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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