Food retailing is a big business, but you have to be a big player to really get ahead. Think of all the items you can buy in a supermarket. Then, multiply that by all the supermarkets that each suburb needs for daily shopping.
People want wide variety at a lower price scale. The market leaders only make about 4%-5% net profit margin on sales, but their hold on the market gives them a big slice of a very large pie.
Most people know Woolworths Limited (ASX: WOW) by name and may even shop there. A devoted shopper could have tripled their money if they were also a shareholder as the share price rose from around $11 to over $35 in the past 10 years.
The company announced it will open a net 108 new stores in this financial year. That covers supermarkets and other brand stores such as Big W, Dan Murphy's, Masters, Home Timber and Hardware and BWS.
Total company earnings will probably grow in the short-term, and earnings drive share price.
The other retail giant is Wesfarmers Ltd (ASX: WES). The company name may not be as familiar to regular shoppers, but it owns Coles supermarkets, Bunnings Warehouse, K-mart and Target – all household names.
It plans to open 70 Coles supermarkets over the next three years. The company is equally skilled at getting strong performance from its business and low costs for its customers. It is selling its insurance underwriting business for $1.85 billion, so that will free up capital for further store expansion.
The extra earnings that it could add to present levels makes future investment returns appealing.
Foolish takeaway
I think both companies will give investors steady growth similar to the recent past. Their store expansion is to cover natural population growth. They want to establish themselves in new communities and suburbs as the place to shop, so they pour in more capital to lock in future growth.
Unless the business story changes dramatically, the two companies will probably continue holding the lion's share of their markets for the next decade.
Apart from competing with each other, they have to contend with foreign based companies such as Costco and Aldi. Competitors will come, but they may not be able to operate on the same scale.
