How to invest in Woolworths Limited and Wesfarmers Ltd while saving on shopping

What is the threat posed by potential new competitors and how would Warren Buffett assess that threat?

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Do you want to know the secret of how to save by shopping at discount grocery stores like Aldi and also win by investing in Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES), Aldi's major competitors. Well, I'm about to share with you some research that will reduce costs at the check out counter and help boost your portfolio returns.

But first I want to tell you about the threat posed by competitors and what criteria Warren Buffett would use to assess that threat.

The Threat:

Major players in the Australian grocery market may soon be facing further competition from cut-price overseas companies (like Aldi), according to The Age newspaper.

How Warren Buffett would assess this threat:

According to Warren Buffett the key is to determine, "the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

Would Buffett buy shares in Woolworths Limited and Wesfarmers Ltd?

To answer this question, let's examine the case of Woolworths after Aldi had entered the market 10 years ago.

1. The supermarket space in Australia falls under the definition of an oligopoly. Woolworths has over 1,000 supermarkets in Australia and New Zealand and is the dominant player in the industry. Nearest rival Coles accounts for 60% of the total revenue of its owner Wesfarmers, but has slightly less retail space than Woolworths.

2. There has been negligible impact on Woolworths' market share, despite Aldi having a decade long presence in Australia and securing 10% of the eastern seaboard market. This is partly attributable to the market growing, but is mainly illustrative of the durability of the competitive advantage held by Woolworths.

3. Woolworths has increased its dividend fourfold over the past decade and its return on investment (ROI) has hovered around 30% over that time.

4. Woolworths has a cost advantage via the economies of scale derived from its 1,000 supermarkets. It has centralised back office operations and logistics supply networks, which allow the negotiation of favourable supply agreements.

Clearly these stocks meet Warren Buffett's investing criteria, so in my opinion, both Woolworths and Wesfarmers are low-risk shares that may be held as a medium-to-long term investments. At the same time you may feel guilt-free in ducking into your local Aldi store to pocket the savings. Just don't tell too many people or you may ruin your win-win scenario!

Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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