2 consumer-centric businesses to buy and one to avoid

Credit: Benjamin Horn

Retail businesses, especially those with consumable goods like food, are attractive to shareholders because of the repeat nature of their sales. Although they usually have lower profit margins than some other industries, the ‘everyday’ nature of their sales makes them more defensive and often gives them long lifespans. Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) are perfect examples of this type of business.

Unfortunately, most businesses of this kind in Australia operate in a mature market – there’s limited room to expand, and the market itself isn’t growing any faster than the population. Here are two consumer businesses that have the room to grow much larger by expanding their market share, as well as one that doesn’t:

Greencross Limited (ASX: GXL) operates vets and pet retailers and benefits from the double tailwind of increased per-capita spending on pets in general as well as a growing portion of the population that sees pets as ‘family members’. People spend significantly more on ‘family member’ pets, as anybody who’s seen my dog Maya with her Weetbix and warm milk on a winter morning will understand.

Greencross’ market is growing at an estimated 2%-3% per annum, and the company also stands to benefit from capturing a greater share of this growing market, aiming to increase its share from 8% to 20% by 2020.

Telstra Corporation Ltd (ASX: TLS) will continue to benefit from growing mobile app and internet usage for many years – I haven’t seen a single soul yet suggest that either industry is close to reaching its peak. Given the ongoing migration to cloud software, Streaming Video on Demand (SVOD), and the proliferation of a zillion other functions for portable devices, Telstra’s biggest industry has a lot of life left in it.

The company also has other growth businesses, however, as the largest player in the market, it will struggle to grow its slice even though the pie is getting bigger.

A2 Milk Company Ltd (Australia) (ASX: A2M) is a dairy company leveraging the easily-digestible traits of its A2 milk to attract health-conscious consumers, as well as those with lactose intolerance (which a2 claims is sometimes misdiagnosed). a2 milk contains only a2 proteins, compared to regular milk which contains a1 and a2 proteins. The a1 protein is thought to contribute to digestive distress. a2 has experienced considerable sales success in Australia so far and its ventures into the US, UK and China look promising.

Despite the price premium its products command, more consumers are making the switch to a2 milk, increasing a2’s share of the market. The icing on top is the growing trend of health-consciousness in consumers that has led to a vast expansion in the health foods aisle as well as the rapid growth of businesses like Freedom Foods Group Ltd (ASX: FNP).

Before buying any of the above companies today however, I suggest you check out another "dirt cheap" consumer business - it's growing like gangbusters, and trades on a fat 6.3% fully franked dividend.

With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016. Click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

Motley Fool contributor Sean O'Neill owns shares of A2 Milk and Greencross Limited. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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