Supermarket stocks getting squeezed heading into ’11

Associated Press

NEW YORK

Orange juice isn’t the only thing at your supermarket that’s been squeezed.

Rising food prices mean grocery-store chains must absorb extra costs on items such as meat, seafood and produce, or they try to pass them along to customers. But many of those consumers are unemployed or have less money to spend, even on essentials. For now, the big chains are mostly choosing to absorb. As a result, profits are falling, and so are their stocks, making them one of the few dim lights in the market in 2011.

On Tuesday, Supervalu was the first of the grocers to report quarterly results, and the numbers for its fiscal third quarter were ominous: a loss of $202 million, or 95 cents a share, compared with a profit of $109 million, or 51 cents, in the same period a year earlier. The company, which operates Albertsons, Jewel-Osco, Acme and other chains, also cut its forecast for the year.

The result: “Investing in [grocers]now is certainly not for the faint of heart,” says Philip Gorham, an analyst at Morningstar.

The pressures supermarkets are dealing with are felt elsewhere, too. Soaring commodity prices help energy and agriculture companies that produce raw materials. But there are plenty of losers from the commodity boom stuck trying to pass on higher costs to customers whose wages are not rising as quickly. Evidence of that came in the government’s inflation report Friday. The Consumer Price Index rose 0.5 percent in December, the largest increase in 18 months. Most of that was due to higher gasoline prices. Food prices increased just 0.1 percent, suggesting grocers still aren’t passing along higher costs on most items.

Forty million Americans rely on foods stamps, up 50 percent from four years ago, and the average price of gas is 12 percent more than it was at this time last year.

That’s one reason middle- and lower-income consumers are increasingly going to supercenters that offer less selection but cheaper prices than traditional grocery stores.

Grocery sales at stores such as Walmart, Target and Costco grew at a rate of 10 percent a year over the past five years, according to Packaged Facts, a market-research firm. Sales at traditional grocery stores are growing closer to 4 percent.