Here Come Lower Grocery Prices

Grocers, faced on one hand with consumers demanding lower retail prices and on the other hand with suppliers hesitating to reduce wholesale prices, have embarked on a "price war" that threatens to do big damage to many of them.

Good for us. Not so good for the grocers.

Citigroup analyst Deborah Weinswig issued a warning on Tuesday, downgrading several big grocery chains. And she lowered her profit targets for Kroger by 10 percent, Supervalu by 11 percent, and even Wal-Mart by 4.5 percent.

The price war has just begun. Regional grocers such as Wegman's are going at it first, cutting or freezing prices pretty much across the board.

But Costco is at it, too. It has cut prices on dairy staples and many other goods. That's a sign that things are looking mighty grim for the grocery business: The main reason people shop at Costco is to save money. The only reason it would cut prices is to stop customers from resorting to stores like Aldi, where the prices are as low as they can go, but where the Soviet-like atmosphere and the dicey selection normally attracts only low-income shoppers.

Consumers are likely to keep bargain-hunting for the foreseeable future. So the only hope for grocers is that food producers will lower their prices, which would at least help grocers maintain their margins.

There is some indication that this will happen. Grocers have been stepping up their pressure on suppliers. And suppliers—including big food companies like Kraft and Unilever—have been enjoying much lower costs since commodity prices have drifted down from their peaks of last summer.

They pretty much have to relent, for their own good. Take Kraft, for example. Its strength is in its brands—but people aren't as interested in brand names as they were just a few years ago. With grocers increasing their offerings of private-label products, branded-food companies don't have nearly the pricing power they once did. Kraft last week reported dismal fourth-quarter results, and it lowered its forecast for the year.

More tellingly, the company reported that revenues were up, but volume sales were down, which means that the only thing driving revenue at this point is price. But that's just not going to last.

For grocers, there is no good way to go here, but the only way for them to ride out the recession is to lower prices, and fast, to hold on to their market share for when better days return.