Price wars at grocery stores may be at end

10/11/2010

NEW YORK - A price war being fought in grocery stores across America may be poised to end, bringing relief to food makers scarred by discounts, but many fighters are too scared to lay down their weapons.

As the recession caused shoppers to count their pennies, sales growth in the grocery industry slumped, giving rise to a fierce battle for market share. Many food makers and retailers used discounts, or deals on products bought together, to fuel sales and protect their turf.

But analysts say the discounts were so widespread that no particular company saw a boost, and note that in many cases, the promotions were so deep that the hit to profit margins could not be made up by more sales.

"Have you ever known a price war where anybody won?" asked Todd Hale, senior vice president of consumer and shopper insights at Nielsen Co, which tracks consumers' buying habits.

Average unit prices for consumer goods sold in the United States rose 3.6 percent in the year ended Aug. 8, 2009, Nielsen said, but fell 0.6 percent in the following year ended Aug. 7, 2010.

"Egg [prices] were down 18 percent through much of last year. It's such a deal, but people don't start eating eggs three meals a day," Mr. Hale said. "Consumers are in a pretty good position ... but that's not leading to growth."

What the industry needs, according to Mr. Hale and scores of food and grocery analysts and executives, is a little inflation to fuel growth, restore profit margins, and train consumers to spend more. With recent spikes in costs for commodities from grains to cocoa, food companies have the incentive they need.

"Falling commodity costs cause people to promote more, rising commodity costs cause people to promote less," said Janney Montgomery Scott analyst Jonathan Feeney, "The latter is good, the former is bad."

ConAgra Foods Inc., Campbell Soup Co., and Sara Lee Corp. are among the companies that have been hurt by price competition. Barclays Capital analyst Andrew Lazar estimated that Kraft Foods Inc., J.M. Smucker Co., Hershey Co., HJ Heinz Co., Kellogg Co., and General Mills Inc. will see the greatest underlying inflation in 2010.

Even though rising commodity costs eat into profit margins, many companies hesitate to ease up too much on promotions, lest they lose sales, since unemployment is still high and consumers are still cautious.