There is a food fight brewing in grocery store aisles, with supermarket chains turning up the heat on suppliers to lower wholesale prices and food companies digging in to hold on to their recent price hikes.

Chief executives from Supervalu Inc. (SVU) and A&P operator Great Atlantic & Pacific Tea Co. (GAP) both recently predicted a tense first-half to 2009 as they engage their suppliers in negotiations about lowering prices, which the retailers hope will give their own sales a lift.

Before getting their suppliers to acquiesce to lowering wholesale prices, retail executives expect suppliers first to pump up their trade spending and introduce more coupons, two-for-one deals and other discounts in grocery aisles, hoping they can keep their prices intact as long as possible.

The negotiations highlight how retailers are looking to their vendors for help in getting lower prices for their customers, who have less money to spend amid a deepening economic crisis and growing unemployment.

When food companies raised prices as energy and ingredient costs spiked, "many retailers couldn't pass it all on," said Marty Weintraub, a supermarket specialist at the retail consultancy Karabus Management Inc. "Now, many grocers are thinking it's payback time."

Many food manufacturers aren't at the point where they need to cut prices just yet, as demand for their products has remained fairly robust despite the higher pricing, says Ed Roesch, an analyst at Soleil Securities, partly due to consumers shifting their food dollars to supermarkets from restaurants.

"We are still at the stage where weaker restaurant traffic is still on the branded manufacturers' side," Roesch said.

But grocers like Supervalu and Safeway Inc. (SWY) are looking to move away from promotional pricing and offer lower everyday prices to improve their price perception and to better compete with low-cost food retailers like Kroger Co. (KR) and Wal-Mart Stores Inc. (WMT). The gridlock over lower prices could slow plans by those grocers to realize their new strategies, analysts say.

"Grocery stores would like to get lower wholesale prices so they can sell lower at retail because they aren't competitive with Wal-Mart," said independent supermarket consultant David J. Livingston. "The bottom line is how do you get more money out of the vendors."

More trade spending could be a temporary way to bring down some prices, and one that vendors may prefer since it guarantees that the cuts would trickle down to the consumer rather than pad retailer margins.

"Taking a price reduction is a dicey proposition because the retailer may not pass on all of it," said Paul Crnkovich, managing director at marketing consultancy Cannondale Associates.

It's also a preferable way to regulate prices in case volatile commodity prices, which have eased in recent months, move up once again. "It's much easier to promote heavy, to turn that spigot on and off, than move the list price," Scott Mushkin, supermarket analyst at Jefferies & Co., said.

In the meantime, grocers are getting some pricing relief from their suppliers in certain categories, particularly ones where the branded products have become commoditized or where store-brand products have a strong presence.

Kraft Foods Inc. (KFT) cut some prices late last year for cheese products, which face tough private-label competition. Clorox Co. (CLX) recently rolled back a price hike for its Glad trash bags.

"We made the decision on Glad given the high level of private-label shares and competitiveness of this category," said Clorox spokesman Dan Staublin in an email. Still, most consumer and food manufacturers haven't made moves to cut prices. Clorox, for instance, said it had no plans for broad-based price decreases.

On the flip side, some manufacturers with strong brands have managed to continue to push through price increases, even in the current environment. Kellogg Co. (K), for instance, recently raised prices for several products. Kellogg spokeswoman Susanne Norwitz said via email that discussions with the company's retail partners are confidential.

"The price adjustments are necessary due to increased commodity costs for ingredients and energy used in the manufacturing and distribution of these products," Norwitz said, adding that despite the recent drop, commodity prices are still well above historical averages.

But as the economic downturn draws out and consumers continue to feel pinched, food makers that hold on to their higher prices may lose more of the market share to private-label products, even in some categories like cereal, where market share for brand-name products remains strong.

Supervalu CEO Jeff Noddle is eyeing the back half of 2009 as a time when food makers may have to relent on their prices. "I think they're going to be forced initially into more trade spending and then ultimately bringing prices down," Noddle said in a recent earnings conference call.

Meanwhile, retail executives are hoping that any lingering pressure food makers experienced from high commodity costs will also winnow in the second half of the year, forcing higher trade spending to give way to lower wholesale costs.

"There's only so long that a vendor can claim that there are inflationary pressures in their cost structure," said Karen Short, food retail analyst at FBR Capital Markets.

-By Anjali Cordeiro, Dow Jones Newswires; 201-938-2408; anjali.cordeiro@dowjones.com

-By Paul Ziobro, Dow Jones Newswires; 201-938-2046; paul.ziobro@dowjones.com

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