The benefits of shrinking food stamps pose a challenge for retailers

For some customers who are already struggling to pay for groceries, the budget is getting tighter.

This month, the Supplemental Nutrition Assistance Program’s pandemic-related emergency funding, formerly known as food stamps, expires in most states, leaving many low-income families with less to spend on food.

More than 41 million Americans receive funding for food through the federal program. For those households, it equates to at least $95 less per month to spend on groceries. But for many families, the decline will be even more pronounced as government support scales up to adapt to household size and income.

For grocers like Kroger, big players like Walmart and discount stores like Dollar General, the fall in SNAP dollars adds to an already long list of concerns about the year ahead. It’s likely to squeeze a weakening part of retailers’ business: the sale of discretionary goods, which are critical categories for retailers because they tend to generate higher profits.

Major companies including Best Buy, Macy’s and Target have shared cautious outlooks for the year, saying shoppers of various incomes have become more cautious about spending on items like clothing or consumer electronics as they pay more for necessities like housing and food.

Food, in particular, has emerged as one of the hardest-hit inflation categories, up 10.2% year-on-year from February, according to the U.S. Bureau of Labor Statistics.

“You still have the same number of mouths to feed, but you have to make choices,” said Karen Short, retail analyst at Credit Suisse.

“So what you’re doing is you definitely need to cut back on discretion,” she said.

The stretch has made it impossible for some to afford even basic items. It’s too early to see the full impact of the reduced SNAP benefits, said Trisha Cunningham, CEO of the North Texas Food Bank, but food banks in the Dallas-Fort Worth area are starting to receive more new guests. The nonprofit helps stock shelves in pantries serving 13 counties.

Demand for meals has exploded, even from pandemic levels, she said. The nonprofit served about 7 million meals a month before the pandemic and now provides between 11 million and 12 million meals a month.

“We knew this one [extra SNAP funds] went away and they would disappear,” she said. “But what we didn’t know is that we would have the impact of inflation to deal with this.”

So far, retail sales have proved resilient in the first two months of the year, even as consumers struggle with inflation and follow a stimulus-fueled increase in spending in the early years of the pandemic. On a year-over-year basis, retail spending rose 17.6% in February, according to the Department of Commerce.

Some of those higher sales come from higher prices. Annual inflation is at 6% as of February, according to the Labor Department’s consumer price index tracking, which measures a broad mix of goods and services. That index has also received a lift from spending on restaurants and bars, which has recovered from earlier in the pandemic and become more competitive with money spent on goods.

Still, retailers themselves have pointed to cracks in consumer health, with credit card balances rising, more sales of lower-priced private label brands and an increased response from shoppers to discounts and promotions.

Some retailers also cited the SNAP funding drop on earnings calls.

Kroger CEO Rodney McMullen called it “a meaningful headwind for the rest of the year.”

“We are hopeful that everyone will work together to continue or find additional funding,” he said during the company’s earnings call with investors earlier this month. “But as you know, because of inflation, there are many people whose budgets are under pressure.”

Credit Suisse’s Short said that for lower-income families, food cost pressures come on top of climbing costs for almost everything else, whether that’s paying the electric bill or filling up the gas tank.

“I don’t think I can tell you what a tailwind is for the consumer,” she said. “There’s just not a single tailwind in my eyes.”

Emergency allocations of SNAP benefits ended earlier in 18 states, which could be a preview of the effect of reduced funding across the country. In a research note for Credit Suisse, Short found an average decline in SNAP spending of 28% at different retailers from the date on which the additional financing ended.

Some grocers and chain stores could feel the impact more than others. According to an analysis by Credit Suisse, Grocery Outlet has the highest exposure to SNAP, with an estimated 13% of 2021 sales coming from the program. That’s followed by BJ’s Wholesale at about 9%, Dollar General at about 9%, Dollar Tree at about 7%, Walmart’s US operations at 5.5% and Kroger at about 5%, according to the bank’s estimates, which were based on on corporate documents and government records.

Retailers that attract a higher-income customer base, such as Target and Costco, should feel relatively less impact, Short said. If anything, the declining SNAP dollars could shift shoppers from one retailer to another, she said, as big players try to gain market share and undercut prices.

Another factor could make for a bumpier start to retailers’ fiscal year, which typically starts in late January or early February: Tax refunds are smaller this year.

The average refund amount was $2,972, down 11% from an average payment of $3,352 at the same point in last year’s filing season, according to IRS data for the week of March 10. However, that average payout can still change over time. as the IRS continues to process the returns of millions of Americans before the mid-April deadline.

Dollar General Chief Financial Officer John Garratt said during an earnings call this month that the discounter is watching how its customers react to the tapering of emergency SNAP benefits and lower tax refunds.

He said stores saw no change in sales patterns when SNAP emergency funds stopped earlier in some states, but he added that “the customer is in a different place now.”

Tax refunds can act as a cash injection for retailers as some people jump for big items like a pair of branded sneakers or a sleek new TV, said Marshal Cohen, chief industry advisor for The NPD Group, a market research firm.

But even if people get their regular repayments, they may be able to use this year to pay bills or pay off debt, he said.

One bright spot for retailers could be an 8.7% increase in the cost of living of Social Security benefits. As of January, recipients received an average of $140 more per month.

However, Cohen said the cash inflow may not be enough to offset the pressure on younger consumers, particularly those between the ages of 18 and 24, who are just starting work and facing milestone costs such as signing a lease contract or buying a car.

“Everything costs them so much more for the early, big spend of their consumer career,” he said.