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.

Private Label manufacturers recently met for a few days at the PLMA trade show in Chicago. The mood on the economy was very dour but attendees were upbeat with the prospects for the private label food industry in 2009. Private Label clearly is gaining share among price conscious consumers. Consumers hit by job losses, disappearing 401(k)s and IRAs and daily depressing economic headlines are more price sensitive than ever before. Consumers are modifying their shopping habits for food in two major ways.

First, consumers are shopping more at stores they perceive are low price retail leaders. That's a plus for Walmart Supercenters (WMT), clubstore leaders Costco (COST) and BJ's (BJ) and dollar stores such as Family Dollar and Dollar Tree. BJ's has been performing extremely well as of late but a lot of that has to do with its high percentage of food sales driving traffic. Target's (TGT) results have been disappointing but that is primarily because food makes up a smaller percentage of its overall business.

The large major food companies have increased the testing and use of new tech media over the last 12 months. By new tech media, we mean the use of online coupons, website marketing, mobile marketing and coupons, viral marketing, and all forms of internet advertising including search, banner ads, and other forms of web advertising. Food companies have been one of the more consistent advertisers on traditional media like cable television, print and Sunday newspaper supplements. More and more they are turning to non traditional media to test its effectiveness in reaching their target consumers.

The reasons for this increased usage are three-fold.

US based food manufacturers have been noticeably silent on Wall Street in the last year. Normally as market volatility increases to the downside and talk of recession dominates the headlines, interest in food companies climbs dramatically due to their predictable earnings and safe haven status. The rationale has always been "Even in a recession, people still have to eat."

Unfortunately, this time around food companies have been caught in the crossfires of unprecedented commodity inflation. Most Wall Street firms and retail investors have held off increasing their positions in food companies until they see how the companies are able to handle the double digit rise in commodities.

Google (GOOG) and Baidu's (BIDU) recent strong results show that the advertising sector is healthy despite tough recessionary times. The resiliency of companies needing to spend to support their brands and businesses is as strong as ever. With their results I thought it would be helpful to complete a sector analysis of all companies classified as Advertising Agencies. Technically, many of these stocks are classified as internet information providers but they achieve a large percentage of their revenues from advertising. The table below summarizes companies with a market cap greater than 1.0B with their chief means of revenue generation being delivered by advertising or search advertising revenue.

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Apple once again delivered very strong results in the face of hesitant consumers under recessionary pressures. Total revenue growth for the latest quarter was +36% led by the Mac brand in personal computers at +51%. The MP3 segment led by the I Pod brand delivered growth of +1% while the iPhone sold 1.7 mm units.

So how is Apple able to deliver consistent sales and profit growth in tough recessionary times with premium pricing while many of its competitors deliver poor results. In a phrase --it's their superior branding strategy.

As the market rebounds, investors continue to reward the large cap growth leaders, and alternative energy led by solar has been one of the prime beneficiaries. The need for alternative energy continues to be a main focus for all governments as oil continues it's climb to over $110 a barrel. Solar stocks are getting the most headlines because they are farther along the commercialization continuum and they are more prevalent than their wind and alternative fuel counterparts.

Any discussion about solar companies must start with First Solar (FSLR). Clearly, the leader in the sector according to Wall Street based on its thin film technology, First Solar's stock price has resumed its climb to near record levels as investors await its Q1 earnings report.

Suntech (STP) and SunPower (SPWR) are the next two leading players based on market cap, but they primarily use silicon-based technology for their products. SunPower just released strong first quarter 2008 numbers but some analysts had some concerns about slowing sales growth for the next quarter based on a single comment during its conference call.

Increasing commodity costs is having a negative impact to the growth of organic and natural foods. As commodities increase consumers are being more selective and price sensitive in their grocery shopping. This trend does not bode well for retailers like Whole Foods (WFMI) and the manufacturers that supply items to the leader in the organic and natural foods segment.

Organic and Natural food items already command a hefty price premium vs. their regular food counterparts.As all items increase by 10-20%, consumers are beginning to trade down to lower cost branded and private label items. They are also reducing the number of grocery trips to the high end retailers like Whole Foods.

Consumers are finally beginning to shift their food purchasing patterns in response to the slowing economy and higher commodity prices.

For years the traditional grocery stores, companies like Kroger (KR),Super Valu (SVU) and Safeway (SWY) have lost customers and market share to mass merchandisers like Wal-mart (WMT) and Target (TGT). Wal-mart and Target have expanded their food offerings because they know it drives customer traffic. Almost all store expansion at Wal-mart and Target in the last few years has been their super center concepts with expanded food sections. They have also remodeled and expanded their traditional merchandise stores to offer food and other groceries. Although food has lower margins, they realize that once they get consumers in the store they will have a better opportunity to sell them higher margin hard retail goods. Consumers have flocked to the mass merchandisers to buy groceries because they offer good locations, one-stop shopping and better pricing than the traditional grocery stores on food items.

For the last few years traditional grocery stores' overall market share has continued to trend down. Only recently has the trend stabilized with a few traditional grocers actually gaining market share. Folks at Super Valu and Kroger among others have placed a strong emphasis on remodeling their stores, being more cost competitive on their product offerings and adding value for their customers.

The bread and baking companies within the supermarket industry continue to face a tremendously challenging environment. Wheat prices continue to be at or near record highs driving commodity costs and hurting bakers margins. The huge run up in flour prices has hurt all baking manufacturers causing across the board price increases and causing industry executives to look for any and all means to cut operating costs.

In addition, baking continues to be a very fragmented market with a handful a major players competing vs. many regional companies. The largest and most well known Interstate Bakeries (maker of Wonder and Home Pride bread and Hostess Cupcakes) continues to fight for its life in bankruptcy courts.

Nestlé Foods (NSRGY.PK) is the largest food company in the world but remains relatively unknown to most U.S. investors because it does not trade on any of the major U.S. stock exchanges. With turmoil in the markets investors should be looking for safer investments that can deliver consistent growth in a recessionary environment. Nestle has a large portfolio of well known brands and products: Nestle Chocolates, Lean Cuisine, Stouffers, Hot and Lean Pockets, Gerber baby foods and a strong pet food business to name a few.

So why do we believe Nestlé is so well positioned? And will it continue to outperform other key food companies like General Mills (GIS), Kraft (KFT) Sara Lee (SLE) and Campbell's Soup (CPB)?

Ralcorp's (RAH) recent purchase of Kraft Foods (KFT) Post cereal division is scheduled to be completed in mid 2008. With the purchase, Ralcorp faces several key challenges in integrating the two companies and transforming the company into a successful manufacturer of branded and private label food products. Ralcorp is most known for its portfolio of private label food products in the cereal, cookie, cracker, frozen bakery and syrup categories. Ralcorp is no stranger to acquisitions, having recently purchased Bloomfield Bakers for $140 million and Cottage Bakery for $170 million. However, Ralcorp's acquisition of Post cereals for $2.8 billion is obviously much larger and presents much more of an integration risk.

The cereal category continues to be dominated by Kellogg's (K) with a 30+ share and General Mills (GIS) with an approximate 24 share of sales. A combined Ralcorp and Post cereal combination will increase their overall share, but will still keep them as the # 3 manufacturer. Quaker (part of PepsiCo (PEP)), privately owned Malt-O-Meal and little known Gilster Mary Lee round out the top competitors. Ralcorp leads the battle in private label cereal sales followed by Malt-O-Meal and Gilster.

Record wheat, corn and other commodity prices are in all of the headlines. The "R" word also captures the daily headlines.

Under normal circumstances during an economic slowdown, defensive stocks like Kraft Foods (KFT), General Mills (GIS) and Kellogg (K) should be in vogue with rising stock prices.The theory has always been "everybody's got to eat", Right? Well, the world wide grain shortage has put that old adage into question. Stock pickers and the market are concerned that food companies will not be able to keep their margins intact nor able to raise prices fast enough.