WALL STREET TO SIT AND WAIT FOR RETAIL RESULTS: ANALYST

ELLIOT ZWIEBACH

Wall Street is likely to withhold heavy investment in the supermarket industry over the next few years, even if the pace of industry consolidation accelerates, Ed Comeau, managing director for Credit Suisse First Boston, New York, said.

Speaking at CSFB's Food & Drug Retailing Conference here, Comeau said consolidation will drive the industry over the next three to five years "because now that valuations are coming down for buyers, some sellers will come around and be more likely to sell, which will result in more activity.

"And while that's good for the industry, investors will likely remain fairly skeptical because of their experience in the late 1990s, when supermarkets traded up on announced acquisitions and then experienced some stumbling and other problems."

The industry will be harder pressed to prove the wisdom of consolidation to investors, Comeau said, "although Ahold and Safeway will get more benefit of the doubt [because of their ongoing integration success]. But it will be difficult for other companies."

As the number of acquisition candidates shrinks, supermarkets are likely to look beyond food retailing for growth, Comeau added -- exploring opportunities in food service, convenience stores, food courts, "and possibly discount stores or supercenters."

Drug stores are another possibility, he pointed out, with supermarkets possibly buying one or more of the major drug chains that could go on the market within 12 to 18 months.

Wal-Mart has already proven the wisdom of branching out, Comeau noted. "Wal-Mart would not have done as well as it's doing if it had stuck to the discount store business," he said.

David Shriver, managing director, equities, for CSFB Europe, said European retailers are likely to make U.S. investments in the next few years. "Many of the major food retailers there are generating a lot of cash, and when they look for ways to spend it, investing in the U.S. looks like a good growth opportunity," he said.