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NEW YORK -- Citing relentlessly increasing pressure from competitive incursions by alternative food retailers, and a greater consumer emphasis on price, Standard & Poor's Ratings Services yesterday cut the debt ratings of Kroger, Albertsons and Safeway from BBB to BBB-minus, placing the chains' debt at the lowest investment grade.
"The supermarket industry is under increasing stress from structural and economic factors such as market share gains by nontraditional food retailers, rising costs, especially for employee benefits; and soft consumer spending," said Standard & Poor's credit analyst Mary Lou Burde in a study supporting the ratings cuts, titled, "Peer Comparison: Leader U.S. Supermarket Operators."
The analyst said the operating margins of the top three conventional operators in the U.S. market are being negatively impacted by the low pricing environment driven by Wal-Mart Stores Inc.'s relentless push into food retailing. "As a result, supermarkets must find ways to capitalize on their traditional strengths in convenience, perishables, and service in order to grow sales and profits," Burde said. "It will be challenging for traditional supermarkets to achieve performance gains in the face of intensifying competition, as cost savings must keep pace with ongoing price reductions."
Still, Kroger, Albertson's, and Safeway are better positioned than smaller, regional operators to withstand these pressures due to their advantages of scale, geographic and format diversity, said Burde in the report. The ratings outlook for all three companies is stable, S&P added. The 2003-2004 labor strike also hurt the retailers' sales and profits, S&P said.