Kroger fuels supermarket sector price war jitters

By Reuters
Posted Dec. 2, 2010 at 5:13 p.m.

Kroger Co. cut some prices in its latest quarter, fueling worries that the slow U.S. economic recovery will cause another flare-up in the supermarket industry’s intense and profit-denting price war.

The largest and top-performing mainstream U.S. grocery chain also forecast full-year earnings that could miss Wall Street’s estimates, and shares fell more than 8 percent.

A decline in Kroger’s supermarket selling gross margin stoked concerns that grocers may again be slashing prices to lure customers who are still recovering from the recession.

Supermarket selling gross margin is a measure of how competitively a grocer prices the products it sells. The 13 basis point decline in Kroger’s latest quarter suggested that the grocery chain was pricing more competitively.

“Their margins were not as good as in the past. This is one of the factors that contributed to the sharp drop in the stock,” said TD Ameritrade chief derivatives strategist Joe Kinahan.

Kroger also narrowed its full-year profit forecast to a range of $1.65 to $1.78 per share, versus $1.60 to $1.80 a share previously. Analysts on average forecast $1.78 a share, according to Thomson Reuters I/B/E/S.

Supermarkets need some price inflation to support healthy profit growth and a broad-based rise in grocery prices has yet to materialize.

Kroger, which has been outpacing rivals like Safeway Inc (SWY.N) and Supervalu Inc., has made continuous efforts to keep its every day prices low and downplayed the selling gross margin decline. CEO and Chairman David Dillon said the industry’s “intense” competition was not getting worse.

Executives said Kroger had been passing on higher costs for select name-brand grocery items and fresh foods like meat and produce. Nevertheless, they said overall prices for packaged food and other items in the center of the store have been falling, largely due to increased promotional spending by national brand suppliers.

Analysts doubt that all grocers and food makers will be able to pass on higher costs for things like dairy, grains, sugar and cocoa to cautious shoppers who are still grappling with high U.S. unemployment.

Beyond that, Supervalu in October said it was preparing a new round of price cuts to win back lost customers, which the markets interpreted as raising the risk for a renewed price war.

“The economic recovery is slower and weaker than we anticipated it would be at this point in the year. Job growth remains elusive and fuel prices have risen,” Dillon said on a conference call with analysts.

Weak employment and higher gas prices are affecting consumer confidence and grocery budgets, Dillon said, adding that Kroger would manage its business with the expectation that economic conditions would remain challenging through next fiscal year.

Kroger shares were down 8.4 percent, or $2.02, at $21.84 in afternoon trading on the New York Stock exchange. Safeway and Supervalu had declines of 5.5 percent and 1.3 percent, respectively.

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