FOR WAL-MART, IT’S SHOWTIME!

Retail giant expanding into food channel

As the Wal-Mart USA exec demonstrated to Miller distributors the power of the chain (doubling sales of Lite after making it a VPI), research analyst Mike Branca at Lehman Brothers was quietly scouring Wal-Mart’s Neighborhood Market in Oklahoma to “get a perspective on how our Consumer Products companies are faring” in the stores. He visited 3 Wal-Mart Neighborhood Markets, 2 Supercenters, and one Albertson’s.

What he found may impress you. First, if Wal-Mart aggressively expands the Neighborhood Market concept, which is basically a scaled down Wal-Mart with more emphasis on groceries, Wal-Mart would be a much bigger player for beer. However, Mike points out quite correctly that beer would not be affected as much as other CPG categories thanks to, you guessed it, the three tier system and widespread DSD delivery. Beer (and all beverages actually) is ubiquitous, and its availability on-premise and in many other channels insulates it from pricing pressure from retail behemoths like Wal-Mart. I personally believe this is why the top 3 brewers decided to start publicly backing the 3-tier system about ten years ago. Incidentally, this could also contribute to the fact that private label brands are virtually non-existent for beer.

Second, an expansion of Neighborhood Markets would step up retail promotional activity, causing price wars in markets that in many cases is already causing supermarkets to sell beer below cost. While this provides a great short term boost in sales, it’s not a good long term business practice as consumers get used to the cheapened price.

Another point is that Wal-Mart is a believer on consumer Darwinism, i.e. the shelf space you get is highly correlated with your market share. This would tend to help A-B who, on an average national basis, does not have 50% of the cold box despite its 50% market share.

A-B WORRIED ABOUT BOTTLE BILLS. A-B said yesterday in a SEC filing that if Congress or additional states started to require deposits on bottles or cans, it might have to “incur significant capital expenditures to comply.”

TEN STATES ALREADY GOT IT. Ten U.S. states already have “restrictive packaging laws and regulations” that require deposits on beverage packages, and Hawaii passed a deposit law scheduled to go into effect in 2005. Such laws “inflationary, costly, and inefficient for recycling packaging materials,” said A-B. The laws have hindered beer industry growth but have not had a significant effect on the company’s market share.

DISTRIB PROBLEM. Mosquito-infested, saliva-filled, sticky, nasty returnable bottles are every beer distributor delivery driver’s personal nightmare. It’s not only unsanitary, it’s unsafe and costly to pick up bottles.

A-B ALSO SAID IN THE SEC DOC that it made accelerated contributions of $201 million to its pension plans in Q4 2002. Reason: stock market is in the garbage, so the company has to take up the slack. Many companies struggling, but luckily A-B is so flush with cash that $200 mm hardly registers.

THE REAL MONEY. A-B said it expects to spend $4.5 billion on capital projects from 2003 to 2007, possibly to increase capacity and upgrade breweries. Until Monday, Harry