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Woolworths still expanding in New Zealand

Woolworths (ASX: WOW) is a company I habitually ignore. Not because there’s anything wrong with the business – it’s a great business – but because for the five or six years leading up to 2012, I found it unimaginative and boring. A few of Woolies’ expansions and a recent trip to New Zealand have been enough to change my mind.

Let’s start locally, with Masters Hardware. The hardware chain being rolled out by Woolworths appears similar to the Bunnings chain operated by its primary competitor Wesfarmers (ASX: WES) in every aspect. It will offer cheap hardware and garden accessories, friendly, helpful, sales-driving staff and a pleasant atmosphere for consumers.

Depending on the brand loyalty felt by consumers to Bunnings, Masters should take a significant chunk of Bunnings customers without really having to fight for them. If the prices between the two chains are the same and the service/shopping experience is the same, customers will spend money wherever is most convenient to them – much in the same way as they do when deciding to shop at Woolworths or Coles.

Secondly, in addition to moving into the Australian hardware industry, Woolworths is also seriously expanding in New Zealand. In its annual report, Woolworths reported a growing market share across the Tasman, and a recent trip there myself revealed a significant number of new stores under construction in prime locations.

Its competitors are well entrenched in NZ but results so far indicate that Woolworths will be able to take a decent market share without huge difficulties. While its native competitors have the best locations in the centre of various towns and cities, Woolworths (known as ‘Countdown’ in NZ) has positioned itself towards the outskirts in new growth areas, which should give it more or less a captive market – particularly if it adds petrol stations as well.

Finally, Woolworths appears to have impressive insight into the dynamics of the Australian cities it builds into – clearly it does its research. In Townsville, Woolworths is building its Masters Hardware building literally right beside the main Bunnings in town. This construction should steal a significant chunk of Bunnings customers once completed – shopping at this particular Bunnings can actually be unpleasant because it is often extremely busy.

A second construction of a Woolworths-branded petrol station on Ross River Road also shows brilliant local insight. It was built on the only vacant lot on one of the busiest thoroughfares in the city, and is the only petrol station on that side of the road for kilometres in either direction. It has been consistently packed with cars ever since it was built. While a single petrol station isn’t much in terms of Woolworth’s bottom line, if it is in any way reflective of the local research Woolworths puts into each of its new stores, investors should be thoroughly impressed.

Wesfarmers isn’t letting Woolies have it all its own way however, with its own equally brilliant (and devious) idea of registering as Masters Home Improvement Limited in New Zealand to prevent any chance of Woolworths expanding ‘across the ditch’ under that name. Bunnings already has a large number of stores in NZ and Wesfarmers is keen to protect its market share. Given the intensity of competition between the two supermarket giants, I’m a little surprised the knives haven’t come out sooner.

Foolish takeaway

Competition aside, Woolworths is aiming for double-digit growth in 2014 and given its ongoing expansions, I can’t see this being too difficult. Neither Wesfarmers nor Woolworths has the leverage or competitive advantage at the moment to inflict any substantial harm to its competitor, so shareholders can feel safe buying into either of these expanding companies. Woolworths is obviously my pick of the two for 2014.

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Motley Fool contributor Sean O'Neill does not own shares in any company mentioned.

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