Grocers Tout 'Sales' Even as Prices Climb

Demand and Bad Weather Raise Costs for Must-Haves; More Wal-Mart Rollbacks

With food costs soaring and the economy slowing, the nation's supermarkets are touting their discounts even as they jack up the price of most items.

Consumers are being whipsawed by the powerful marketing pitch of buy-one-get-one-free offers for nonessential items at a time when they're paying more for must-haves. The average price of a dozen large eggs in February was $2.17, up 24% from the year before, while a gallon of whole milk rose 26% to $3.87 compared with February 2007.

Rising demand for meat and dairy products in emerging overseas markets, increased use of grains for alternative fuels, and bad weather in some parts of the world have pushed up the price of every commodity from corn to coffee. That, in turn, led to the biggest jump in food prices in 17 years in 2007. In February, U.S. prices for groceries continued higher, rising 5.1% from February 2007, according to the Bureau of Labor Statistics.

Wal-Mart Stores Inc., the largest food retailer in the U.S., has long been the low-price leader among major supermarkets and discount stores. But in a marketing move two years ago in which it tried to capture more dollars from wealthier shoppers, the chain stopped stressing its low-price message. But faced with a looming recession, the retailer is now bolstering that image. Just before the Super Bowl, the chain announced an "economic-stimulus plan" that included lowering prices between 10% and 30% on thousands of grocery and other items.

At a Wal-Mart Supercenter in a northern suburb of Chicago, the price of a box of Little Debbie Frosted Donuts was recently reduced to $1.50 from $1.63 while a box of Sunbelt Oats & Honey granola bars was cut to $1.66 from $1.80.

But even with the promotions, the price of a basket of goods selected by Credit Suisse researchers at a Chicago Wal-Mart was up 2.5% in February compared with January. The basket price of a Target Corp. store in Chicago was up 2% and that of a Kroger Co.'s Food4Less store in Chicago was down 0.1%.

In Dallas, retirees Marge and Jude Hoeper, ages 74 and 80, respectively, have noticed that some of Wal-Mart's food prices recently have shot up.

Holding a can of Bush's baked beans, Mr. Hoeper says its price just rose to 76 cents from 68 cents a few weeks ago. And prices of bananas have consistently gone up; they are now 58 cents a pound, up from a low of 36 cents a few months ago.

"You know there is inflation when prices start going up here," says Mr. Hoeper, a former engineer.

Wal-Mart declined to make executives available for interviews but said in a statement: "When our grocery suppliers bring price increases to the table, we don't just accept them, and increases do not necessarily show up in the retail price. We will continue to work closely with our suppliers in every way possible to keep the prices down for our customers and help them manage their grocery budgets."

Food company executives say Wal-Mart understands the manufacturers' costs have risen and has been fair in allowing them to pass them along. But, they note, the retailer is pressing them to do more price promotions and to look for ways to eliminate waste, such as making packages smaller and fully loading delivery trucks.

Meijer Inc., a closely held retailer with 181 stores in the Midwest, responded to Wal-Mart's economic-stimulus promotion by sending an email to customers reminding them of its own everyday low prices, according to TNS Retail Forward. "Check out our Big Game Party Package for under $50 to see our prices compared with that other major retailer (who shall remain nameless)," the email states. A spokesman for Meijer, Grand Rapids, Mich., declined to comment.

In February, Germany-based discount grocer Aldi Group announced it would lower prices by as much as 27% on more than 100 products at stores in the St. Louis area and perhaps later in other markets.

Kroger, the second-largest U.S. food retailer, has also been lowering its prices to be closer to Wal-Mart's, according to Citi Investment Research. Kroger declined to comment, but the chain's finance chief, Michael Schlotman, told analysts last month that, "we're significantly better priced at the shelf edge today than we were in 2002, both compared to our traditional competitors and to the lowest priced merchant in the market -- not always Wal-Mart, but usually Wal-Mart."

Jewel-Osco, a chain owned by Supervalu Inc., recently narrowed the gap between its prices and Wal-Mart's in the Chicago area, according to a new pricing survey from Credit Suisse.

Elaine Pangan, a 23-year-old nursing assistant shopping at a Jewel-Osco in Chicago, said she's noticed the store promoting more bargains lately -- even though her grocery bills seem to keep creeping up. "Every time I go to checkout, they're always promoting what's on sale as soon as you get there," she said.

Safeway Inc. CEO Steve Burd told analysts last month that his stores will offer more regular low-price items and fewer temporary sales. "We think longer-term we want to be less promotional and have a better everyday value," Mr. Burd said. "And so I think you will see us increasingly invest in everyday price because it has a lot to do with consumers' price perception."

Recent data from traditional grocery stores show that sales growth among large packaged food and beverage manufacturers is starting to slow and volume is starting to decline. Some analysts see that as a sign that high food and beverage prices are starting to turn off consumers who are strapped by high gasoline prices, falling home values and job losses.

Consumers have been making fewer trips to supermarkets and certain other food retail outlets, as they combine errands and look for other ways to save money, according to a recent Nielsen Co. report. The number of annual trips to grocery stores declined to 59 in 2007 from 61 in 2006, a drop of 3.3%, according to the report. But trips to supercenters rose to 27 from 26 trips a year.

Wal-Mart shares have risen 11% this year as investors bet it will outperform rivals in the weak economy. Shares of conventional grocery giants are down; Supervalu has slipped 20%, followed by Safeway, down 14%, and Kroger, down 5%.

Food companies also have been looking for their own ways to reduce waste and make up for their increased input costs without consumers noticing. General Mills Inc. recently made its cereal boxes smaller but kept the price the same. PepsiCo Inc.'s Frito-Lay snack unit is raising prices and reducing the number of chips in some of its bags. ConAgra Foods Inc. is considering including fewer kernels in its popcorn bags.

Betsy McKay contributed to this article.

Write to Julie Jargon at julie.jargon@wsj.com.