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Why Warren Buffet could be drawn to Woolworths Limited

The recent commentary surrounding the hefty losses Warren Buffett’s Berkshire Hathaway Inc has suffered on its investment in leading UK supermarket retailer Tesco PLC has some important lessons for investors in Australia’s leading supermarket retail owner Woolworths Limited (ASX: WOW).

Buffett first invested in Tesco in 2007 and so far it hasn’t been a pleasant experience with the stock recently plunging to an 11-year low!

Buffett has long been a fan of retail businesses when he can identify the existence of a “moat”. Examples of his other investments 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.

Many of these retailers continue to perform well with Tesco a glaring exception. Here are two problems that Tesco faces but where Woolworths looks to be excelling, making the Woolworths investment thesis appear more appealing:

Market Power – Buffett likes to buy businesses with “moats”. The dynamics of the UK market compared with the Australian market appear to be in Woolworths’ favour. Woolworths looks to have a reasonably attractive moat given the scale advantage it enjoys which allows it to be a low-cost retailer. Likewise, its incumbent property footprint sees the group have anchor tenant status in many malls and shopping centres – a position which a new entrant would most likely fail to match or shake.

Growth Opportunities – Tesco’s global ambitions have excited investors over the years, however its need for overseas expansion has arguably been partly the cause of its undoing, and also highlight the troubles of growing its domestic franchise in the face of competitive entrants to the UK market.

In contrast, Woolworths still has exciting growth prospects within the Australian market both organically and inorganically. Organic growth opportunities include value added services such as home delivery and expansion of products and services offered through its network and brand such as insurance and financial services. Inorganic opportunities include management’s decision to enter the hardware space – a sector dominated until now by the Wesfarmers Ltd (ASX: WES) owner Bunnings.

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

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