The Wal-Mart Effect: Cott Beverages Lose Shelf Space at Wal-Mart

Cott beverages, a long-time Wal-Mart supplier which relies on the company for the bulk of its revenue, was informed this week that Wal-Mart will be cutting its orders from the soda maker. While a “bankruptcy watch” might be a bit premature, Cott representatives are saying the impact of Wal-Mart’s decision will be “significant,” to say the least.

Cott shares plunge on lost Wal-Mart business [Globe and Mail (Canada)]

Soft-drink maker Cott Corp. [BCB-T] , which is already battling to turn back a tide of red ink, saw its shares plunge by more than one-third Tuesday as it confirmed it is losing some of its vital Wal-Mart Stores Inc. business.

By midday, the shares had plummeted by $1.40 (U.S.) or 34.5 per cent to a new 52-week low of $2.65 on the New York Stock Exchange, having fallen 91 cents or 18 per cent Monday.

The Toronto company issued a brief statement before the market opened saying it has received a notice from Wal-Mart, its largest customer, that the giant retailer is reducing the amount of shelf space and merchandising support it provides for the private-label carbonated soft drinks, including Sam’s Choice, that it buys from Cott.

Cott said the reduction would be “significant” to its business plans but also said it is still “actively negotiating” with Wal-Mart and the program for 2008 has not been determined.
Cott shares sink on lost business
Cott Corp.

The Globe and Mail

“We do know that there will be a reduction but I don’t believe anything is finalized,” a Cott spokeswoman said.

The company also said Wal-Mart’s notice did not indicate the reduction in shelf-space and support also applies to Sam’s Choice water.

Cott, which bills itself as the largest producer of retailer-brand soft drinks in the world, said it was responding to recent reports of shelf re-allocation by the Bentonville, Ark., retailer. In a report Friday, Beverage Digest suggested Cadbury Schweppes may be gaining space on Wal-Mart’s shelves for its Royal Crown and Diet Rite sot drinks at Cott’s expense.

The reports triggered the sharp fall Monday for Cott’s already battered shares.

The Canadian company is banking on its U.S. bottled-water and energy drink businesses – including a new line of fortified water for dogs, no less – to get back into the black, as declining consumer demand for soda pop and rising costs have taken the fizz out of its financial results.

The bad news about Wal-Mart comes just under three weeks after Cott reported a loss of $76.8-million or $1.07 a share, for the fourth quarter of 2007, compared with $29.6-million or 41 cents a year earlier. The most recent loss a $55.8-million goodwill writedown, as well as a $9.7-million asset impairment charge.

Revenue was $412.4-million, compared with $400.1-million.

Analysts estimate that Cott has an average of about 16 feet of shelf space for its soft-drinks in Wal-Mart stores in the United States.

Analyst Kaumil Gajarwala at UBS Securities in New York said Tuesday Cott’s loss of shelf space at its top customer is “a cause for concern.” As a result, he told clients in a note, he has reduced his rating on the company’s shares to “neutral” from “buy” and slashed his target price to $4.50 (U.S.) from $8.

Wal-Mart currently accounts for 38 per cent or $700-million of Cott’s total revenue, he said. “We believe,” he added, “the revenue loss from losing four feet of shelf space could represent up to 10 per cent of Cott’s current Wal-Mart revenues, or $70-million.”

Mr. Gajarwala said his new price target for Cott’s shares is based on a new, lower multiple of 6 times the company’s estimated annual earnings before interest, taxes, depreciation and amortization of $125-million. This, he said, is “below average bottler multiples of 7 to 8 times.”

Another analyst, who spoke on condition he not be named, said the development at Wal-Mart is “potentially very serious” for Cott, because it suggests the retailer is finding it more profitable to sell other brands in that shelf-space rather than the retailer-brand product from the Canadian company.

“So this may just be the beginning, and not just in Wal-Mart,” the analyst said. “It also may be a signal to other retailers to start doing the same thing.”

Still, he noted that the Safeway Inc. supermarket chain in the United States has said publicly it wants to boost its private label soft-drinks up to 50 per cent of sales.

As well, he said, private-label brands can be a “good tool” for retailers when they are negotiating with major brands.

The analyst also said the problem Cott is having with Wal-Mart on this front is another illustration of one of the fundamental difficulties it has always faced in the private-label business. “The biggest risk for Cott has always been that it didn’t control its own destiny,” he said.

Posted by Alex Goldschmidt on Tuesday, February 26, 2008

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