How good is Woolies?

Consensus is the enemy of investors. When one exists, it's worthwhile testing its veracity. Not every consensus is wrong; to be blindly contrarian is just as bad as being blindly obedient, but testing common ideas is at the heart of investing.

One idea cemented in legend is the notion that Woolworths is the country's preeminent retailer. The success of Woolworths is impossible to refute; listed on the ASX in 1993 at $2.45 a share with a market cap of $2.5bn, Woolworths has morphed into a business worth over $30bn. On any measure of profitability; return on equity, EBIT margin, profit per square metre, it's amongst the world's best. Woolworths is, without doubt, a retailing marvel.

But is it remarkable because of management or because of circumstance? It's an important question, especially now. Resurrected arch rival Coles is taking market share; Woolies is entering the hardware business and some say there is no more growth in supermarkets. If Woolworths is to succeed in the future, management will be important.

Its success in supermarkets is amazing, but consider its position; half of a duopoly in an essential industry which, for years, had an awful, broken competitor in Coles. Woolies held, in effect, a monopoly. A result other than stunning success should be considered failure.

Many of the ideas implemented so successfully by Woolworths have come straight from overseas peers. International visitors often remark how much Woolies resembles Tesco, even in marketing and store layout. Woolworths may have copied the innovation of industry leaders, but that doesn't make it innovative in its own right. Coles had a chance to do the same, but that speaks more of its weakness than Woolworths' strength.

When Woolworths has operated without the benefits of its monopoly position, the results have been less than spectacular; Dick Smith, for example, is a poor retailer. How can we reconcile its failures with the supermarkets' success? Overseas expansions, although modest, haven't impressed either.

This is not to cheapen its success to date or to say that Woolworths will fail in future. But, at the very least, what makes the business powerful needs to be considered.

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