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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: Neil, are you comfortable with the guidance that the companies are giving for 2002?

Mr. Currie: I have different views regarding the two sectors. For the drug retailers, particularly after March’s improving sales picture, at least I feel comfortable with my earnings forecasts. I certainly have quite a high earnings forecast for Walgreen. I have a different view regarding the supermarket group. We have seen a small shortfall in earnings growth over the last six months or so, relative to expectations, and the companies have guided down earnings projections. My forecasts tend to be below the consensus. I feel there will be more competition between the supermarkets this year as a result of Kroger’s more aggressive sales growth strategy. We’re yet to really see how Kroger (NYSE:KR) is going to spend its money, but certainly I think the cost of competing against Kroger is going to be higher than in previous years. There’s no guarantee that Kroger itself is going to get a decent return from its investment in price and promotion, which could lead to further investment down the line.

TWST: Neil, how would you compare the strategies that the various grocery retailers have deployed as they’ve sought not only to differentiate themselves but to hang on to their market share? Which have been most successful at this?

Mr. Currie: If you look at recent history, the most successful have been Safeway and Kroger, compared to others that have experienced some operational difficulties over the last couple of years. But I think, as Meredith said earlier, each market is very different. In the Western states, we think that grocery markets are less competitive than the Eastern states. What I do applaud is Kroger’s more vigorous focus on attempting to grow their sales line. I’m not sure whether it’s five years too late or not, but I feel that at least they’ve targeted a more sustainable strategy to grow their earnings in the longer term than just simply pushing at their margins, which I feel most supermarkets have focused on far too much in the last five years or so.

TWST: Neil, what’s happening at the front of the store? Are there any trends to note that reflect a changing business mix at the front end of the drugstore?

Mr. Currie: The sales mix has been continually changing more toward the pharmacy side, purely because the pharmacy market is growing in double digits and the front end is growing in low single digits. I think what we saw in the back half of last year is that the recession caused a slight contraction on front-end sales and also some increased promotional activity. I believe we’ll continue to see pharmacy growth going forward, maybe in double digits, and that’s going to continue to drive customers into the store. And as long as the drugstore retailers do their jobs well, they can derive improvement in sales at the front end from the built-in growth at the back end.

TWST: Neil, what are you watching most closely as you consider the outlook over the next 12-18 months, and what do you consider to be the greatest challenges ahead for most of these companies?

Mr. Currie: Just sticking to the drugstores, I would echo Meredith’s comments about increased competition among retailers that sell consumable products. I have higher comfort levels with drugstores, though, because they cater to a slightly different shopping purpose than supermarkets or supercenters.

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.