Is the Next Shoe Dropping in Retail Price Battle?

Is the Next Shoe Dropping in Retail Price Battle?

No one expected this to be an easy year for food retailers, but an analyst's warning last week raised the level of concern about how major grocers will perform.

Deborah Weinswig of Citigroup Global Markets, New York, released a report called “Modern Day Price War to Pressure Grocers,” while at the same time downgrading Kroger and Safeway shares (click on "Industry Stocks Dip in '09" for the story). In the case of Safeway, she even unleashed the dreaded “S” word, which stands for sell, not Safeway. It should be noted that Weinswig's opinions here don't appear to represent conventional wisdom among analysts.

However, her report may have helped drive supermarket stocks lower in general, continuing a downward trend for those shares this year. Weinswig's outlook was particularly disturbing because she painted a picture of food retailers challenged on numerous fronts. Her points include:

  • Regional operators are becoming more price-aggressive. Weis Markets and Wegmans are among retailers that recently unveiled new plans to cut prices, which put more competitive pressure on grocers in general.

  • Retailers are beating vendors to the promotional punch. Companies such as Wegmans and Costco are cutting prices in anticipation of lower costs, but even before suppliers provide support.

  • Wal-Mart is expected to invest more in grocery price cuts this year, a move that would raise the competitive stakes for supermarkets.

Looking at Weinswig's points, the first question is whether a new price war is at hand. Put another way, does 2009 represent a major acceleration or just more of the same price activity? A couple of other analysts contacted by SN countered Weinswig's thesis by remarking that the promotional environment hasn't changed much from last year.

However, a recent survey conducted by SN found that nearly 80% of retailers expect to ramp up price advertising this year — and about half of those expect the increase to be significant. So while this year's moves may or may not represent a new “war,” they are likely more than incremental and are worth noting.

Weinswig's contention that retailers are promoting prices ahead of supplier support raises more concerns. Why are retailers acting unilaterally? Why aren't vendors playing the partner role here? In the SN survey cited earlier, when asked what they expect of vendors this year, 65% of retailers said suppliers will offer more promotional dollars as a substitute for lowering prices, and 29% said vendors will keep prices high despite reduced inflation. Those are probably not the actions retailers are looking for.

If nothing else, consider this analyst report to have raised red flags for discussion. Supermarkets are still relatively well positioned, but major hurdles remain. This is a time for trading partners to get on the same page with promotional and other strategies. It's a period in which retailers should stay promotional to satisfy consumers, but also use other tools at their disposal, such as segmentation and hybrid pricing, to gain an edge.

It's anyone's guess how many retailers are positioned well enough to ride out a protracted price war, but if trading partners act strategically, maybe we won't have to find out.