Call me a bear but would a lot have to go right for the Woolworths Limited (ASX: WOW) share price to shoot the lights out in 2017?
Take a look at this chart of the Woolworths share price since 2012:
Clearly, Woolies has got to some catching up to do.
What went wrong with Woolies?
Woolworths was until recently the owner of the Masters and Home Timber and Hardware brands. Masters was an issue, to say the least. Personally, I think it had great potential but its strategy was all wrong. And unfortunately, it could not have come at a worse time.
Because while Masters was choking down hundreds of millions of dollars in losses, the Woolworths management team was also neglecting their supermarket customers.
Ask yourself: Do you prefer to shop at Coles or Woolies?
Coles is owned by Wesfarmers Ltd (ASX: WES).
I used to love Woolworths. But in the last three years my allegiance has switched to Coles. Woolworths got really expensive and its range wasn't as appealing anymore.
At first, I thought the rising prices was good for business and profits. Boy, was I wrong.
At one stage, Woolworths supermarkets had profit margins of almost 7%. That's huge for a supermarket business. So big, in fact, that it was labelled the most profitable supermarket in the world.
But what happens when a company starts to crank its profit margins?
Consumers — like you and me — go elsewhere. They vote with their feet.
And that was reflected in the results. Coles was selling far more product per square foot of store space.
On the mend?
The problem for a business like Woolworths is that once a consumer has a perception about its brand, such as 'Woolies is more expensive than Coles and Aldi', it can take a long time to change.
Woolworths is lowering its cost base, negotiating with suppliers and reinvigorating its brand to regain that relevance. But it's early days.
Should you buy Woolworths shares?
With Coles and Aldi breathing down the neck of Woolworths, I'm not ecstatic about its long-term prospects. However, in 2017 I would not be surprised if its share price rallies higher.
I'm not a buyer at today's prices, but after many years being asleep at the wheel I think some investors are piling in because they think Woolworths is a bargain. This could be a self-fulfilling prophecy.
