Business is always changing with new challenges, none more so than for retailers. They have to work with tight margins, seasonality and constantly changing consumer preferences. Supermarket and general retailing giant Woolworths Limited (ASX: WOW) is always adjusting and recreating itself to keep earnings growing.
The stock has risen about 2% over the past three months, roughly in line with the gain of the S&P ASX All Ordinaries Index (ASX: ^AORD) and is close to setting a new 52-week high. It is always in close competition with its arch-rival Wesfarmers Ltd (ASX: WES), which operates Coles and other stores like Bunnings Warehouse, K-Mart and Target. However, overseas companies like Aldi and Costco are expanding into Australia. Will they upset the incumbent duopoly?
Just the other day, my son said his friends went to a newly opened Costco and everything is cheaper there (once you pay the annual membership fee), so now he is planning to go shopping there himself. Could a new market entrant like Costco take down Woolworths or at least spoil the growth and earnings we are all used to seeing? I think not. Here are three reasons why you should hold onto your Woolworths shares and keep your eye on the long-term like all Foolish investors do.
1) Size and scale
Costco may be a big success in the US, but there are only a handful of stores here in Australia. It is testing the market, but doesn't have the scale, experience and logistics network that Woolworths has. If a certain level of success isn't reached, it may just close or limit the Australian "experiment". However, Woolworths, a $45 billion company, is here to stay.
2) The real estate game
Woolworths and Wesfarmers are constantly competing for prime commercial real estate sites for future stores. This makes it harder for new entrants with shorter timeframes to acquire and hold good sites. The two big retailers are long-term investors in property and follow the growth and development of new suburbs and towns like hawks. That can make it much more expensive for new competitors and hinder their growth.
3) Deep pockets for expansion
The company can afford to keep up its store expansion rate for many years, completely outpacing smaller rivals and stay toe to toe with Wesfarmers. It can survive better on even smaller margins and outlast new entrants. Even Metcash Limited (ASX: MTS), the wholesale business overseeing the Independent Grocers of Australia (IGA) network, doesn't have the resources to match Woolworths' pace.
