For Subscribers

Get the complete article now!

Three analysts and top management from five sector firms examine the supermarkets & drug chains sector in this special 33-page Supermarkets & Drug Chains issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info539.htm.

TWST: Mark, moving on to the issues that will affect the environment for the retailers in 2002 and 2003, first the Wal-Mart (NYSE:WMT) effect: has the impact that Wal-Mart has had on the US grocery industry been exaggerated? Or has it indeed become the 800-pound gorilla of food retailing?

Mr. Husson: We think there are several 800-pound gorillas in food retailing in the US today. We think the impact has been exaggerated by Wal-Mart analysts. We think that what you tend to find is that the markets are ruled by momentum. Once an idea gets going, there is a snowball of momentum behind the idea in the share price. That convinces people even more that the argument must be true, and that snowballs the share price further and so on and so forth, until you get a very high degree of trust in the Wal-Mart story and a low degree of trust in the supposed victims. The problem is that Wall Street is composed of a bunch of people on a little island off the East Coast of America, which is completely removed and remote from what the rest of the country is actually experiencing at any moment in time, particularly with regard to Wal-Mart. And I think some of the ideas that take hold on Wall Street have very little room in the real world. For instance, Wal-Mart has two-thirds of its stores outside the top 100 metro markets. It’s a small-town retailer. The big retailers have over 70% of their stores in the top 100 metro markets, where 63% of the population lives. So with its store openings, Wal-Mart looks big, but they actually miss many of the metro markets. Furthermore, if you look on the face of it, Wal-Mart seems to have stores in markets where 45% of Safeway stores are. That looks like a worrying overlap. But if you look at each individual Safeway store and draw an eight-mile ring around it, then Safeway (SWY) only has Wal-Mart Supercenters in 15% of its stores’ markets. So it’s a tiny overlap with Safeway. Then you have a look at Wal-Mart’s demographic, and you find it’s very much a blue-collar focused retailer. If it does have any white-collar customer loyalty at all, it’s in the young married couples who have kids and are financially stressed, whereas Safeway is very much a white-collar retailer. It’s very strong with young singles. They have absolutely no interest in shopping at Wal-Mart at all. So we think that the idea of an 800-pound gorilla stomping around the country is an attractive one to Wall Street, which likes simple arguments with dramatic outcomes. However, the reality and the practice is very different from that.

TWST: Mark, what are you factoring into the outlook for the food and drug retailers for the balance of this year and looking out to 2003, and what do you see as the greatest challenges that these companies face?

Mr. Husson: I agree broadly with what Meredith is saying about the drugstore retailers. Historically, whenever you’ve gone into a recession, the guys in the white coats have sort of crossed their arms and just waited patiently for it to end so they could start selling stuff again. However, increasingly it is ex-supermarket teams that are now running the business, so it has been different this time. They have been much more proactive about getting sales going and have used price to drive sales. But once you take the price genie out of the bottle, I’m not really sure that you can stuff it back in again. Undoubtedly, both these industries have been cyclical, but sales will come back, and comparable-store sales will probably surprise everybody who think it’s going to be winter forever. Spring always comes. Night follows day. Comp-store sales will pick up and the pricing environment will get better. The question is to what extent in drugstore retailing. I’m still not convinced that it goes back to normal, whatever normal was. I think it stays competitive.

This special issue includes:

1) Supermarkets & Drug Chains - In an in-depth (13,800 words) Analyst Roundtable, Meredith Adler, Equity Analyst following the supermarket and drug store industries at Lehman Brothers, Neil Currie, Executive Director in the consumer group at UBS Warburg and Mark Husson, Analyst at Merrill Lynch Global Securities, examine the outlook for the sector including stock performance, drug benefit plans and share specific stock recommendations.

2) CEO interviews (average 2,500 words). Top management of five sector firms examine the outlook for their firm and the sector.