Kroger (NYSE:KR), Walmart (NYSE:WMT), Albertsons Companies (ACI), and other major grocery retailers will need to adjust to a less favorable pricing environment in 2023, according to UBS.

The Swiss bank noted that supply chain problems since the start of COVID have allowed major grocers to pass on higher costs to customers via steady price increases. As CPI prints cool and supply chain bottlenecks continue to ease, prices are expected to normalize quickly and restore a price-competitive environment in grocery.

“Our latest Richmond, VA KR/WMT pricing study suggests KR’s price premium to WMT has recently returned to its historical ~9% level, suggesting WMT is once again becoming aggressive on price,” the bank’s analysts told clients. “Plus, as disinflation emerges, we would expect grocers to promote more to preserve market share in a more normalized environment.”

Given consumers are likely to remain under pressure amid a cloudier macro backdrop, a focus on value is also expected to remain paramount. As such, the impetus to lower prices is only increased. As another data point for the value focus, UBS noted that BJ’s Wholesale Club (BJ) and Costco Wholesale Corporation (COST) have recently seen record membership renewals even as fee hikes loom on the horizon. Both retailers are expected to pick up market share alongside Walmart (WMT).

“Pure-play major food retailers will likely have an overhang as the market debates both the pace of dis-inflation and prospect of deflation at some point. We note that historically, KR, WMT, [Dollar General] (DG), [Dollar Tree] (DLTR), and COST have all seen the softest relative share price returns in periods where Food at Home CPI has been below 0.8%,” the analysts concluded. “A soft landing and a boost in spending power could drive upside to our industry sales estimates…That said, a steeper than anticipated recession and rapid deflation could drive a downside scenario, where we would anticipate modest top line contraction.”

The research also notes that while freight and supply chain impacts on margins are likely to be allayed into 2023, wages are likely to remain elevated.

Elsewhere, the bank named Sprouts Farmers Market (SFM) a category leader, but maintained a Neutral rating. Target (TGT) was touted as a “transformation story” as the team expects that the company has “largely worked through its inventory challenges” and could expand margins in 2023 even amid elevated promotional activity.

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