Wal-Mart's price cuts leave soda makers flat

By Jeremiah McWilliams

The Atlanta Journal-Constitution

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File Executives at beverage companies such as Coca-Cola, PepsiCo, Dr Pepper Snapple Group and Coca-Cola Enterprises worry the aggressive discounting could harm the industry's long-term prospects.

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A soda price war started by Wal-Mart is catching beverage companies in the middle.

Soda sales are reportedly jumping as the world's biggest retailer continues price cuts it started in April and deepened over the Memorial Day weekend. But executives at beverage companies such as Coca-Cola, PepsiCo, Dr Pepper Snapple Group and Coca-Cola Enterprises worry the aggressive discounting could harm the industry's long-term prospects.

Packs of 24 cans of Dr Pepper, Coca-Cola and Pepsi for $5 are now common in Wal-Mart stores, and in some outlets shoppers have spotted them for as little as $3.99. A year ago, the average price for a 24-pack in grocery stores was $6.12, according to Beverage Digest. Grocery stores near Wal-Mart stores are slashing prices to try to remain competitive.

It's unclear how long Wal-Mart's soda promotions will last. Industry insiders say it could be months.

The cuts could put the retailer in a fundamental conflict with big beverage companies, which worry that ultra-low prices could jeopardize eight or nine years of work to get consumers to accept higher prices. That effort was meant in part to produce gains for the bottlers who make and distribute soft drinks.

Analysts say the new low prices could train shoppers to look for deep discounts before parting with their money.

"Giving away 24-packs is not in the interest of the industry," Bill Pecoriello, CEO of Consumer Edge Research, said at a Beverage Digest conference in New York this week.

"I wouldn’t say what we’ve got right now is rational pricing," Gary Fayard, Coca-Cola's chief financial officer, said at the same event. Fayard said Coca-Cola had tried to provide a variety of packages and prices and expects prices to be rational in the long-term.

Asked if Coca-Cola has asked Wal-Mart to stop or reduce the rollbacks, a Coca-Cola spokesman said the company does not comment on "customer relationships." Wal-Mart did not return a phone call seeking comment.

Even if beverage companies would prefer to keep retail prices higher, Wal-Mart seems to be able to override those preferences as it selectively cuts prices on the 15 or 20 categories of goods that pull shoppers into stores. "No one really comes to mind as having stronger bargaining power," said Morningstar analyst Joel Bloomer. "I think the net strength is still going to fall with Wal-Mart."

Wal-Mart's soda price cuts are part of a broader strategy to reinforce its appeal to budget-minded shoppers, after an effort to emphasize private label items failed to work as well as the chain hoped.

“At the end of the day, its brands that drive traffic,” said J.P. Morgan analyst John Faucher.

Beyond the soda aisle, Wal-Mart also has offered 40-ounce containers of Heinz ketchup for $1, Tide detergent for $5, Colgate and Crest toothpaste for $1.50, and packs of 10 batteries for $6. The price gap between Wal-Mart and Target, one of its main rivals, widened in May as Wal-Mart cut prices.

"Clearly, the consumer is the winner," said SunTrust Robinson Humphrey analyst Bill Chappell.

But beverage companies are watching warily.

"The big beverage companies have an interest in rational and sensible pricing," said John Sicher, editor of Beverage Digest. "They need the bottlers and bottling operations to be healthy and earn a decent return so they can function well and aggressively."

Even if lower prices create a volume spurt, in the long-term "it wouldn't be good for anyone in the industry to see irrational pricing," said Sicher. "If you have bottlers that are strapped, it's not good for the industry."

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