There's a reason they are called 'convenience stores.' It's...

There's a reason they are called 'convenience stores.' It's because they are convenient. :) They will never match Woolies on price but I for one would rather pay $55 for groceries at IGA than $50 at Woolies with the added hassle of queues, parking and extra distance. Generally speaking people will, but in bad economic times those doing it a bit tough will often make extra effort to go to a big supermarket, which has contributed to Metcash's margin squeeze the last few years.

If iga owners can never match woollies on margins due to commissions to metcash I don't know how the model can grow that much in the long run.

You could have said the exact same thing 10 years ago because Coles and Woolies were squeezing the little guys then too, but there are still plenty of IGAs around today and MTS is turning a good profit and steady earnings growth.

The point is that it's cheaper for the IGAs to pay commissions (for want of a better word) to Metcash than it is for them to try and ship produce in independently. They won't ever BEAT Woolies on price but using Metcash allows them to narrow the margin to a point where convenience comes into play.

I understand your logic but the proof is right in front of you. Independent stores are still around despite many years of competition from the big boys, and Metcash is a big advantage to them.

The community point makes sense but what's to stop Coles investing in more stores in these remote areas and using their pricing power to rob market share?

They do, as soon as a town grows to a certain point. But I worked all over regional Qld for four years from 2006-2010 and I can tell you that the locals in small towns tend to be fairly heavily anti-development and any chain that tries to come into their town often faces a heavy backlash, be it Coles, Woolies, McDonalds or whatever. The Coles usually wins out in the end (some years down the track) but plenty of towns either don't have a Coles (so rely on the IGA) or the IGA operates alongside (apparently profitably, since they are still there).

FWIW I have said many times here that I am happy to hold MTS for 'low single digit growth' because the div yield is good (significantly better than WOW or WES), but I am keeping an eye on earnings because if growth turns negative then what you are suggesting will have come to pass and the big boys will be winning. But I am hopeful that as the economy picks up, price deflation will reverse and margins will improve for all three of WES, WOW and MTS.

That's my investment philosophy for MTS anyway. I recognise it's risky for the reasons you mentioned but at the moment the div yield is attractive enough to balance it out. I hold two of the big banks, MQG, BHP, ORG and WPL in my div paying stocks and I can tell you that since I bought MTS its div yield has outperformed the lot of them. Only the big banks are still matching its div yield but they have both lost about half their value over that time, whereas MTS is basically flat.

Incidentally it's time to head home and I must pop into the local IGA on the way and pick up something for dinner. ;)