Does Woolworths Group Ltd (ASX: WOW) have the biggest moat in Australian business?
As an avid Warren Buffett fan, I am always on the lookout for companies that have a competitive advantage and dominate the industry.
Founded in 1924 Woolworths has grown to become Australia’s largest supermarket chain. Boasting 995 stores across Australia Woolworths employs over 110,000 team members in stores, distribution and support offices across the country.
This has since grown throughout New Zealand with over 181 Countdown stores employing 18,000 team members stocking more than 20,000 product lines.
Rounding out Woolworths’ go-to-market strategy is Endeavour Drinks which is the parent company to well-known brands such as Dan Murphy’s, BWS and Cellarmasters.
Woolworths operate in a diverse number of industries; however, their core business is Australian food and liquor – specializing in consumer staples. These non-cyclical products are mainstays in every Australians’ cupboard with consumers unwilling to cut these from their everyday budget (irrespective of the broader economic climate). In my opinion, this is great quality to have in any company or share investment, if you’re looking for a dependable income stream.
Importance Of Moats
One of Woolworths’ largest moats is its ability to scale its purchasing operations – this market share allows it to have considerable buying power when negotiating with suppliers. From an operational standpoint, the scale also allows the business to standardize logistics, marketing, and sales across all supermarkets across Australia.
An interesting consideration is the vast amount of consumer knowledge this scale provides the company, with outlets scattered across Australia Woolworth is at the coal face of buying habits and to a lesser extent the discretionary spend of the Australian population. The power of these touchpoints can be reinvested in supplier contracts (prioritising popular stock) or enhancing marketing campaigns (which ultimately drive increased sales and revenue).
Bear Case
The contrasting view is that its enormous scale can potentially hinder its continued growth while expansion opportunities will become limited as new companies enter the market. However, with population growth and inflation underpinning its growth, much of its future evolution will come naturally with urban sprawl.
Conclusion
Woolworths is a recent addition to my ASX share portfolio, my initial attraction was its market size (and dominance) but the ongoing population growth and its almost ‘recession-proof’ consumer business is becoming a very attractive feature.
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Disclosure: At the time of writing, Anthony owns shares of Woolworths.