Dive Brief:

• Tops Markets saw its profit margins erode in Q4 2016 against deflation and heavy promotional activity, though the retailer maintained its market share, according to Supermarket News. Sales for the quarter were down 2.9% while same-store sales were down 1.9%.
• Decreased funding for the Supplemental Nutrition Assistance Program also impacted the retailer. SNAP accounts for 10% of Tops’ sales.
• Market share retention coupled with healthy increases in sales of organics and prepared foods has boosted Tops’ confidence in its future performance. “We continue to take the long-term view,” said Tops CEO Frank Curci, in a call with analysts.

Dive Insight:

During the holiday season, Tops Markets ran a “Christmas Bonus” promotion that awarded gift card discounts to customers who spent various levels of money with the company. At the same time, the retailer ran its “Price Lock Guarantee” promotion, which locks in low prices for eight to 12 weeks, and made the number of participating products 20% higher than usual.

In the deflationary environment retailers are coping with, promotions like these run the risk of further shrinking company margins. However, they keep stores top-of-mind with customers. Once deflation eases, the thinking goes, the company can finally capitalize on the high traffic and sales it maintained.

This strategy seems spot-on for Tops, particularly in light of the mounting evidence that deflation will finally ease this year. Tops competes with Wal-Mart, Wegmans, Price Chopper and other high-performing retailers, meaning it must fight tooth and nail for market share under normal circumstances.

In addition to its fighting spirit, Tops has invested in a few high-growth opportunities. It's putting more money behind organic products, which saw sales growth of 33% in Q4 and 23% across 2016. It’s also expanding its selection of prepared and grab-and-go foods, which grew around 5% for the company last year.

Although Tops seems well-positioned to accelerate sales this year, questions remain about the company’s performance further down the road. Tops doesn’t have an e-commerce presence yet, which means it may eventually lose market share to competitors like Wal-Mart. Tops’ reliance on SNAP funding could also be a major worry, considering the current administration is seeking to make drastic cuts to the program — if not cutting it altogether — under the 2018 Farm Bill.