S&P noted that the largest alternative food retailer is Wal-Mart Stores Inc., which has "an estimated $67 billion share of the $458 billion grocery market" and "is growing rapidly."

Competition in the supermarket business used to be viewed as mostly market-based, said Karen Ghaffari, New York-based senior director in Fitch's corporate group and head of its retail team, during her company's conference call. "Today, however, as we look at the supermarket industry, we see a sector that has become gradually more competitive over time with many non-traditional food retailers such as discounters, drug retailers and dollar stores growing their offering in grocery and perishable items as a means of increasing customer-shopping frequency."

"Competitive pricing pressures have increased and consumers have altered their shopping patterns," Ghaffari added. "Over the long term, we expect supermarkets will continue to remain somewhat important for consumers given their convenience and broad product offerings. However, the competitive threat will remain intense."

S&P's lowering of the trio's ratings was "based on increasingly difficult operating environments and weakened credit protection measures," said Burde during S&P's own conference call, on June 29.

While all three have made some progress in restoring credit protection measures, it has not been enough to offset the increased credit risk of competition, she added. "All will face increasing pressure in coming years."

These three companies each have distinct operating strategies that will vary in success, noted McNeely. Albertson's, which has a BBB rating from Fitch and had its outlook changed to "negative" from "stable," is aiming at a variety of demographics, from the cost-conscious to the gourmet customer, McNeely noted. That company is the second-largest supermarket company with 2,500 stores in operation.

Kroger, the nation's largest supermarket operator, with more than 2,500 stores plus hundreds of convenience stores and jewelry stores, has put more focus on closer pricing parity to competitors, particularly non-supermarket competitors, McNeely noted. She added that Kroger, which also has a BBB rating from Fitch and had its outlook revised to "negative" from "stable," is working on meeting customers' needs by listening to them on what products they want.

And Safeway, which has a BBB rating from Fitch and already had a negative outlook, has developed new store models as well as a new "LifeStyle" protoype that is more like Whole Foods stores. Safeway is the third-largest supermarket company with more than 1,800 stores.

Over time, the ratings of all three companies will depend on the success of their different strategies as well as their balance-sheet metrics, said McNeely, adding that maintaining lower leverage levels will provide the companies with more financial flexibility and greater ability to mitigate competitive pressures. "Going forward we expect that profit margins will remain under pressure," she concluded.

Real estate came into the Fitch conference call conversation when a listener asked about any prospect for leveraged buyouts of these grocery store companies. McNeely said she doesn't think that will happen. "We work a lot with our real estate group, and the one thing that the real estate group has imparted to us is that, in all the years that anyone's been in business, they've never seen so many people that are not real estate people being in real estate," she said.

"There¹s a lot of money chasing companies and I think it's really important to see who's buying," McNeely continued. "And if they're not buying it for the fundamentals, to run a business, there's a lot of hedge fund, funny-money equity firms that are trying to create some action."

"Fundamentally, it's a very tough business. Going back to '86, when Safeway did their LBO, they had a ton of assets for sale. I just don't see that with these companies, where you can buy them and then all of a sudden find some hidden value."