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Supermarkets are losing the grocery price war

Publix Super Markets grocery store shopping
Luke Sharrett | Bloomberg | Getty Images

Low food prices and razor-sharp competition are creating bargains for shoppers -- but killing profits for grocery chains.

"It's created a price war among everybody. This is great news for consumers, but bad news for businesses who sell food," said Phil Lempert, a supermarket analyst who is the founder of supermarketguru.com, a Web site tracking industry news and trends.

At the same time, supermarkets are destroying their profit margins as they fight for new shoppers -- and fight off deep discounters like Walmart and online sellers.

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It becomes a spiral. As food prices fall, retailers become more aggressive in trying to sell higher volumes in order to maintain revenue.

"To do that, they're putting things on sale and getting people into the store and hopefully selling them more quantity," says Jon Stringer, retail editor at Supermarket News. "As long as sales are growing, you're able to get a little more out of fixed costs.

Prices of supermarket items declined 1.3% last year, compared to the year before, says the Agriculture Department's Economic Research Service. It was the first annual decline since 1967. Just about every family will feel the impact since weekly household grocery expenses in 2016 were $107.34, according to the Food Marketing Institute.

Wegmans, a 92-store regional supermarket chain based in Rochester, N.Y., recently lowered prices on organic bananas from 69 cents a pound to 59 cents a pound. An 18-ounce jar of Wegmans house-brand peanut butter fell in price from $1.99 to $1.49. Prices on 40 key items, including beef, dairy and eggs, fell as well.

Wegmans executives say they had no choice.

"For us to be competitive, we've always had a commitment to our customers to have the lowest prices on products families use the most," explained Tom DiNardo, the chain's senior vice president of sales and marketing. "Everybody who sells food is our biggest competitor."

Costco has cut some of its food prices as much as half. A carton of 18 extra large eggs was $3.61 last year. It came down to $1.79. A three-pound bag of Kirkland Signature pistachios was $19.99. It fell to $14.99; Arm & Hammer liquid laundry detergent came down to $10.99 from $15.79.

Price deflation was to blame, according to CFO Richard Galanti.

"As compared to 12 months earlier across all of our U.S. inventory on a cost, not sell basis, on like items, the average deflationary amount was slightly over half a percent, closer to 1% on foods," he explained.

One of the largest supermarket chains in the country, Cincinnati-based Kroger's, just ended a 13-year streak of quarter-over-quarter higher sales at stores open at least a year. It blamed lower food prices.

Yet at the same time, Lempert says, labor and other costs were rising, thinning profits "and that's everyone from Kroger to Whole Foods."

Meat, chicken and eggs have seen biggest cuts because of oversupply and lower than expected exports. According to the USDA, agricultural exports dropped by $17 billion or approximately 11% between 2014 and 2015.

"We're definitely in a prolonged deflationary period," said Kelly Bania, a senior analyst at BMO Capital Markets, who covers food retailing.