Undercut by a bigger brand

It finally happened, I was undercut by a bigger brand who can sell essentially the same product at 2 for 1. They are ranking higher than me and my sales have dropped drastically since they popped up. If I try to match their prices I’ll be profiting about $2.50 per sale. I have purchased their product to compare and it is VERY similar (it’s a dog treat) although not 100% the same. I’m really not sure how they could be making any sort of profit selling at their price point.

I already negotiated with my supplier for a lower price and that’s basically how I’ll be able to make any profit if I also start selling at 2 for 1. I’m not sure what to do at this point. If you have any advice please share it.