There’s plenty of brilliant bargains I reckon long-term investors should consider buying following the recent stock market crash. But I’m not certain McColl’s Retail Group (LSE: MCLS) will have what it takes to make investors big profits by the time they come to retire.
Food retailers have, historically, been considered ‘safe as houses’ investments. We still need to eat and drink whatever the weather, right? And so sales at grocery retailers don’t tend to crash, irrespective of how tough economic conditions are.
However, the increasing fragmentation of the grocery sector poses huge risks for McColl’s. And they’ve grown significantly following Aldi’s decision to launch an online grocery operation with Deliveroo.
This represents a big problem for the likes of McColl’s as it seriously undermines its modus operandi. Convenience. Aldi’s new service could allow shoppers to receive scores of own-branded goods within 30 minutes of placing their order. Things don’t get much more convenient than that, surely?
Okay, Aldi’s new service is small in scale and operates from around half a dozen stores. But it could prove a huge money spinner for the German chain and another significant problem for physical-only retailers like McColl’s, should it take off. It seems though, all those who operate an online service stand to gain significantly following the coronavirus outbreak.
Citing a report from Ensono, information technology bible Computing recently reported that 22% of shoppers who hadn’t bought online before lockdown are now doing so. Chillingly for the likes of McColl’s, the study suggests the proportion of consumers doing at least half of their grocery shop online looks set to rise from below 20% to north of 30%.
This particular chain also stands to lose out to the larger operators like Tesco, Aldi et al because of their ability to offer bigger discounts to cash-strapped consumers.
The 2008/2009 banking crisis proved to be a landmark moment for the German discounters as difficult economic conditions forced them to try and stretch their shopping budgets that little bit further. And the shocking recession that’s coming down the tracks promises to boost trade at those offering their goods for less once again.
Thus, McColl’s will need to remain engaged in massive, profits-damaging discounting to stop sales crashing through the floor.
Up 200% since the stock market crash
McColl’s shares are cheap. At current prices, it trades on a forward price-to-earnings (P/E) ratio of 6 times. This is well inside the broadly-considered bargain watermark of 10 times and below. But it’s a reading that reflects the rising threat to its operations — in both the current fiscal year and beyond — from its competitors’ physical stores and online services.
McColl’s share price has exploded since the stock market crash. It’s risen more than 200% from mid-March’s record lows of around 15p per share. I won’t be buying the grocery retailer’s shares though.
The fact its value has fallen by more than four-fifths during the past two years illustrates the huge risks posed by the increasingly-competitive landscape. This is a share which I fully expect to resume its downward trend. Sooner rather than later.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.