Is Wal-Mart Going to Kill Your Favorite Stocks?

Wal-Mart Stores (NYSE: WMT  ) : Lord of low prices and slayer of vendor margins.

That could have been the title of a research note penned last week by top-ranked Citigroup retail analyst Deborah Weinswig. Weinswig sees the world's largest retailer pressuring vendors for price concessions so that it can offer consumers even lower prices -- without sacrificing its own margins.

Essentially, we're talking "pay to play" tactics, in which Wal-Mart management politely suggests, "Look, if you really want this shelf space going forward, then we need something from you …. "

According to Weinswig, Wal-Mart's timing reflects a number of factors, not the least of which is a push to hang on to the customers it gained during the recession. In particular, she expects the world's largest retailer to discount aggressively among grocery items, where for some products, current price gaps compared with other retailers run as wide as 50%.

The analyst has predicted that Wal-Mart can grow its market share in groceries by one percentage point, and she's also forecasting a big upside move in Wal-Mart shares, having raised her target to $65 from $54.

Ultimately, what's good for Wal-Mart and consumers is almost surely bad for packaged-foods and beverage companies that count the big-box retailer as a key customer. To keep investors prepared for margin hits that may soon show up in companies' quarterly results, I've listed popular consumer-staples names below, highlighting sales to Wal-Mart as a percentage of total company sales.   

Company

% 2009 Net Sales to Wal-Mart

J.M. Smucker

24% *

General Mills (NYSE: GIS  )

21% *

Kraft (NYSE: KFT  )

16%

ConAgra

16% *

PepsiCo (NYSE: PEP  )

13%

H. J. Heinz

10.8% *

Coca-Cola Enterprises

9.1% **

Data from company 10-Ks filed with the SEC. Percentages are approximate.* Denotes fiscal-year 2009 (opposed to calendar year)** Includes only North American Wal-Mart locations.

Clearly, J.M. Smucker and General Mills fall under Wal-Mart's thumb to the greatest extent. Ironically, I recently named solid retailer relationships as one of General Mills' core company strengths.

But I'm not necessarily backing down from that assessment. In general (no pun intended), companies that are serial innovators (ahem) tend to garner greater negotiating power, as their frequently new, updated, and improved products deliver substantial value to the retailer by consistently driving store traffic and receipts. While it's no guarantee of success with Wal-Mart, General Mills definitely has a leg up.

Elsewhere in consumer-staples land, I suggest that investors keep an eye on Coca-Cola (NYSE: KO  ) . No, it's not listed in the table above, but it is set to become the proud owner of Coca-Cola Enterprises' North American bottling and distribution business. We should enjoy top-notch theater if and when those two corporate giants lock horns over price.

Finally, Warren Buffett fans might casually take notice of any such developments. At the close of 2009, Coca-Cola and Kraft represented 19.7% and 6.5%, respectively, of Berkshire Hathaway's (NYSE: BRK-A; NYSE: BRK-B) equity holdings. But he's got a piece of Wal-Mart, too, albeit a smaller one.

In the end, Wal-Mart's vendor leverage is neither new nor transitory. And while I certainly don't expect it to be the single defining factor of packaged-foods companies' 2010 results, it's one more reason why the consumer-staples sector isn't always as safe as you think.  

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Related Foolishness:

Berkshire Hathaway, Coca-Cola, and Wal-Mart are Motley Fool Inside Value picks. Berkshire Hathaway is also a Stock Advisor recommendation. Heinz, Coca-Cola, and PepsiCo are Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak doesn't hold a financial interest in any company mentioned in this article. The Fool has a disclosure policy.


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  • Report this Comment On March 22, 2010, at 5:36 PM, madmilker wrote:

    well, with them doing this in China....

    "Wal-Mart China persists in local procurement which provides more job opportunities, supports local manufacture industry and promotes local economy. So far, 95% of merchandising sold at Wal-Mart China store are local products by which Wal-Mart has established business relations with nearly 20,000 suppliers. At Wal-Mart, we treat suppliers as partners and would like to develop with them. In 2008 Wal-Mart won the Supplier Satisfaction published by Business Information of Shanghai for five consecutive years."

    they killing America first....

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