$SFM

Grocer Discounts Amid High Food Prices Raise Margin Concerns Ahead of Fourth of July

Grocers are offering discounts ahead of the Fourth of July holiday as they battle for consumer dollars amid rising food prices that some experts say may affect profit margins.The overall cost of food rose 3.1% in the 12 months through May, the US Bureau of Labor Statistics said on June 10. Food-at-home prices were up 2.7%, and food away-from-home increased by 3.5% from the same month last year.An Independence Day cookout for 10 people will cost $73.82 for a basket of 10 items including cheeseburgers, chicken breasts, potato salad and ice cream, up 4% year over year, according to the American Farm Bureau Federation, an advocacy group for farmers in the US.Food prices have surged as consumers faced higher energy prices, the impact of tariffs and drought conditions in growing areas globally. That's left grocers such as Kroger (KR), Albertsons (ACI) and Sprouts Farmers Market (SFM) to compete for budget-strapped customers by offering lower prices.Investors are taking a wait-and-see approach on whether cutting food bills will affect retailers' bottom lines at a time when demographics are changing and appetites are already reduced from the rising use of GLP-1 weight-loss medications, said Scott Mushkin, chief executive of R5 Capital, a consumer consulting and research firm. Grocers so far haven't mentioned lower margins due to discounted prices but it's "100%" something about which the market is concerned, he said."When there's declining volumes, the only way to get market share or get your volumes flat to positive is to win share from somebody else," Mushkin said in an interview with. "You're seeing more and more companies talk about investing in prices, which means just lowering prices."Kroger, the largest traditional US grocery store with a market capitalization of roughly $34 billion, said Friday it would offer specials on several items including soft drinks, dips and dinner sausages, ahead of the Fourth of July.The effects of the company's self-funded price investments -- when a grocer lowers a price to increase volume and stay competitive with rivals -- remain to be seen, Morgan Stanley said in a note to clients. Still, they lowered their 12-month price target on the company to $67 from $73.Kroger Chief Financial Officer David Kennerley said on the company's June 18 earnings call that food inflation in the first quarter came in at the low end of the retailer's expectations. But he still expected inflationary pressures to increase in 2026 amid the broader macro environment.Oppenheimer analysts said in a report last week that Kroger is implementing pricing efforts in some test markets and has seen positive results including gaining market share. Kroger's goal, the analysts said, is to capture more of the consumer basket without being the lowest-cost retailer. That, in turn, will reduce risk to margins."Management is testing these efforts in more stores," Oppenheimer said. "The company does not seem to be aiming to be the lowest price retailer, which, in our view, should minimize the risk of any price war."Sprouts Farmers Market, with a market value of about $8 billion, and Albertson's, with a $6.6 billion cap, are also offering discounts on meats, vegetables and desserts ahead of the Independence Day weekend.Despite rising food costs, spending on food for the Fourth of July is expected to increase this year.About 62% of Americans plan to celebrate with a barbecue or picnic and will spend $9.4 billion on food, up from $8.9 billion in 2025 and on par with 2024 levels, according to a survey of 7,675 consumers by the National Retail Federation. This is historically high with spending ranging from $6.3 billion to $7.7 billion between 2014 and 2022.Ricky Volpe, an economist in the College of Agriculture, Food & Environmental Sciences at Cal Poly San Luis Obispo, said he expects grocers' margins to decline amid discounts ahead of and after Saturday's holiday, but volume to increase as prices decline.That'll increase opportunities for grocers to capitalize on bigger basket sizes, said Volpe, who previously researched food-price formation, competitiveness in the food industry and forecasted retail food price inflation at the USDA's Economic Research Service.Rising inflation may lead some consumers to discount retailers that sell food at a lower average price. Big box stores such as Walmart (WMT) and Costco Wholesale (COST) will likely see strong growth over the next six to 12 months, Volpe said."We historically see their revenues, market share and even overall profitability increase during challenging inflationary times like this," he said. "They're always taking market share away from the traditional."Discounts will likely continue beyond the Fourth of July, though retailers may offer lower prices on their own products rather than larger brands, Volpe said."We will probably, looking into the back half of the year, see intensified promotional activity for store brands and private labels relative to national brands because retailers typically have more control over their own brand prices and operate on higher average markups or margins for their own brand prices."Marcy Nicholson