Food retailing seems humdrum. Demand is stable and the U.S. grocery industry is huge: $1.03 trillion in sales in 2010, according to Progressive Grocer. But these days organic and gourmet grocers are on the fast track. Health food purveyor Whole Foods (WFM) stock has shot up 36.5 percent this year. More conventional grocers are slogging it out. Safeway stock (SWY) dipped 21.3 percent and Kroger (KR) eked out a 0.1 percent rise.

Why? Spiking food prices are crimping supermarket sales and profits. So Safeway, one of the nation’s largest food and drug retailers, is tapping into growth niches. It flies banners under the names Safeway, Vons, and Dominick’s and has more than 1,600 stores in the United States and Canada.

In 2005, Safeway began focusing on its new Lifestyle format, with a large selection of organic foods and even sushi and olive bars. By the end of 2010, 85 percent of Safeway stores had adopted Lifestyle formats. This year, the company is plowing another $1 billion into expanding the concept.

That may not be enough. Safeway’s s second-quarter earnings rose 7 percent to $10.2 billion versus $9.5 billion a year ago. But same-store sales, excluding fuel, rose just 0.5 percent in the quarter, disappointing some analysts. Net income rose 3 percent.

Slower growth

Of the 20 analysts followed by Thomson/First Call, three have strong buy recommendations on Safeway and one has a buy, with 10 holds, five underperforms, and one sell.

Safeway is feeling the effects of the economy and inflation noted Goldman Sachs analysts after downgrading the stock to a sell. Niche grocers like Whole Foods have more growth potential, they added. The company reports next on or about Oct. 13.