Old River-Winfree has two Wal-Marts in close proximity;  Baytown and Liberty.  

NEW YORK –  Wal-Mart Stores Inc. (WMT) will lower grocery prices by $1 billion this year, hoping customers will come in for the reduced costs and then fan out to other parts of the store.

The retailer, the largest grocery retailer by sales in the U.S., is taking the step to continue or increase the progress its U.S. stores began to see in the second half of last year, when U.S. comparable-store sales turned positive. While the $1 billion sounds like a large number, Wal-Mart had $145 billion in grocery sales last year in the U.S. Wal-Mart calls the approach “investing in price,” which equates to reducing prices or not passing along the cost of inflation, so that the retailer’s margins will be dinged. The hope is that lower prices will generate enough additional customer traffic and loyalty to make up for the short-term sacrifice in profit.

Bernard Sosnick, retail analyst at Gilford Securities, said the $1 billion drop in prices is significant because groceries carry thin margins, and many other food chains would be hard pressed to make this kind of cut.

Traditional supermarkets like Kroger Co. (KR), Safeway Inc. (SWY) and Supervalu Inc. (SVU) have also “invested in price,” as food inflation runs high, while consumers are still extra conscious of their cash. The advantage Wal-mart has over those stores is that it can make up for any losses it takes in the food isles in higher margin departments like apparel.

Wal-Mart plans to lower prices in the food and consumables areas, with customers then heading to other parts of the store, like apparel and general merchandise, Chief Merchandising Officer Duncan Mac Naughton said at an industry conference.

Mac Naughton said initial progress the company saw in 2011 has continued into the retailer’s new fiscal year, which began in February and momentum has continued into March.

“Some key momentum is building inside Wal-Mart U.S.,” he said.

Supervalue and Safeway, meanwhile, have struggled lately to grow customer traffic and sales volumes, blaming overall economic headwinds. Kroger, which has been performing better, offers a different perspective. “Market share of traditional grocers, by whoever measures it, has been declining,” Kroger’s Chief Financial Officer Michael Schlotman said at a conference Wednesday, adding that his company is focused on growing their share of overall food consumption, not just traditional supermarket sales.

Safeway said it doesn’t comment on competition. Supervalue said its “hyper-local” strategy, which customizes food based on the community and uses locally sourced products, gives it an edge over competitors. “Some other retailers can’t localize their stores in this way,” a spokesman said.

But Mac Naughton said low prices remain a cornerstone, as customers continue to struggle with unemployment, rising gasoline prices and tepid economic growth. The executive didn’t specify what category or categories will see the price changes.

All the cost savings for customers will be funded by productivity improvements and expense savings, Mac Naughton said.

Still, the approach may squeeze suppliers of groceries to Wal-Mart, a group that already operates on thin margins.

Wal-Mart is the country’s biggest grocery store and growing. The retailer’s annual report, filed late Tuesday, shows groceries last year accounted for 55% of the namesake chain’s U.S. sales, compared with 53% a year earlier. Meanwhile, apparel sales slid another point to 7% as Wal-Mart has struggled trying to be thought of as a destination for things beyond basics.

Wal-Mart shares were recently up 0.03% $61.11, while Supervalu fell 5.4%, Safeway dropped 1.4% and Kroger was down 0.6%.