Wal-Mart to slash grocery prices

A shopper looks through produce as the first Wal Mart Supercenter to operate in the State of California opened in La Quinta, California, March 3, 2004.

SAN FRANCISCO (Reuters) - Wal-Mart Stores Inc will cut food prices and mount a new ad campaign over the next six weeks, a threat to other U.S. grocers that sent an industry shares index down more than 2 percent on Friday.

A Morgan Stanley analyst first reported the world's largest retailer's plan, calling it a major setback for other U.S. grocers, and the company confirmed the promotions in an email.

"While this helps address Walmart's traffic woes, we view this as a major setback for the grocery stocks, which have been rallying on hopes of a return to more rational pricing," Morgan Stanley analyst Mark Wiltamuth wrote in a note on Friday.

The Standard & Poor's Food Retail Sub-Industry Index closed down 2.2 percent.

Walmart has used aggressive pricing in grocery and other units to bring shoppers into its stores. The grocery business is particularly pressured by such pricing, as its profit margins are already low.

Investors in Walmart have been concerned about signs that shoppers who gravitated to its stores during the worst of the recession -- boosting sales and profits -- are returning to rivals. Traffic fell in Walmart's U.S. stores during its fourth quarter, despite the holiday season, when shopping is at its peak.

In the promotions, customers entering Walmart stores will be greeted by signs advertising price rollbacks on 10,000 items. The focus of the price cuts will be on food and other consumables.

The changes, to hit stores by April 1, will be supported by a television and media campaign.

That timing means the campaign would be in place just before Easter, which falls on April 4 and is a big time for home-cooked meals.

Wiltamuth cited the "continued strain" on grocers' margins and questioned whether the market should begin to ask whether grocers will be able to pass inflationary costs through to consumers.

Safeway Inc shares closed down 2.5 percent at $24.04 and Supervalu Inc shares fell 2.4 percent to $16.73 on the New York Stock Exchange. Kroger Co shares fell 2.7 percent to $21.64 and Whole Foods Market Inc closed down 0.5 percent at $35.83 on the Nasdaq.

Walmart shares closed down 1.1 percent at $55.34 on the NYSE.

(Reporting by Alexandria Sage; editing by Andre Grenon)