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By Dan Sewell and Sarah Skidmore, AP Business Writers

PORTLAND, Ore. (AP) — With many families suddenly struggling to feed themselves, the big warehouse clubs known for king-size packages of steak and jumbo boxes of Cheerios are increasingly competing with grocery stores for the 36 million Americans now on food stamps.

Costco Wholesale Corp. said Wednesday that it would start accepting food stamps at its warehouse clubs nationwide after testing them at stores in New York. That is a big about-face for a chain that has catered to the bargain-hunting affluent with its gourmet foods, and a reflection of the fact food-stamp use has hit new highs.

Costco joins warehouse-club competitor BJ's Wholesale Corp., which started taking food stamps last April, and Sam's Club, which began accepting them in the fall of 2008.

Up until recently, some wholesale clubs were skeptical poor people would be willing to pay the $50-a-year membership fee or would be interested in buying food in the bulk quantities for which the stores are famous.

But now, in this economy, stores are battling for every dollar and see a big potential market in the growing ranks of food-stamp recipients.

From warehouse clubs to supermarkets and mom-and-pop groceries, stores are retraining their cashiers and hanging new signs to welcome such customers.

"Certainly this economy was a wake-up call," Costco chief financial officer Richard Galanti recently told investors. "It is not just very low-end economic strata that are using these."

The rolls of food-stamp recipients have grown by 10 million over the past two years. The U.S. Department of Agriculture said nearly 200,000 retailers nationwide now accept food stamps, 20 percent more than in 2005.

Most major food chains — like Wal-Mart Stores Inc. and Safeway Inc. — have accepted food stamps and other public assistance as payment for many years.

Costco had refused to do so, arguing that there would not be enough shoppers to make it worth the trouble of updating its electronic payment systems and that food stamps would slow down the checkout lines.

In May, however, Costco began accepting food stamps in New York under political pressure, and the practice turned out to be more popular than expected. Richard Galanti said the company's assumptions were "probably a bit arrogant."

Moreover, some of the warehouse club chains say that poor people — particularly those with large families to feed — can save money by buying food in bulk.

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The warehouse clubs are not waiving their membership fees for food stamp recipients, and memberships cannot be bought with food stamps.

But Costco executives said they were surprised to find that some shoppers are, in fact, paying the $50 fee precisely because the company takes food stamps.

The company hopes to accept food stamps in about half its 407 stores in the U.S. by Thanksgiving. The rest will be phased in as Costco gets the necessary state approvals.

As for Kroger Co. and other grocers that have long accepted food stamps, they are adding new signs to welcome those on food stamps, as well as increasing staffing and stocking up on key products at the times of the month when benefits are issued.

"This is a big deal. It's a meaningful segment of our shoppers, and it's increasing rapidly," said David Dillon, Kroger CEO, who recently visited a store to talk with shoppers using food stamps about their concerns.

Kroger cashier Richelle Crawford in Cincinnati said she sees more shoppers using food stamps, and she tries to help the newcomers.

When they try to pay for items that cannot be purchased with food stamps, she escorts them back to the aisle and points out the signs indicating what is eligible.

Latoya Murdock, a single mother of two small children, smiled recently as Kroger employees fussed over them. She said she needs food stamps to help keep her youngsters healthy.

"I have absolutely no shame in using it for them," she said, holding up her benefits card. "It's been a lifesaver. I never leave home without it."

Peter Hsia, a retail strategist for the Kurt Salmon Associates consulting firm, said taking food stamps could help stores even after customers don't need them anymore.

"They've got a big slice of their core customers who are now using food stamps, and you don't want to lose them when the economy picks up," he said.

The move could also help the warehouse clubs hold onto members who have fallen on hard times.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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