Coles planning for growth away from Wesfarmers Ltd (ASX:WES) with small stores

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The soon-to-be separate Coles Group is planning on expanding its store network with small format stores after exiting Wesfarmers Ltd (ASX: WES).

After Coles has left Wesfarmers it will contain Coles Supermarkets, Coles Financial Services, Liquorland, Vintage Cellars, First Choice, Coles Express and a 50% interest in flybuys and freehold property holdings. A pretty good business portfolio.

Wesfarmers shareholders will receive one Coles share for every Wesfarmers share that they own. The plan for dividends is that the two separate businesses will pay roughly the same level of dividends as a combined entity would have at the start.

Coles is already a national supermarket chain, but it has plans to grow in inner-city and ‘local’ locations by rolling out Coles Local. These are half the size of a regular supermarket and will only stock one third of the number of products – around 8,000. This number will still allow people to do a full supermarket shop. It will have a focus on fresh food and convenience meals.

The idea is to challenge Metcash Limited (ASX: MTS) supplied IGAs, Harris Farms and Woolworths Group Ltd (ASX: WOW) Metro stores.

Foolish takeaway

I really like the idea of a smaller store as it allows Coles to expand into locations there simply wasn’t enough space for a full-size supermarket. This could be important because more of us are now living in high-density locations.

Whilst I have no interest in investing in Coles because I think the margins are going to drop over time, I think this strategy makes Coles a better investment idea than it was before.

If you’re after defensive earnings then I’d much rather one this ASX stock, indeed I already own it in my portfolio.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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