Kodak Wins Big Contract With Wal-Mart

Eastman Kodak Co. on Wednesday won a contract worth at least $25 million from Wal-Mart Stores Inc. to install 1,400 self-serve machines that let customers embellish photo reprints, replacing machines from Fuji Photo Film Co.

Kodak’s victory against Fuji comes at a time when the two companies are embroiled in a long-running trade dispute, in which Kodak contends that Fuji unfairly prevents the U.S. company from competing in Japan.

Kodak’s Image Magic digital-imaging stations will take the place of about 600 Fuji machines that use an older technology to copy photos. Customers can change a photo’s size and borders, enlarge portions of the image and store it digitally for later retrieval from other machines, Kodak spokesman Jim Blamphin said.

The contract represents the latest salvo between Rochester, N.Y.-based Kodak, the nation’s largest film company, and Japan’s Fuji, which has been winning a bigger share of the U.S. film market. It’s one way Kodak plans to attract customers as it attempts to dominate the fledgling digital photography business.

“Kodak sees this as a big opportunity,” said Michael Ellmann, an analyst at Schroder & Co. How much of an opportunity is difficult to assess without knowing all the terms, he said.

Kodak could reap about $10 million a year once the machines are installed, assuming it costs the company $2 to produce each print and each machine makes 75 prints a week, with customers paying $7 to $10 a print, Ellmann estimated.

Wal-Mart paid $18,000 to $20,000 for each station, Kodak said. It would not disclose its percentage of the revenue or how much it will pay for the paper used for prints. Kodak already has installed 13,000 Image Magic stations worldwide. Its goal is to place 50,000 in stores within five years, analysts said.

Fuji wasn’t immediately available for comment.

Earlier this month, Kodak unveiled an Internet-based service that allows consumers to store and ship pictures electronically, in a move to broaden interest in digital photography.

The fee-based service, called Kodak Picture Network, lets consumers store photos with Kodak when getting prints developed at more than 30,000 retail photo counters and stores. The consumer will then be able to view photos online, order reprints and e-mail pictures to others. Through the Image Magic stations, customers can put their customized photos on the system as well, Kodak said.

The first digital-imaging stations will be installed next month, and the rest are expected to be in place by March in most of Wal-Mart’s U.S. stores, Kodak said. Kodak was one of three finalists for the contract. Neither it nor Wal-Mart would say who the other bidders were.

“Wal-Mart likes somebody that’s efficient, has a top-line product and can do it cheap,” said Tony Gray, a money manager at STI Capital Management, which owns about 70,000 Kodak shares. “My guess is [that] Kodak was pretty aggressive.”

Fuji’s loss of the contract “is mildly surprising because Fuji has a strong relationship with Wal-Mart, and in order for Kodak to fight back, they probably had to fight pretty aggressively on the prices of those machines,” said Toby Williams, head of global equities at SBC Warburg in Tokyo.

Williams added that Fuji probably didn’t push too hard to win the contract, with its photographic paper plant in the U.S. already running at full capacity. Another paper plant scheduled to open later this year will also run at full bore from the start, he said. “I don’t think the impact on Fuji [of losing the Wal-Mart contract] is that meaningful.”

Fuji was the aggressor last year when it outbid Kodak to buy Wal-Mart’s photofinishing operations, analysts said. Fuji bought six labs from Wal-Mart and received a long-term agreement to provide developing services for the retailer.

“We have a great relationship with both Kodak and Fuji,” said Wal-Mart spokesman Dale Ingram.

If customers like the machines, Ingram said, Wal-Mart may consider buying more.

Kodak’s second-quarter net income fell to $368 million, or $1.12 a share, from $440 million, or $1.30, a year ago, as stiffer price competition depressed sales. Revenue fell 6.6%, to $3.85 billion from $4.12 billion.

Fuji had net profit of $574 million in the year ended March 31.

Bentonville, Ark.-based Wal-Mart, the world’s largest retailer, had 1,945 discount stores, 362 super-centers and 438 Sam’s Clubs in the U.S. as of April.

Kodak shares rose $1.94 to close at $67.50 on the New York Stock Exchange. Wal-Mart shares fell 13 cents to close at $35.94, also on the NYSE.