Shore Capital continues to prefer discounters over supermarkets

Shore Capital has repeated its preference for discount retail stocks over incumbent superstore operators after research showed that the Convenience, Discount and Online (CDO) channels will drive growth in the UK grocery market over the next five years.The Institute of Grocery Distribution (IGD) estimated last week that the UK grocery market will grow by 16%, around £28bn, during the next half-decade and be worth £203bn by 2019.Inflation is forecast to contribute £19.3bn of this growth over the period, while population growth accounts for £6.3bn and volume growth is £2.9bn.Shore said the strong growth expected from CDO represents mixed news for the large supermarket groups as they are the fasting growing element in Convenience market and more or less control the Online channel."However, the problem for the incumbent superstore operators is that the Convenience segment represents a financially less rewarding channel compared to historic supermarkets. With their growing capability, such shops are increasingly cannibalistic of larger outlets as increasing numbers of consumers seek to shop in smaller stores more frequently. "Additionally, whilst Online brings with it large baskets in the main and, arguably, more profitable customers at a holistic level if management rhetoric is to be believed, the picking and fulfilment costs means that it is a demonstrably less profitable activity and cannibalistic too."Shore said that the "sting in the CDO acronym is 'D', the Discounters". These are gaining over 1% share in the UK market per annum currently, despite retail growth rates remaining sluggish.The Discount channel is estimated by the IGD to grow from £10.8bn in 2014 to £21.4m by 2019, representing growth of 98%, or 14.7% per annum.Shore has 'sell' ratings for Tesco, Wm Morrison and Ocado and a 'hold' stance on J Sainsbury.BC