Grocers are feeling the pressure as deflated food prices ramp up competition and eat away at profits.

For the past eight months, fresh food prices in the US have been on the decline. A dozen eggs have fallen by as much as $1, a gallon of milk has dropped by 40 cents and the price of ground beef has dropped by roughly 50 cents, according to stats from CBS.

The culprit? America’s food supply. The country’s food production is keeping pace with past years, even though demand overseas has drastically dropped. Not only is America oversupplying, but the strong US dollar has made food expensive in overseas markets like China.

“There are a couple of issues here,” CBRE Americas head of retail research Melina Cordero tells Bisnow. “The big driver is the reduced demand from abroad from the products that we’re producing domestically. But another thing we’re still exploring is whether US consumer demand is shifting from grocery stores to restaurants.”

Prices Drop, Profits Lost

While Americans are enjoying the benefits of lower prices, grocers’ profit margins continue to shrink. And with large players like Whole Foods' new 365 by Whole Foods concept dropping prices, smaller regionally-focused brands are forced to do the same to keep customers.

“The grocery industry has been so competitive in recent years. A lot of big grocers are trying to dominate the market across the country and it's driving this price war,” Melina tells us. “I think all of those forces—domestic competition, global demand and consumership in restaurants are putting pressure on food prices.”

Several grocers have lowered their full-year guidance due to the drop in commodity prices. In its latest earnings report, The Kroger Co reported same-store sales at 1.7%, its weakest results in six years due in large part to 1.5% in food deflation. As a result, Kroger lowered its earnings per share forecast by 8 to 9 cents. Sprouts Farmers Market did the same, cutting its full-year comparable sales forecast range to $0.83 to $0.86, down from its previous estimate of $0.96 to $0.98 in growth.

Additional Revenue Streams

To combat deflating prices, grocers are scrambling to cut costs in back-of-house operations and to diversify their offerings in the front-of-house.

“They’re morphing and pushing into other categories that have higher margins,” Melina tells us.

In today’s supermarket or grocery store it is not uncommon to find a restaurant, café or even a built-in bar available. “As supply chain costs go up and down, if they can build a revenue stream off higher profit areas, it’s a way of protecting the business,” Melina says.

And it’s no surprise that today’s grocers are morphing into hybrid restaurant and grocery stores, as increased restaurant visits are becoming more of a cultural norm—and not just for Millennials.

Last year, restaurant sales outpaced grocery sales for the first time in history, according to the US Census Bureau, and CBRE projects that gap will increase. The change has caught the attention of retail landlords, causing a shift in the prevalence of restaurants at shopping centers. Where grocers were once the dominant tenant, restaurants now take up 15% of core retail sales, with grocers following closely behind with 14% of sales.

“I think consumers are happy at this point to have a little extra money in their pockets,” Melina says. “The question now is, what are consumers doing with that extra money? How are consumers benefiting from low food prices and where is that extra money going?”