Grocers Increasing Ad Spending To Woo Customers

Supermarket chains--no longer the only place to buy the week's groceries--are pumping more money into advertising to fend off growing competition from mass discounters, drug stores and even dollar stores.

The ad splashes are cutting into profit margins at a time when sales remain weak across the industry. Chains like Safeway Inc. (SWY) and Great Atlantic & Pacific Tea Co. (GAP) are touting price cuts on thousands of items, a double whammy to profits: spending to entice customers to come in for lower-priced items.

The increased spending hasn't yielded an immediate payback, but some industry analysts say the strategy could help some chains shake the image of being too expensive. Supermarkets are hoping to parlay the spending into loyal customers as the economy improves.

The supermarket chains no longer just compete in their traditional industry. Mass discounters Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) and wholesale clubs like BJ's Wholesale Club Inc. (BJ) have grocery offerings. Traditional drug stores like Walgreen Co. (WAG) and CVS Caremark Corp. (CVS) are bolstering their grocery offerings, while dollar stores like Family Dollar Stores Inc. (FDO) are expanding their offerings for the home pantry.

"The industry's trying to stabilize market shares now and create a foundation so that 2011 can be a good year," BB&T food retail analyst Andrew Wolf said.

Data from research firm Kantar Media show supermarket chains' advertising spending rose 19% to $393.3 million during the first half of 2010 compared with 2009. The increase is ahead of a 9.5% jump by other retail segments and a 5.7% increase by all industries over the same time.

Safeway's "Promise" campaign has been one of the more ambitious among large grocery chains during the past year, highlighting lower prices on thousands of items in television and other media. Volumes have improved in recent quarters at the third largest traditional grocery chain in the U.S., but the lower prices have kept sales gains elusive. Analysts on average expect Safeway on Thursday to report a 1.1% decline in identical-store sales--a key industry benchmark--for the third-quarter.

Investors are wondering whether Safeway will maintain its aggressive advertising pace. Safeway spokeswoman Teena Massingill declined to comment on future advertising plans for fear of tipping the company's hand to competitors, but said Safeway continues to reinforce elements of the "Promise" campaign for each operating division.

Kroger Co. (KR) and Supervalu Inc. (SVU) have also stepped up their media spending. Kroger says part of the increase comes as it has redirected spending from weekly supermarket circulars, which are becoming less effective, to radio, television and the Internet.

"The weekly ad circular probably doesn't have the impact that it used to have," Kroger Vice President of Corporate Affairs Lynn Marmer said.

Kroger, the largest traditional U.S. grocery chain by sales, has performed well during the downturn, as it solidified an image of having lower prices before the downturn. Its shares are up 6.3% this year. Safeway and Supervalu, meanwhile, have struggled to shake perceptions of operating stores with higher prices, and their shares have trailed Kroger.

"Advertising alone is not going to be the magic bullet," Jefferies & Co. analyst Scott Mushkin said. "They have to marry it with real actions."

One low-price player putting pressure on traditional retailers is Aldi Inc. With 1,100 stores currently in the U.S., the discount operator plans to open up to 100 stores this year and next. When it enters a state, like it did with Texas this past year, Aldi launches an advertising blitz, a strategy that it started in the past couple years.

"Our advertising, as much as our low prices do, get people into the stores," Aldi spokeswoman Heather Tarczan said.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

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