot Bluechip stocks.
Think of it as like buying UHT milk: you can stick it on the top shelf and safely forget about it until you really need it.
Tread your own path!
Disclosure: Scott Pape owns Woolworths shares.
Photo: http://www.flickr.com/photos/valerieyum/
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28 comments
Good to know! I was allocated a handful of Woolies shares when I was working at Big W as a teenager, the number of shares ticks over by a couple every year, and I plan to let them just sit there quietly and keep doing that =)
Can you please give us some ideas about investing in ethical companies…. Woolworths disgusts me!
and they seem to be cheap at the moment
Awesome! Thanks Barefoot, this is just the kind of info I'm after about bluechips. Please keep it going.
It's the gouging of the suppliers that I object to, and whilst money is good and it helps you achieve things in your life, the theory of Ethics should come into play as well. Are you comfortable supporting a company that is perpetually price gouging suppliers just so they can stamp independant grocers like IGA and small Mum and Dad enterprises out of the market? I know that the products are more expensive at my local IGA but at least everyone gets a fair go out of it. Myself I'm not sure I could sleep well at night knowing I'm supporting a company that is forcing others out of business.
What’s the next blue chip on the agenda Scott?
Scott….I just love your sense of humour it makes even the most mundane story a joy to read…..lol…likenening Woollies to UHT Milk. I love it.
Have a great day
When given the opportunity I shop at Coles as they still accept my ‘sign’ credit card option which saves me banking fees. Also Woolworth’s makes 2 Billion per year on poker machines which I think make a joke of their family friendly image.
Great article! I’d love to buy my 3 yo son some Woolies shares but can’t open a share trading account because he’s under 18. Any ideas?
Open an account in your name and buy them. What is the issue?
i guess an option for all the haters but investors is buy their shares but don’t buy their food??
Fair enough? they’re not exactly slashing amazon rain forests…..yet.
on a historical P/E basis this is the best time in a decade to purchase WOW. i would hold off until QE III is announced or not and wait until the european situation resolves itself. also scott you forgot to mention that woolies is getting into hardware just as the property bubble is bursting.
Leon mate – QEIII? Seriously….what on earth does Quantitative Easing in the US have to do with the capacity for WOW to generate revenue? If you actually knew anything about it you wouldn’t be using it as a reason for not buying into a defensive well diversified stock. Also, currently analysts are all either recommending this stock as either a strong or moderate buy. The entire point of this article is WOW’s ability to withstand economic downturns, its why its considered a blue chip stock and why it trades at a premium. Again, the European situation – what does that have to do with WOW – do you somehow think the issues with European sovereign debt will impact on people’s desire to buy groceries? FINALLY what the hell does the property market falling have to do with hardware stores? When people’s property value is falling do they no longer cut the grass, improve the floors, redo the kitchen????
Europe and US policy has nothing to do with share price does it?? how much has woolies fallen in last few days……
WOW has fallen around 10% since the initial discussion almost entirely based on O/S events. its behaviour over the short term has been far less volatile than the broader index (around 1%/day vs around 2-3% for the index) and has tended to move counter cyclical to index. ie risk on WOW sold off, risk off WOW is bought) as i have said before this is best time in ten years to buy WOW on historical P/E basis. buffett prefers to buy less than 12 P/E and is backing a truck up at around 8 P/E. but you just dont get that with WOW. so long term fundamentals say to me you should leg in now in around 3 lots over next 18 months. hope this helps everyone
How many shares do you have to have to be profitable?
weird question susan. the yield on woolworths is around 4% so worse than term deposit. however with around 14.5% capital growth over the last decade you are looking at nearly 20% return on your money, year on year. this is outstanding and almost as good as warren buffetts long term average. to be profitable and pay a decent wage (~100k/annum) you will need around 2.0 million dollars worth of woolworths by rough estimates? is this what you are asking?
Leon try leaving advice to others. First while the yield is currently 4.3% and barely under what a term deposit gives, it pay s a100% fully franked dividend which is used to offset the OP tax. The TD is fully assessable as income. Since you have no idea what the OP earns you have no idea if its better or not. Second not sure where you are getting a 14.5% return “year on year” as you say. Since 2003 WOW has roughly doubled. Thats a return of 9% year on year which is ABSOLUTELY NOWHERE NEAR BUFFETT. So please don’t include him in this. Finally need 2M worth of woolworths to get 100k where do i start….
the numbers are there for all to see. sorry you fail.
weird question as it may be but yep that’s the answer i wanted, thanks.
First share I ever bought (in the initial float). Applied for the minimum 1000 @ $2.40 but was cut back to 800 due to the demand. Subscribed to the DRP when introduced and am still enjoying the growth in the investment. Doing OK from my point of view . . .
A good, steady investment for sure…BUT for those of you who like to invest ethically, (yes, I can hear you luaghing already) well, maybe there’s other options…
A few years ago in Brisbane I noticed Woolies had started placing very tall, steel tubed and carboard signage/advertising systems at the checkouts. These things blocked access to collecting your grocery bags and made it difficult. I couldn’t figure out why such an awkward thing would be placed there _ I know these guys never, ever do anything without solid research and reasons. It wasn’t until I started to find that I was quite often leaving the very last bag behind when distracted by the payment bit. I couldn’t see it after putting my wallet away and just wondered off – no call back from the checkout person. I did this often, always kicking myself and then going back when I realised after getting home. Sometimes I realised days later when trying to find something and had by then tossed out the docket.
I asked checkout people at 3- 4 stores just how many people did what I was doing, they all said ,’heaps!’, maybe 10 30 a day! Dry goods go back onthe shelf if they’re not collected.
Now, here’s the figures for the profit taking on this ‘innocent’ advertising idea, and let’s be conservitive in this:
- say 15 people a day with a bag at $20 worth = $300.
- Say 10% of people forget all about their bag per day, that equals $30 per day at one store.
- According to Scott Woolies has 2,800 outlets, that equals $84,000 per day.
- Let’s say this happens on only 200 days of the year…that = $16,000,000 per year extra income for Woolies, for nothing but the cost of a few grand on plastic and steel signs (or should I say ‘steal’. Even if I’m off by 50% it’s still $8,000,000.
I have noticed these things in stores in Melbourne, Sydney and Cairns, they are still there and I ask occasionally and people still leave truckloads behind…talk about leverage.
I have worked at Coles on checkouts for over three years. if someone leaves something behind that they have paid for what happens is this: I notify the front desk and give them a description of the person. They go through the bag and scan everything with a ‘Max’ which is a hand held ordering/scanning device. All items barcodes + time + description of person is written down. Cold things are put back in fridge/freezer, dry goods kept at front desk for the day, then put back.
If the person comes back with their receipt and it all checks out we give them all their stuff back or equivalent. Even if they don’t have the receipt but they can describe the contents of the bag we give them the benefit of the doubt. Plus there are a couple days leeway if they only realise the next day or cant get back in for a few days. I would assume Woolies would have a similar system. We take it pretty seriously at Coles.
Enjoyed your commentary on Argo,Woolies & CBA which form a small part of my portfolio
I am thinking of buying 12000 woolies shares. Is it a great time to buy for long term growth,
barry check my comments here. i have been buying WOW since 1995 and understand the business well. i have not bought since around 2001 and am buying now. beware however their hardware strategy and also O/S events. good luck (but with patience you shouldnt need luck!)
Hi Scott,
I’ve followed your advice & I’m now debt free with $10k in the bank plus $3k in my mojo. I’m ready to invest but want to set up an online trading account. Who would you recommend?
My Mother has always said if you are going to have a little business get into the grocery business “as EVERYONE has got to eat”, this was long before supermarkets were even around, I think the FIRST supermarket was called Foodland in Melbourne.