Cause and Effect: Cott’s Shares Dive After Wal-Mart Loss

Wal-Mart giveth, and Wal-Mart taketh away. This is one of the best examples in recent months of a company whose fate hangs in the balance because of Wal-Mart. After yesterday’s news that Wal-Mart had decided to dramatically reduce Cott Beverages’ shelf space, the company’s shares went tumbling, plummeting almost 50% in a day and a half. Wal-Mart’s omnipotence in the market place often determines which companies live and which ones die, the price they sell for and even products’ content. Remember this when Wal-Mart denies responsibility for recalled toys or sweatshop factory labor. For Cott employees reading this: don’t worry, you’re in good company.

Cott’s Shares Go Flat As Wal-Mart Mulls Shift [Wall Street Journal]

Cott Corp. may be losing some of its fizz. Shares of the Toronto maker of private-label soda and other drinks have fallen 49% over the past two days after it acknowledged that it could lose a sizable chunk of its sales at its largest customer, Wal-Mart Stores Inc.

The potential loss adds to the difficulties for Cott, which has been struggling amid surging commodity prices, intensified competition in the U.S. beverage market, drooping soft-drink demand, and other problems. On Feb. 8, the company reported a steep fourth-quarter net loss. Cott’s Wal-Mart business represents about 38% of its revenue.

While private-label, or store-brand, products are theoretically attractive to consumers in a weak economy because they’re cheaper, U.S. sales of private-label sodas are declining faster than their branded counterparts. Wal-Mart is increasingly marketing name-brand products in its stores—touting itself as a place where customers can purchase big brands for less. Cott’s sales have also been hurt by its price increases over the past year to cover its rising costs.

Cott said it has been notified by Wal-Mart of a reduction in the amount of space on store shelves and in merchandising programs that the huge retailer allots for its private-label carbonated soft drinks such as Sam’s Choice, a brand that Cott makes for Wal-Mart.

The retailer plans to fill those shelves instead with RC Cola and Diet Rite, owned by Cadbury Schweppes PLC, according to Beverage Digest, an industry publication which also first reported that the extra shelf space—estimated at about four feet—would come from Sam’s Choice and other products. A Cadbury spokesman declined to comment.

Diet Rite is growing faster and sells more quickly than private-label brands, says Mark Swartzberg, a Stifel Nicolaus analyst. A loss of four feet of shelf space at Wal-Mart could translate to about $89 million less revenue for Cott and a drop in earnings per share for the year of nine cents, he said.

Cott conceded that the Wal-Mart move “would be significant to Cott’s business plans,” but added that it is still “actively negotiating” with Wal-Mart.

A Cott spokeswoman said its other customers haven’t been reducing shelf space.

The news also led Standard & Poor’s to impose a “CreditWatch with negative implications” on Cott’s debt rating.

A Wal-Mart spokeswoman declined to comment.

The disclosure about Wal-Mart diverged sharply from a picture Cott painted just over two weeks ago on a conference call following the release of its fourth-quarter earnings. On that call, a Morgan Stanley analyst asked whether the company’s space for private-label sodas in stores was shrinking after hearing that “a very large customer of yours is reducing shelf space for private-label [carbonated soft drinks].”

Brent Willis, Cott’s president and chief executive, responded that “more than 90% of the customers we know...are planning to increase shelf space on private label, are planning to increase promotions on private-label beverages” and make other moves to boost private-label drink sales. He declined on the call to comment on specific retailers.

A Cott spokeswoman said she couldn’t comment on whether the company had received the Wal-Mart notice at the time.

Cott shares were down $1.51, or 37%, at $2.54 as of 4 p.m. in New York Stock Exchange composite trading yesterday, following a day earlier fall of 18%.

Posted by Alex Goldschmidt on Wednesday, February 27, 2008

Click Here for a Printer-Friendly Version