Costco (COST) customers looking for "the real thing" now have to look elsewhere: The warehouse retailer said on Monday that it's no longer buying Coca-Cola (KO) products. Once stores run out of their dwindling supplies, they won't be restocking.
Costco is playing hardball; negotiations between the two companies to reach a recession-ready wholesale price have apparently broken down. Costco acknowledges this problem on its Web site: "Costco is committed to carrying name brand merchandise at the best possible prices. At this time, Coca-Cola has not provided Costco with competitive pricing so that we may pass along the value our members deserve."
It's an uncommon move for Costco, but not a surprising one. Consumers are looking for ways to squeeze their budgets, and retailers are trying to increase profits while cutting prices. That's been a hopeless quest for Costco this year; the 3% pretax profit margin it posted between 2004 and 2007 is now just 2.5% -- a net profit margin of somewhere around one cent on the dollar after taxes, overhead, and other incidentals. With such a narrow margin, the slightest uptick translates into a major value shift.
Every 0.01% the company ekes out on its pretax profit margin translates into a one-cent increase in earnings per share, and a likely 0.5% uptick in its stock value. The superthin profit-margin model, and its major influence on stock value, follows Walmart's (WMT) example; Walmart, with its 3.3% net profit margin, regularly strong-arms its suppliers into deals that guarantee its famously low prices.
Coca-Cola may seem like the wronged party here, but it's complicit in its own undoing. Coke, after all, caves in to Walmart's demand for a razor-thin profit margin by slashing its products' prices, in return for Walmart's massive distribution -- and swamping not only Coke's smaller competitors but Walmart's smaller, higher-priced, higher-profit rivals.
The result of recession, unemployment, and an increasingly desperate push for profits have left Walmart, Costco, Coke, and thousands of other companies in a cannibal buffet. Having feasted on the easy pickings offered by smaller chains, these companies now find themselves eyeing each other. With unemployment still rising, retail sales won't be getting fatter anytime soon.
Take the first steps to building your portfolio.View Course »