As others have said, grocery stores (even small ones) have this down to a science. They have a good idea what demand is going to be, they know how long specific foods will keep on the shelf, and they place orders accordingly.

Even if they are off, it's easy to discount goods to get them off the shelf.

They have a large inventory because margins (for the most part) are very thin on groceries, so they make money by making a penny on millions of transactions. Most stuff that has bigger margins (think fresh bakery items) have drawbacks (they go "bad" quickly). By and large grocery stores go through it pretty quick so the large inventory is justified--people buy a lot of groceries.

> is there an economic reason to do this?

Yes--they have to make a small amount of money off of a large amount of goods.

> How much of the food ends up going bad?

Note as much as you think. Grocery stores have an incentive to reduce waste, since that's money they spent they'll never get back. There's a reason a lot of stores have a "hot foods" bar where they can recycle soon-to-expire foods, like produce, into soups. Aggressive sales to get food off the shelves is commonplace if the demand forecasting was off.