Customers are no longer using huge American-inspired superstores to do the weekly shop. Instead, consumers are making more frequent trips to the shops, buying smaller amounts on a regular basis.
For retailers like Morrisons and Sainsburys, which are built around the stack them high and sell them cheap superstore mentality, its proving difficult to adapt to this changing retail environment.
On the other hand,McColls(LSE: MCLS) has been built from the ground up with convenience shopping in mind, giving the company an edge over its larger peers.
Struggling to adapt
Sainsburys and Morrisons have been trying to adapt to changing consumer shopping habits for years, but they are struggling. Morrisons in particular is really struggling to adapt.
Morrisons made a late entry into the convenience store market, although this hasnt stopped the company from rolling out its M Local stores at a rapid rate over the past year.
However, the retailer was recently forced to admit that it was planning to close 23 underperforming M Local stores during the current financial year. This followed the news that Morrisons was planning to shut 10 smaller supermarkets during 2015.
The sudden U-turn and decision to shut such a large number of M Local stores implies that the company is struggling to get to grips with the convenience store model.
In contrast to Morrisons, Sainsburys is trading strongly in the convenience sector. Sainsburys convenience store sales rose 14% during the fourth quarter of last year, and 23 new convenience stores were opened.
Still, Sainsburys is struggling in other areas. Group like-for-lake sales fell by 1.9% across the group during the fourth quarter of last year.
Additionally, falling sales and price cuts are eating into the groups profit margins. As a result, the company is planning to slash its dividend payout by around 25% this year.
A different breed
As Morrisons and Sainsburys struggle, McCollshas shown that it is able to succeed in the small,convenience store format increasingly favoured by customers.
The groups like-for-like sales rose 0.7% during its trading year ending 30 November 2014. Pre-tax profit jumped by 186% and earnings per share rose by 48%.
And the City believes that McColls earnings are set to continue growing steadily for the next two years. Analysts have pencilled in earnings per share growth of 2% during 2015 and growth of 6% during 2016. Considering the fact that the majority of McColls peers are reporting falling sales, these figures are relatively impressive.
McColls is halfway through an aggressive expansion plan. 60 newconvenience stores were acquired last year and the groups 800thconvenience store was opened December. Management wants to have 1,000 stores open by the end of 2016.
Whats more, McColls is currently trading at an attractive valuation. The company is trading at a forward P/E of 11.3 and is set to yield 5.6% this year. The payout will be covered one-and-a-half times by earnings per share.
Even though McColls is a better pick than Sainsburys and Morrisons for me, investors shouldnt expect fireworks from thecompany any time soon. But if youre looking for a steady grower with an attractive dividend yield then McColls is the stock for you.
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