Food Retailer index

Deflation has hit the supermarkets’ aisles and some analysts believe their share prices will soon deflate, too.

Price deflation happens when there isn’t enough demand to shift inventories at current prices, forcing suppliers to offer round after round of discounts. When purchasers catch on to the availability of discounts, they demand yet more. Supermarkets are particularly susceptible to the phenomenon, because shoppers can so easily compare prices, listed in the shop windows of competing stores that are often in close proximity.

Recently, packaged-food maker Kraft Foods said supermarkets were running down inventories rather than making new orders.

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Mr. Wantrobski expects the S&P Food Retailer index to remain in a range. The food retailers have reversed a long-term trend in relative strength, he said. For about two decades up to roughly 2005, the food retailers lagged the broad market, Wantrobski said. That’s partly because the market favored high-tech growth concerns rather than slow-moving steady investments for much of that period.

“I think the next bull market will be more value driven, akin to what occurred in the 1940s, 50s and 60s than the 90s,” he added.

In the short term, however, the “relative strength” is no guarantee that the sector will rise from here. Mr. Wantrobski expects the supermarkets to bounce harder than most sectors when the market bounces and not to fall as far as most sectors when the market falls.

http://blogs.wsj.com/marketbeat/2009/02/12/supermarkets-may-be-overripe/