Wall Street brokers have been busy downgrading US supermarket shares as Albertson's, the latest American food retailer to suffer from the Wal-Mart effect, issued a profits warning. The Idaho based chain warned competition from Wal-Mart, high labour costs and expenses relating to last year's merger with American Stores meant second quarter profits (released on September 5) would be lower than expected. Analysts had predicted earnings of approximately 62 cents a share for the quarter ended August 3, but the company's admission that the actual figure would be closer to 50 cents wiped $3.5bn off the chain's market value in just two days. Albertson's is the second largest grocery chain in the United States, and its surprise announcement caused shares in rivals Safeway and Kroger to nosedive. However, investors warmed to Wal-Mart following Albertson's admission that the retail giant's success was having a negative impact on profits. During a conference call with analysts, Albertson's executives said Wal-Mart was opening Supercenters on territory where Albertson's has traditionally dominated: Montana, Wyoming, Utah and home ground Idaho. While Lehman Brothers insisted Albertson's weakness was not industry-wide, UBS Warburg said its poor performance signalled "longer term concerns within the sector", which is no longer "the relative safe haven we thought". The retailer's decision to "invest gross profits to drive sales" has prompted fears that a price war looms as supermarkets slash margins (and earnings growth) to gain market share. "People will react," said one analyst, "but Albertson's move just puts it more in line with the competition, rather than undercutting it." While the news follows a series of depressing announcements from US food retailers including Pathmark, Kmart and Grand Union in recent weeks, problems were "stock specific", he insisted. "Safeway and Kroger remain good investments. I really don't see this as symptomatic of a price war or problems right across the sector." Another analyst agreed that margin erosions and valuation downgrades right across the board were unlikely to follow, suspecting the main reason for Albertson's problems was the failure to successfully pull off the integration with American Stores. {{NEWS }}