How Inflation Affects Grocery Stocks Like Kroger, Walmart And Costco

Key takeaways

• Even during times of high inflation, people need to eat, meaning grocery stocks tend to perform better than other industries in volatile markets.
• Grocery stores can pass along rising costs to consumers, offsetting a decline in revenue.
• Investing in different types of grocers can limit your downside risk, see the list below for examples.

Inflation has been on the rise for months, and there’s still so much work to do before it comes down in a meaningful way. This is causing many concerns among consumers. Prices for necessities like food are rising.

As an investor, you may want to know what impact higher inflation has on grocery stocks. Do they react as other stocks? Or do they fare better during these times? Here is a primer on the grocery sector and making money investing in these stocks.

Inflation and the Consumer

Inflation can significantly impact consumer spending habits. As prices rise, people will stop to consider the things they need versus the things they want. This tradeoff happens in every aspect, as consumers find they need to stretch their dollars, and the wants get pushed off until prices retreat.

When it comes to food, people simply must have it. Still, this doesn’t mean consumers will continue with the same food shopping habits now as they had when prices were lower. Many consumers will look for sales or shop at discount retailers that offer a better value.

Inflation and the Stock Market

Inflation is typically a bad event for the stock market. When inflation rates rise, the Federal Reserve begins to raise interest rates in hopes of cooling off the economy. However, one of the impacts of rising interest rates is a decline in the stock market.

This decline happens because higher interest rates cost businesses more to borrow money, slowing growth. As growth slows, future earnings for most companies decrease, and investors start to look for other opportunities that allow for a healthy return and minimal risk.

For example, if you expect a stock to earn 10%, you might invest in it. But suppose inflation causes your estimated return to fall to 5%. In that case, you will probably look at other investments that offer as close of a return to this without the added risk of market volatility. When this happens, the stock market drops due to diminished demand for stocks.

Why Grocery Stocks Hedge Against Inflation

For two reasons, grocery stocks tend to fare better than most other stocks.

First, regardless of what happens in the economy, people need to eat. Because food is a necessity, the higher costs of groceries from inflation can easily pass on to the consumer. For example, if you are looking to buy a swimming pool and the price jumps 15%, chances are you will wait to buy until there is a sale or the price comes down. But if you go to the grocery store and the cost of milk is 15% higher, consumers still buy it. You might buy less, but you still need milk.

Second, many grocery stores pay a dividend to investors. The total return from an investment includes the dividend yield. Say a grocery stock is projected to grow by 5% this year and pays a 2% dividend—an investor can expect a total return of 7%. Even if earnings miss, resulting in the stock growth of 3% with a 2% dividend, an investor still makes 5%.

Put these together, and grocery stocks tend to perform better than the overall market when inflation rises.

Individual Grocery Stocks

After seeing how high inflation impacts the grocery industry as a whole, let’s look deeper at some individual grocery chains and how an inflationary economy may affect them.

Kroger

Kroger is primarily focused on groceries and one of the top names that comes to mind when it comes to grocery stocks. Kroger is the largest grocery store chain in the US and is the second largest retailer behind Walmart. This supermarket chain has stores in 35 states across the country. Kroger also operates grocery stores under different brands like City Market, Food 4 Less, Pay-Less Super Markets, and Pick’n Save.

With a diverse range of stores, which include several discount markets, Kroger can keep its customers returning as prices rise.

Walmart

Walmart is a hybrid play in the grocery store sector. Yes, they sell groceries, but they also sell electronics, clothing, personal care items, household goods, and more. And as a discount retailer, they attract consumers because of their low prices. There is also a growing online presence by Walmart as they complete with Amazon.

It makes sense then that more consumers will flock to Walmart as prices on everything increase. But this doesn’t mean Walmart is immune to inflation. Consumers can opt not to buy electronics or household goods, offsetting a potential sales increase for groceries.

Finally, because Walmart can purchase goods from wholesalers for less than other grocery stores, it can keep its prices lower for longer, which benefits the company as the economy sours.

Costco

The warehouse giant is another hybrid play when it comes to retailers. Like Walmart, it offers a variety of goods in many categories, including groceries, household items, and personal care items. Investors may want to take a deeper look at Costco for two reasons.

First, the typical Costco customer tends to be middle to upper-middle class, meaning they’re more resilient economically and they have disposable income. Typically, inflation doesn’t impact them as much as lower-income consumers, and they can better withstand a rise in prices for a more extended period.

Second, the Costco model includes annual membership fees, helping offset any sales drop. Even if a customer stops shopping at Costco, there is a good chance they won’t cancel their membership.

Investments That Help Limit Risk

Grocery stocks are a good investment during inflationary periods but are not immune to stock price declines. Also, because markets and consumer tastes can change quickly, investors should have a vetted strategy to work with.

Diversification is where Q.ai thrives, taking the guesswork out of investing, with artificial intelligence that scours the markets for the best investments for all manner of risk tolerances and economic situations. Then, it bundles them up in handy Investment Kits that make investing simple.

Additionally, investors on Q.ai can activate Portfolio Protection at any time to protect gains and reduce losses, no matter what industry they invest in.

Bottom Line

When inflation rises, investors look for safer investments that offer a return on their money, and grocery stocks are a strong choice. Grocery chains can pass along price increases to consumers without seeing a significant sales drop.

Like any industry, grocery retailers are not immune to a down market—they can still get caught up in the volatile swings of the market, as we saw just a couple short years ago. However, grocers tend to come out the other side healthy and robust in the long term.

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