Are the Price Wars Coming?

Financial Times reports on price-cutting by Kroger, Supervalu, Safeway, and some of their smaller competitors.

Kroger, the largest US traditional supermarket group by sales, has been rolling out a "new lower prices" campaign across its more than 2,400 stores, with yellow and red signs highlighting prices on fresh produce, meat, and health and beauty products.

Simultaneously, its weekly newspaper advertising inserts have been highlighting its low cost private-label goods under the heading "value for the way you live."

The adverts are part of a cacophony of price cutting promotions from America's national and regional supermarket chains – as they compete against Wal-Mart's low-cost supercenters and small hard discounters for their share of weekly food and grocery spending by hard pressed consumers.

That retailers cut prices in a recession is hardly surprising, but it does seem that things are a bit more extreme this time than I recall from past recessions. Perhaps that's fed by the fall in commodity prices:

The price of a gallon of milk, for instance, has dropped 50 per cent from last summer in the US – reducing both the identical store sales figures that are closely watched by investors, and the net profit per unit sold to the retailer. In May, food prices fell 0.2 per cent from the month before, according to US labour department figures.

FT notes that Kroger came into the recession with an established EDLP strategy, while Supervalu was still absorbing its 2006 Albertsons acquisition and Safeway had been positioning itself as somewhat upscale. The results are that Kroger's same-store sales are up 3%, while Supervalu is down 3%, and Safeway up 0.5%-1.0%.

Since Supervalu seems to be hurting the worst, the thought is that a price war could break out in earnest if their new CEO decides to deepen the cuts there (my local Jewel sure looks like Supervalu is serious about price-cutting).

Robert Summers, retail analyst at Pali Capital, said in a note to clients on Supervalu, that weak identical store sales "in one of the major players tends to create ripples across the industry, and makes for the potential for escalating price competition".

Stay tuned, this could get interesting.