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The Wall Street Journal reported over the weekend about how CPG manufacturers, facing pressure from retailers to lower their prices so as to be in synch with the recession’s impact on consumers, are instead “offering more coupons, promotions and other price reductions,” which allows them “to boost sales without permanently cutting prices.”

According to the story, “In a BMO Capital Markets study of 75 food retailers – including Kroger Co., Wal-Mart Stores Inc. and Safeway Inc. (SWY) - nearly three quarters of the retailers surveyed indicated that promotional levels have increased and were heavily weighted to staples like dairy, cereal and soup.”

A number of manufacturers spent a food part of 2008 raising prices to compensate for increased commodity costs, and have been trying to hold firm about now lowering prices despite significant pressure from some of the nation’s largest food retailers, including Supervalu and Safeway. Adding to the tensions between retailers and manufacturers has been the willingness of chains to use private label brands – which generally are both less expensive and carry higher margins – as a cudgel in their dealings with suppliers.

And, the Journal writes, “For grocers, the promotions are also a way of better competing with Wal-Mart's low prices. After factoring in promotions, traditional grocers have cut their price gap with Wal-Mart to about 14%, down from up to 30% last summer…”

KC's View:
I just don't see how this is healthy for the food business in the long run. It is illusory rather than real…and it still leaves Walmart 14 percent cheaper than traditional grocers. This is considered a sufficient response?