Behind supermarket price cuts lies a battle among grocers, suppliers and consumers—with fuel costs threatening to make it even messier.
KEY TAKEAWAYS
Grocery-store sales are designed to influence what shoppers buy, not necessarily reduce their total bill. Discounts can increase basket size by steering customers toward products they never intended to purchase.
Aldi’s price cuts cover nearly a third of its products and may save shoppers millions of dollars. But they are also a limited-time competitive strategy from a chain aggressively gaining market share.
Kroger is resisting supplier price increases by removing certain products from its stores. That pressure suggests grocers are increasingly unwilling—or unable—to absorb higher costs or pass them along to consumers.
PepsiCo’s earlier chip-price cuts produced flat volumes and lower revenue. The company is now preparing to raise some prices again as fuel costs weigh on consumer demand and distribution expenses.
Traditional supermarkets are showing signs of margin pressure while specialist chains remain more resilient. Some grocers are relying on fuel earnings, advertising and stock buybacks to support results as the core grocery business weakens.
YOU CAN QUOTE ME
A grocery-store discount should be viewed as a merchandising strategy, not an act of charity. The grocer decides where to cut prices based on where it wants customer traffic and spending to go.
Inflation cannot be understood by looking at shelf prices alone. Gasoline, diesel, freight, wages, rent and utilities shape both consumer behavior and grocery-company profitability.
Lower prices do not automatically restore demand. When household budgets are constrained elsewhere, even a meaningful price cut may simply produce lower revenue on the same sales volume.
Investors should separate genuine operating strength from financial support mechanisms. Earnings fueled by gasoline sales, advertising income and share repurchases do not necessarily indicate a healthy grocery business.
Price wars can feel wonderful to consumers in their early stages. For the shareholders funding those battles through thinner margins, the experience may be considerably less enjoyable.
You can quote me: “Price wars are wonderful for shoppers–for a while. But, alas, they are rarely wonderful for the shareholders of the companies fighting them.”
The fine print. I consider myself a pretty good cook–though some may debate that, but I stand by it–and when I cook, I like to shop for it myself. Shopping is part of the ritual which I have long used to relax after long days in the canyons of New York’s financial district. No lists, no apps, no delivery, just me wandering the aisles like a man on a mission. These grocery store visits also double as field research–you actually learn more about inflation in twenty minutes in a supermarket than in a week of reading Fed statements. Recently I went in for four things for a dinner, and I came out with seven, because the store had very helpfully put big yellow SALE signs on three things I did not need. The four things I actually came for? Full price–every one of them. I stood at the register doing math in my head–an occupational hazard, I'm afraid–and quickly realized the store had not lowered my grocery bill at all. It had lowered the price of what it wanted me to buy. 🤣
This morning when I tuned into my local NYC news station to check the weather and subway delays (I know I can get these on my smartphone, but it’s kind of a tradition and it serves as a backdrop for my first espresso), I noticed a headline on the crawler at the bottom of the screen–big grocery chains are cutting prices to help families fight inflation. HELP–that was the word. Seeing that headline, I knew that I had to dig further–especially given my recent excursion to the grocer. Now, to be fair, some of the headline is real. Aldi–the discount chain that has been quietly eating everyone's lunch–started cutting prices on nearly a third of its products last Wednesday, on everything from chicken and fresh produce to coffee, nuts and paper towels, and says the cuts will run through at least November 3. Aldi estimates shoppers will save about $86 million. That's not nothing. But read the fine print–and it is a limited-time offer on part of the store, from a company whose entire business model is taking share from the supermarket down the street. Foot-traffic data from Placer.ai shows Aldi gaining visits faster than any other grocer this year, according to a recent report. That is not a gift. That is a strategy. And it is a strategy with an expiration date.
Kroger, one of the country's largest supermarket chains, took a very different approach–it isn't so much cutting prices as refusing to raise them. Kroger has pulled Red Bull (another one of my favs–don’t judge me, please) from every one of its stores and gas stations, and Boar's Head deli items from roughly 200 of its more than 2,700 locations, after the parties reportedly “disagreed over price increases.” Boar's Head, by the way, disputes that pricing was the reason, and talks are said to be ongoing. Think about what that tells you. The grocer is standing in the middle of the aisle with its arms crossed, telling its suppliers–NO MORE. And when a grocer won't absorb a supplier's price increase and won't pass it on to you either, something has to give, and usually, it's the brand on the shelf.
Now, look at it from the other side of the negotiating table, because that is where the real story is. Earlier this year, PepsiCo did exactly what the politicians and the morning shows want a food company to do–it cut prices, by as much as 15% on several of its biggest chip brands in February, after some bags had crept above $7. That’s right, seven dollars–seven dollars for a bag of chips! And what happened? Its North American food business reported a 2% revenue decline on flat volumes. Lower prices, the same number of bags, less money. So, you may not be shocked to learn that PepsiCo is now planning to raise prices again on grocery-store bags of Doritos, Ruffles and SunChips late this year or early next, by a low-to-mid single-digit percentage, according to people familiar with the plans. The company reportedly says the new prices will still be below where they were before the cuts, and that it remains committed to affordability. The same Bloomberg report I dug up this morning also reports that General Mills has ended its round of price cuts and is leaning on new products instead.
But here is the part I cannot stop thinking about–PepsiCo said elevated gas prices dampened consumer demand more than it had anticipated. Wait, WHAT? Read that again. 👈👀 The shopper didn't stop buying chips because chips were expensive. The shopper stopped buying chips because the gas tank got there first. And with Brent crude back above $107 this morning after Washington rejected Iran's latest proposal to reopen the Strait of Hormuz, the gas tank isn't going anywhere–and neither is the diesel bill for every truck that delivers every bag of chips to every shelf. Check out the following chart and keep reading (compliments of Bloomberg’s own AI chatbot AskB–incidentally awesome for getting quick answers).
This chart shows quarterly gross margins (the share of every sales dollar a grocer keeps after paying for the goods on its shelves) for six major chains, going back to the third quarter of 2023. At first glance it looks like a whole lot of nothing–flat lines, small wiggles, grocers doing what grocers do. Go on, look closer! Sprouts Farmers Market, at the premium end, is still sitting at 38.7%. Grocery Outlet, the closeout bargain chain, is at 30.2% and holding. It's the big mass-market supermarkets in the middle that are bending. Albertsons has slid to 26.6%, the lowest reading on the chart. Ahold Delhaize (the parent of Stop & Shop, Food Lion and Giant) has eased to 26.4%. Weis Markets, a regional operator, bounces around at 25.8%. Kroger is at 22.4%, back to roughly where it was in early 2024 after peaking in 2025. These are small moves, I know. But in a business where a single point of margin can be a big slice of the profit, direction matters more than size. And the direction is exactly what you would expect in the early innings of a price war–the chains that go head-to-head with Walmart, Costco and Aldi are giving ground, while the specialists at either end are not.
Now, in fairness to Kroger, the company says its underlying gross margin rate, stripping out fuel, rent and depreciation, actually rose 13 basis points in its second quarter. Much of the headline dip is fuel and pharmacy mix. Fine. But look at what is holding up the house in its latest earnings release. Identical sales, which strip out fuel and stores that opened or closed, rose just 0.2% in the quarter, and management cut its full-year forecast to between 0.2% and 0.8%, down from 1% to 2%. Adjusted earnings still beat Wall Street at $1.09 a share, and the company's own filing credits its first-half earnings gain primarily to higher fuel earnings and fewer shares outstanding, partially offset by LOWER adjusted operating profit outside of fuel. Kroger bought back $1 billion of its own stock in the quarter and raised its dividend 11%. Back in the first quarter, it blamed a margin dip partly on higher transportation costs and “planned price investments” (Wall Street's polite way of saying price cuts, lol). So the earnings are being propped up by the gas pump, the buyback and the advertising business it runs for the brands on its own shelves–everything, it seems, except selling groceries.
So what should we as investors take from all this? I'm not going to tell anyone what to buy or sell–that's not my thing in this blog/newsletter–but I would be asking some pointed questions. When a grocer reports earnings, is the profit coming from the core business, or from fuel, advertising and a shrinking share count? In a price war, who has the deeper pockets, a retailer that can fund lower grocery prices with membership fees and ad revenue, or a traditional grocer funding them out of its own margin? And with “food-at-home” prices flat in August and up just 2.2% from a year ago while crude marches higher, how much of the freight and diesel bill has actually reached the shelf yet? Remember, too, that gross margin is only the first line of the story. Rent, wages, freight and utilities all come out after the gross margin line, and none of those costs are falling. The suppliers are already giving us their answer. Price wars are wonderful for shoppers–for a while. But, alas, they are rarely wonderful for the shareholders of the companies fighting them.
As for me, the three sale items I didn't need are still sitting in my pantry–unopened. My wife asked me last night what I planned to make with them. I told her I hadn't decided. She said, "So the store got you to buy what it wanted, at the price it wanted." She's right, as usual–the store won that round. Every grocer in America is now running the same experiment on its customers that it ran on me the other day. Put the yellow signs where you want the traffic, and hope the rest of the basket pays for it. The question for investors is how many more rounds it can afford to win.
FRIDAY’S MARKETS
On Friday, the S&P 500 rose 0.51%, the Nasdaq Composite gained 0.48%, and the Dow Jones Industrial Average climbed 478 points, or 0.93%, to 51,828, ending a three-week losing streak. For the week, the S&P 500 added 1.2%, the Nasdaq 2.1% and the Dow 0.3%, while the small-cap Russell 2000 fell 0.8%. Oil prices dropped on reports that the U.S. and Iran were exploring a deal to reopen the Strait of Hormuz, with November WTI crude falling about 2% to settle near $92.44 a barrel. Treasury yields eased after the 10-year yield briefly approached its highest level since 2007. The picture for those has changed vastly by this morning.
NEXT UP
Dallas Fed Manufacturing Index (Sept) may have slipped to 7.8 from 11.6.
Fed speakers today: Bowman, Cook, and Barkin.
Later in the week we will get Consumer Confidence, JOLTS Job Openings, ADP Employment Change, Personal Income, Personal Spending, GDP, PCE Price Index, ISM PMIs, Durable Goods Orders, Nonfarm Payrolls, and Unemployment Rate. That should be enough to keep you on the edge of your seat. Make sure and check back in often–if you want to stay ahead of the surge.