As we close in on the end of 2010, the promotional landscape remains difficult for retailers, with few markets more competitive than in the US, where ongoing low levels of consumer confidence and efforts from the major operators to gain market share have continued to drive prices downward. With commodity prices starting to show upward movement, how much longer can this promotional environment be sustained?

There seem to be few winners in this competitive environment, with manufacturers like JM Smucker recently pointing to “unprecedented competitive pricing” in its categories. Campbell Soup Co. continued to struggle after deciding not to go toe-to-toe with its competitors on promotions that it believes are “not in the best long-term interests of the category“. US retailer Kroger, meanwhile, has faced criticism of its inability to maintain margins in the promotional environment.

While the broad retail sector is beginning to show some improvement, the grocery retail environment in the US remains tough, says McMillan Doolittle retail consultant Neil Stern. “While overall retail sales in the US are beginning to see a rebound, the grocery retail remains challenging. Most of the majors are still running negative like-for-like sales. The exception is Kroger but they are struggling to translate their sales gains into profitability.”

Supermarket operators, Kroger in particular, have been accused of pandering too much to consumer sentiment. Speaking on Kroger’s conference call last week, UBS analyst Neil Currie questioned its ability to eke back margin lost at around the same time last year, when he said Kroger admitted that it had “over-invested in pricing margin and operating margin declined quite rapidly“.

While the economic environment in the US remains bleak, consumer confidence in the country has recorded some improvement, with the Consumer Confidence Index reaching 54.1 for November, up from 49.9 in October.

However, the news from the index was not all good, with more consumers claiming that business conditions are “bad”, edging up to to 43.6% from 42.3%, while the number of consumers stating that jobs are “hard to get” increased from 46.5% from 46.3%.

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What all of this highlights is the mixed nature of economic recovery in the US. Kroger CEO David Dillon echoed this sentiment last week when he said the retailer is seeing “a lot of variability” among its customers. “Some customers have, for their world, things have improved, and the picture we described last quarter is the same picture I would describe today.”

However, for every silver lining, there are still clouds, with the grocery retailer still seeing increases in the number of customers using food stamps to purchase groceries. “The percent of our business done on food stamps on the whole has continued to rise. It’s at an all-time high and roughly double – a little bit more than double, than where it was just a short three years ago or so,” Dillon said.

While private label has benefited from consumers trading down, there seems to be some degree of improvement for branded manufacturers, with Kroger last week saying its identical-sales increase was driven by positive growth in national brands.

However, the retailer admitted that deflation is persisting in the retailer’s grocery department largely due to promotional spending by national brand suppliers, which Dillon said was masking some of the list price increases it has received.

“Inflation in grocery has been slow to develop, but we still believe it’s coming,” said Dillon.

Bryan Roberts, director of retail insights at Kantar Worldpanel, expects promotional intensity in the US to remain high, particularly in ambient categories, due to their longer lag times.

“We’ve got inflation creeping back into many products, which the supermarkets are slowly trying to pass onto consumers, but at the same time, the competitive pressures out there are still forcing prices down in many ambient categories where food price inflation obviously has a substantial time lag. There has been a significant uptick in promotional spending by the big brands – both to fight against each other and private label,” says Roberts.

For Stern, it remains to be seen whether retailers will be able to successfully pass on food inflation. “Food inflation is beginning to appear, particularly in commodity categories and the key question will be whether retailers can, or will, be able to pass these increases through to the consumer?”

Inflation has already begun to impact manufacturer Kraft Foods, which has been quick to increase prices to reflect higher commodity costs.

“We’ve come out of the chute and quickly responded with pricing. We’re entering that into a generally weak consumer environment but so far, we’re quite pleased with the reaction from our customers, direct customers, retail partners and the consumer response has been okay as well,” said Kraft CEO Timothy Mc Levish last month.

However, what remained unclear on the call was whether these increases were pushed through behind promotional offers.

Unfortunately, while leading retailers like Wal-Mart pay lip service to shifting back to an EDLP model, this highly promotional and competitive environment shows no signs of abating in 2011.

“Brands have upped spending to regain or maintain share and we’d expect that trend to continue into 2011 as brands try to balance out passing out rising input costs without losing sales to competitors or store brands,” said Roberts.