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Wal-Mart Now Sells 15% of all Grocery Food in America

From Agribusiness Examiner #246
May 12, 2003
By <avkrebs.earthlink.net>

EMERGENCE OF WAL-MART AS NATION'S
LARGEST GROCERY RETAILER HAS
TURNED FOOD BUSINESS UPSIDE DOWN

MARK TATGE, FORBES NEWSLETTER: People eat even in a down economy. That
historically made food stocks a safe bet even in turbulent times. But the
current recession may be a rare exception.

Why? The food industry faces some of the toughest times in a decade, a
reflection of seismic shifts occurring in how food is produced, distributed,
sold and consumed, according to a recent report by UBS Warburg analyst Evan
B. Morris.

Kraft Foods, Sara Lee, General Mills, Kellogg, Hershey Foods and Campbell
Soup enjoyed a heyday the past decade. Food makers merged and got bigger,
aiming to trim costs, improve earnings and wield greater pricing power.

But something happened they didn't expect: a shift in retail pricing power.
Wal-Mart Stores and Target got into the grocery business and turned
everything upside down. In less than a decade, Wal-Mart has risen from
obscurity to become the largest grocery retailer in the U.S. The company
sells more than $50 billion in groceries annually and has captured 15% of
the market.

Wal-Mart's aggressive entry into the grocery business has touched off a
price war. Traditional grocers like Kroger, Albertson's and Safeway must cut
prices 10% to 15% or lose customers.

Food manufacturers have also been hurt by retailers' private-label brands.
Private-label packaging and quality has improved so much that it has become
a direct substitute for higher-margin branded food products made by major
food companies, says Morris.

And food companies can't count on an increase in consumer grocery spending.
Food Institute 2002 figures show that sales at U.S. grocery stores increased
only 1.5% since 2001, while restaurant sales were up 5.5% over the same
period.

Packaged food sales should grow no better than population growth for the
foreseeable future--- a paltry one percent annually. Earnings per share at
these companies are decelerating to eight percent annually, down from the
11% to 14% rate of a decade ago, Morris said. Even though food companies
have recently passed on some increases in the price of raw materials, Morris
says the companies' ability to incrementally raise prices is diminishing in
the face of increased competition.

The profit and sales pressures come as some food companies are being forced
to spend more on marketing and promotion. During the 1990 food merger boom,
Campbell Soup, Sara Lee and Kellogg let cost savings flow to the bottom line
rather than invest in their products. These trends aren't likely to abate
soon, a fact already reflected in stock prices. As a group, large-cap food
stocks sell for 14.6 times 2003 earnings per share estimates, compared with
17.1 times EPS for the S&P 500.

"These companies simply don't have the pricing power they had a decade ago,"
says Kevin Grant, co-manager of the value-oriented Oakmark Fund in Chicago.
"The stocks are cheap."

So should investors be buying? Selectively. Grant says he owns both Kraft
and General Mills. Morris currently recommends only one stock in the group:
Kraft. He said Kraft remains a standout despite recent news that the company
will have to incur non-cash pension and retirement expenses. These and other
expenses are expected to hurt earnings for both 2003 and 2004.

Out past 2004, Morris figures Kraft could deliver volume growth two to three
times faster than the industry average and EPS growth of eight to ten
percent annually. As for the rest of the group, they have about as much
crunch as a soggy potato chip.

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