Inflation, Discipline Spark Industry Recovery: Report

JON SPRINGER

CHICAGO — A combination of food price inflation and a rational pricing environment is helping to spark a recovery among U.S. supermarkets, according to a new report released Monday by Fitch Ratings here. However, retailers will need to manage rising costs and weather growth of alternative channels of trade to sustain the turnaround, Fitch said.

Anticipated price inflation — and a determination to pass higher costs along — should lead to faster sales growth and better expense leverage over the next 12 to 24 months, slowing the cycle of declining margins resulting from reduced customer counts and price investment during the previous two years, Fitch noted. The report cited U.S. Department of Agriculture estimates of 3.5%-4.5% food-at-home inflation in 2011 and 3%-4% inflation in 2012.

Wal-Mart Stores’ renewed commitment to an everyday-low-price strategy — and away from the promotional posture it effected a year ago — should help retailers maintain a rational pricing environment.

Kroger Co., Cincinnati, which has the best same-store sales growth of the “Big 3” U.S. supermarket retailers, should continue to outpace rivals Safeway and Supervalu, Fitch said.

Safeway, Pleasanton, Calif., has the potential to regain some of the margin lost through price investments if it can accelerate sales, the report said. Minneapolis-based Supervalu will continue to see margin pressure while sales are negative, Fitch added, although cost reductions are softening the blow.