The supermarket business is in steep decline. Last year, supermarkets sold only 51% of the nation's groceries, down from 66% in 2000, The Wall Street Journal reports. That huge drop is turning the traditional supermarket business on its head.

The grocery business has scattered. People can buy groceries from all kinds of places now, leaving supermarkets in the dust.

Wal-Mart (WMT) may be the biggest threat. The discount retailer has pushed hard on grocery offerings over the past decade, adding organic produce and matching or undercutting competitors' prices. Groceries now make up about 55% of Wal-Mart's U.S. sales, the Journal reports, up from 41% four years ago.

Target (TGT) is moving in quickly as well, revamping its stores to add freezer aisles, produce, meats and bakery sections. Its Super Target stores have the most grocery items, but 75% of stores have fresh and expanded frozen food sections, the Journal reports.

Dollar stores have also risen to meet demand. Stores like 99 Cents Only, which was taken private last year in a buyout, offer a decent array of produce and dairy items along with canned goods. At the other end of the spectrum is Whole Foods Market (WFM), a niche player that has seen unexpected success even in the economic downturn. Shares of Whole Foods have risen 320% in the past three years.

Some supermarkets are now targeting male shoppers, as the following video shows.

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The impact on traditional grocery stores has been dramatic. Shares of Supervalu (SVU) are now just $2.37, down more than 80% in three years. "In this economy, it's simply not acceptable anymore to have prices as far out of line as ours have been," CEO Craig Herkert told the Journal.

Shares of Safeway (SWY) haven't suffered as much, falling 20% in three years. Still, the stock is very cheap, trading at just 9.2 times earnings. Kroger (KR) has held up better, trading at about 20 times earnings.

Shoppers' habits have changed, and the supermarket is no longer the twice-a-week destination for groceries, diapers and garbage bags. They'll go to Costco (COST) for some household basics, then dollar stores for others. They'll pick up items at Wal-Mart. They'll even buy items from Amazon (AMZN), which offers packaged groceries in bulk at competitive prices.

It's little surprise, then, that the grocery business is in tumult. Winn-Dixie was bought out in December. The owner of A&P came out of bankruptcy this year but isn't publicly traded.

But where can grocery stores go from here? It's tough to cut further, with margins already razor thin. Supervalu's margins are about 4.9%, the Journal reports. There isn't much room to attempt huge changes in strategy at those levels.

As improbable as it may seem, traditional grocery stores are headed to niche status. There are too many choices and too many deals for smart shoppers, and in this economy shoppers have become very wise.

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