Sam's Club launches private-label vodka

Should competitors be worried? Or is this just more noise in the battle of the brands?

By InvestorPlace Jan 8, 2010 10:14AM

InvestorPlaceNews out this week says Wal-Mart (WMT) subsidiary Sam's Club is launching a private-label vodka at the end of January. It will be called Rue 33 and cost about $28 for a 1.75-liter bottle. 

 

The booze wars started with industry consolidation by a few major players -- who would have thought that Budweiser could be considered an import brand? -- but now the beer, wine and spirit companies that survived are going to have to learn how to fight a new battle: private-label booze. 

Wal-Mart isn't the only one trying to dip its toes into the adult beverage business. Costco (COST) has Kirkland, its own private-label brand, and Trader Joe's carries Charles Shaw, aka Two-Buck Chuck, wine.

 

But the big question is not so much whether having its own private-label brand of liquor will add significantly to WMT's bottom line but how this will affect the premium brands that have been on the market for years. While the impact of Wal-Mart, Costco and the like on traditional alcohol manufacturers could take years to play out, there is a partial case study we can review today.

 

Constellation Brands Inc. (STZ), whose marketed brands include Mondavi wine, Corona, St. Pauli Girl and Svedka Vodka, reported earnings this morning, and the impact of tighter consumer spending on premium brands was clear. What's interesting is that the company dumped its value brands in an effort to focus on the more lucrative premium-brand market.

 

Constellation said the economic challenges and promotional spending impacted its numbers. Quarterly net profit fell by almost half due to restructuring costs, but the real story here is sales. Branded wine sales were down about 3% in North America, although, overall, they rose 2% due to gains in Europe and elsewhere. Beer sales in the Crown Imports joint venture with Grupo Modelo SA were down as much as 10%, while changes made in its spirits operations brought on a 2% decline.

 

The company said it earned $44.1 million, down from $83.5 million a year ago, while sales were down about 4% to $987.7 million. Here is the good news, though: Pro forma earnings were 54 cents per share, above Thomson Reuters' estimates of 52 cents and $905.3 million in revenue. STZ also maintained its annual targets.

This leads to one notion: With STZ now focusing its attention on the premium-brand market, if the pool of buyers shrinks again due to tough economic times, then more and more of the brand recognition buying in wine and beer and spirits will head down to value brands -- and perhaps into private-label brands.

If that is the case, "recession-proof" may no longer apply to alcohol stocks. But I think there is room for private label in wine, beer and in spirits. 

 

For starters, premium brands have taken a hit in the economy, but brands have ruled and will continue to reign unless the Great Recession becomes so bad that everyone has to become far more price-conscious than they were in 2009. 

 

And consider what has happened with generic brands in other markets. Kroger (KR) and every other major grocery chain have gone to private labeling of foods, and while this has had an impact on companies such as Campbell Soup (CPB), brand names are still in business.

 

It boils down to this: Private labeling is the equivalent of "generic" or "no-name" food or other products, which simply won't do for many higher-end buyers. It's the middle-tier and lower-end brands that have the most to lose in this initiative. 

 

Wal-Mart or Costco won't make a game-changing effort here. This is another ploy to capture an additional 1% market share.

 

At the time of this writing, the author did not own shares of any of the stocks mentioned above in personal or client portfolios.

 

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