The Supermarket Battles of 2009

Citigroup recently downgraded shares of Safeway (SWY) and Kroger (KR) due to what they see as a looming price war. They also cut profit targets for Wal-Mart (WMT) and Super Valu (SVU). Competition in the grocery industry is nothing new. With the recessionary environment, consumers are more price sensitive than ever before. Private label shares in most food categories have increased dramatically in the last few months.

Kroger leads in this area with a 27% share, followed by Safeway at 25%, Wal-Mart at 18% and Super Valu at 17%. Wal-Mart traditionally doesn't place undue emphasis on private label vs. branded but is in the process of repositioning their Great Value brand and rolling out many new private label offerings. With consumer price sensitivity at a peak, this will lead to an increase in super market battles on price.

Further complicating this is the significant decline in commodity prices since Q4 2008. Food manufacturers like Kellogg (K), General Mills (GIS) and Kraft (KFT) typically hedge their purchase of commodities and forward buy. This means they are locked into contracts (usually 6 months to a year) to purchase commodities at a set price. This is good news when commodities are increasing, but it is currently bad news because it means they bought commodities for 2009 at the higher 2008 prices. As a result, food companies have yet to see the benefit of lower commodity costs. Food manufacturers are currently under a lot of pressure from key retailers to lower their pricing. Most have resisted, but eventually costs will come down in Q2 2009 and beyond.

These same branded manufacturers are under pressure from private label sales. This will benefit key manufacturers like Ralcorp (RAH) and Treehouse Foods (THS). As private label prices moderate, branded manufacturers will be forced to counter first with more aggressive trade promotions and possibly with lower everyday retail prices. This is good news for consumers but potentially bad news for food retailers and food manufacturers.

So based on this there will be several key supermarket battles occurring in 2009.

1. Food retailers vs. other food retailers,
2. Branded food manufacturers vs. retailers on pricing
3. Branded manufacturers vs. private label manufacturers.

The end benefit should be lower supermarket food costs for the consumer but potentially squeezed margins for both retailers and food manufacturers.