6 Companies Battling for Americans' Grocery Money (Update1)

The strategy behind this grab for groceries is based on the premise that customers coming in to, say, a discount store for the reduced costs on one product segment or to a drug chain store to pick up a prescription, will then fan out to other parts of the store and buy groceries, given the convenience, and then maybe make an impulse purchase of higher-profit items.

"Consumers today shop a multitude of formats based on need," Agnese said. "There are many types of trips consumers make, from convenient fill-in trips, such as to a dollar store or drug stores, to one-stop shopping to stock-up trips at traditional supermarkets and clubs.

"The struggle today is to maximize share of wallet by trying to fulfill as many of the consumers' needs as possible and to do it well," Agnese says of the different types of consumer staples retailers.

"For supercenter operators, such as Wal-Mart and Target(TGT ) , food is the customer magnet that sharply increases the store's overall sales volume, taking customers away from traditional grocery stores," he said.

And now "dollar stores are adding consumables, especially frozen food, in an effort to drive traffic into stores," said Agnese, referring to companies such as Family Dollar Stores(FDO) .

Wal-Mart has been hurt by this, hence the aggressive move to cut prices to gain back store traffic after its disappointing results in its most recent fiscal quarter ending in January. It reported that U.S. comparable-store sales grew only 1.5%, below analysts' estimates of 1.8%, despite the start of the price-cutting strategy. That prompted S&P to cut its rating to "buy" from "strong buy" on its shares in expectation of slow earnings growth on the year.

In contrast, Target reported that February same-store sales grew a huge 7%, after increasing 4.3% in January.

But it was Wal-Mart that fired the first shot in this grocery battle beginning in the 1990s, essentially incorporating a supermarket within its traditional department store concept. And now Target is making a major push into fresh foods with its "P-Fresh" program, which it now has in 875 stores and is expanding rapidly.

The losers in all this have been the traditional supermarket chains such as Safeway(SWY) and Supervalu(SVU) , with the noted exception of Kroger(KR) , which has managed to differentiate itself by selling gasoline cheaply, and, since it has a manufacturing unit, making and selling its own store brand products.