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Stock Strategist Industry Reports

Shopping for Bargains in Supermarkets

The headwinds are fierce, but a few firms can withstand the force.

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Although economic conditions improved throughout 2009, domestic grocery store operators have not benefited due to food deflation, a heavy promotional environment, and labor costs. According to U.S. Census data, grocery stores are expected to generate roughly flat growth in 2009 from the prior year, after generating a compound annual growth rate of 4% from 2002 to 2008. The beginning of 2010 appears to be challenging, as consumers are still grappling with a high unemployment rate and tighter credit.

The Fight for Consumers' Dollars Intensified in 2009 and Will Likely Remain Tough in 2010
In food retail, switching costs for consumers are virtually nonexistent. Individuals largely choose locations based on price, and the situation intensified as the downturn progressed. Grocers reacted by lowering prices to retain traffic. For example,  Supervalu's (SVU) Jewel-Osco chain lowered prices by as much as 20% in certain categories to appeal to price-conscious consumers. Safeway, which had previously spent time investing heavily in its stores, also moved to a low-cost, low-price strategy. Even  Kroger (KR), which had been the most proactive in repositioning stores to better compete with deep discount formats, lowered prices to maintain market share. We believe competition will remain intense, particularly as  Wal-Mart (WMT) (the largest food retailer in the U.S. with approximately $130 billion of grocery share, around 20% market share) has renewed its low-price policy with a vengeance, and  Target (TGT) is testing a new store format that increases its presence in perishables.

Michelle Chang does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.