Warren Buffett made a 'huge' mistake buying Tesco Plc, so I think he'd be sceptical of buying in at the current Woolworths Limited (ASX: WOW) share price.
Woolworths is often compared to the UK-based supermarket operator Tesco due to its market position, offering and… the recent Woolworths share price performance.
Buffett and Tesco
Buffett built a stake of around 5% in Tesco before admitting that the investment was a "big mistake" in his 2014 letter to his shareholders. He believed he was too slow to sell his shares.
His Berkshire Hathaway investment partner, Charlie Munger, would have said Buffett's "thumb-sucking" cost them because in the time they held Tesco shares its market share dwindled and profit margins were squeezed.
"In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives," Buffett wrote at the time.
All-in-all, Buffett and Munger's Berkshire Hathaway lost $US 444 million with their investment in Tesco. The duo have made far worse losses, of course, but this one is still fresh in the memory.
Tesco and Woolworths
Tesco's fall has often be likened to Woolworths' fall from grace. Indeed, the company's relative market position and products are similar.
Tesco's woes began when German giants Aldi and Lidl, online companies and U.S. supermarket chains made a move for Britain. Tesco was forced to cut prices, close stores and, basically, revamp its entire operation. As my colleague Mike King wrote in early 2016 it took, "Tesco 4 years to turnaround its business."
However, as you can see in the graph above, shareholders are yet to be rewarded by Tesco's efforts.
Closer to home, Woolworths' story has been eerily similar. Profit margins have collapsed while rivals like Aldi and Coles — owned by Wesfarmers Ltd (ASX: WES) — have closed in. Costco is also expanding its footprint, and online is proving to be a headache.
Outside of its supermarkets, Woolworths' Big W is struggling.
Buffett and Woolworths?
Despite Buffett's likely reaction to the idea of buying another supermarket 'turnaround', let's run Woolworths shares through the four-step Buffett-Munger filter:
1. You must be capable of understanding of the business. As a seasoned businessman, I think Buffett could easily understand Woolworths. That's a tick.
2. The business must have a durable competitive advantage. Woolworths can offer products for a low price — that's a comparative advantage. But is it a competitive advantage and is it durable? I'm not so sure.
3. Management must have integrity and talent. Woolworths' CEO Brad Banducci has only been in the role since February 2016 but has deep experience in the company's retail businesses. The board is headed by Gordon Cairns, a highly credentialed and experienced leader.
4. No company is worth an infinite price. The current Woolworths share price might seem ok — if you believe the supermarket business will return to its former profitability. However, if you think the intense competition is here to stay and the future won't be as profitable, I'm not so sure the valuation is compelling.
In summary, with a poor history in supermarket turnarounds and meeting just two of the four criteria, I doubt Warren Buffett would buy Woolworths shares today.
