Warren Buffett is certainly aware of the problems established supermarket brands can face from increased competition – his company Berkshire Hathaway Inc, has suffered a significant loss from its investment in leading UK supermarket retailer Tesco PLC.
The lessons learned from Tesco are no doubt relevant to the current situation facing Australia's leading supermarket owner Woolworths Limited (ASX: WOW) however the sinking share price could make the risk-reward trade-off an appealing investment opportunity for a long-term shareholder such as Buffett.
Buffett has long been a fan of retail business franchises where he can identify the existence of a "moat". Examples of successful investments Buffett has undertaken in the retail sector include jewellery store Borsheims, furniture retailer Nebraska Furniture Mart, chocolatier See's Candies and the world's largest retailer WalMart Inc.
Great long-term investment returns can often be achieved by acquiring leading, high-quality, blue-chip businesses that are experiencing short-term pain. Could that currently be the case for Woolworths? Only time will tell, however, there are a number of reasons to believe that in the decades to come, Woolworths will still be Australia's leading retailer…
Market Power – Buffett likes to buy businesses with "moats". Woolworths looks to have a reasonably attractive moat given the scale advantage it enjoys which should allow it to be a low-cost retailer and leverage its buying power. Likewise, its incumbent property footprint means the group has anchor tenant status in many malls and shopping centres – a position which new entrants will fail to match or shake.
Growth Opportunities – Woolworths still has promising organic growth prospects within the Australian market. These opportunities include value added services such as home delivery and expansion of products and services offered through its network and brand into areas including insurance, financial services and utilities.
