Supermarket Smackdown

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But even with the advent of dead net cost, supermarkets will never be able to go head to head with Wal-Mart on the price of every item. "That way lies madness," as one Wall Street analyst put it. The only viable alternative is to narrow the perceived price gap by bringing down the cost of a select group of products that customers are prone to use when comparing prices. "The art is knowing which items," says Bishop, who for a fee lets clients in on the secret.

KEEP CUSTOMERS LOYAL

The new variable in this food war is that customer loyalty is either dead or very much divided. Last year Stephen Hoch, a professor at the University of Pennsylvania's Wharton School, published a two-year study of Chicago-area shoppers that showed 73% of consumers regularly bought grocery items at two or more stores. And cherry picking isn't just a metropolitan phenomenon. In Racine, Wis., for example, special-education teacher Stacey Goetz, 26, routinely treks to Sam's Club for meat, Aldi for dairy products and a health-food store for oat flour and sugar-free waffles. In between these trips, she scours supermarket flyers for good deals.

Despite this trend, the industry is still banking on the notion of good old-fashioned customer inertia. "For consumers that are not pure price or niche driven, location is the No. 1 reason for choosing one retailer over another," says Burd. "We have hundreds of locations that retailers would refer to as Main and Main."

It's no surprise, then, that Wal-Mart isn't content to stick with giant stores on the outskirts of town. For the past five years, it has been tinkering with a smaller Neighborhood Market that is designed to penetrate urban centers and, says Burt Flickinger III, managing director of New York City's Strategic Resources Group, "occupy the empty stores of bankrupt supermarkets."

This means that even as the big chains are scrambling to compete, they all know that Wal-Mart is just getting started. "We could be so much better than we are," Wal-Mart CEO Lee Scott told TIME. "We are not as good in food as we need to be yet, so there's a lot of upside." He rattles off expansion plans for the company's Supercenters, Sam's Clubs and Neighborhood Markets and notes that even in the Wal-Marts that aren't adding perishable sections, the plan is to sell more food. In other words, the grocery wars are just beginning. "You will see it on all fronts," Scott says, "in all the things we do, food will be a key part of it." --With reporting by Steve Barnes/Little Rock, Elizabeth Coady/Fort Wayne and Stefanie Friedhoff/Howell