OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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Some think the operative model is Wal-Mart versus Kmart.

OID: I think you own both Kroger and Safeway. Any thoughts on supermarkets vis-a-vis tough times?

Nygren: Of course, Wal-Mart is coming into the supermarket industry. And they're utilizing the same kind of cost advantages that they had in the discount business in the supermarket industry. It's making it very difficult for the independent grocery store today - like it wasn't difficult enough already with both Safeway and Kroger going after their customers.

Nygren: I'm not as worried about that. I don't see that as a long-term structural threat. There is some trading down. There is some food deflation. However, in a normal economy, I think that comes back.

But there's a school of thought on the supermarkets that says if you want to see where the industry is going over the next decade, look back a decade at Wal-Mart versus Kmart.

Wal-Mart doesn't have the information advantage it did….

OID: It sounds like you disagree.

Nygren: I do. I think the most important difference between the outlook for the supermarkets today and the results for Kmart over the past decade is that Kroger and Safeway already have a culture of cost control and a focus on being cost-minimizers. They already have state-of-the-art computer systems. Shortly after I first got in the business, I remember vendors coming in who dealt with both Kmart and Wal-Mart - and Sears for that matter - saying, "It's unbelievable the information that Wal-Mart has access to at their fingertips compared to what's available to Kmart or Sears." Well, you don't see that kind of advantage for Wal-Mart versus Kroger and Safeway.

And not everybody wants to buy the low-price spread.

Nygren: I think the other thing investors are ignoring is that in markets where Wal-Mart supercenters have been for a long time, they tend to peak out at a market share of somewhere in the 20%s. I think that just says that there's a certain segment of the population who is interested in the most price-sensitive shopping experience that they can achieve. All they care about is lowest cost. And there is another segment that is willing to pay a fair price, but a bit higher price, for a more pleasant shopping experience. And I think the Safeways and Krogers provide just that.

They give you better breadth of product, probably a cleaner shopping experience - and you can ask the butcher to cut a piece of meat for you if you're not happy with the selection you see on display. Well, that's a service level you don't get in a Wal-Mart supercenter.

So at less than half the market P/E, we see opportunity.

Nygren: So with these stocks at single-digit P/Es and less than half the market P/E - and both very focused on how they reinvest their excess cash with significant share repurchase programs underway - we think it's an opportunity to take advantage of a misperception.

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