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The market meltdown that wiped more than $5tn dollars from US stock markets last week has left investors with few places to hide. From Big Tech to low tech, virtually every industry took a hit after US President Trump unveiled his “liberation day” tariffs. Investors on the lookout for havens may want to check out supermarket stocks.
Trump’s hardline approach to tariffs will result in higher prices for the American consumer. One can make do with not buying a new pair of trainers or sweaters. But food and basic household goods tend to be more inelastic in demand. This makes big box retailers with strong grocery offerings, such as Walmart, Costco and BJ’s, good defensive plays.
For starters, big supermarkets source the vast majority of their products domestically. At Walmart, groceries — mostly locally sourced — account for about 60 per cent of US sales. The figure for Costco is not far off. Or, to look at it another way, Bernstein reckons a third of the goods sold at Walmart US and Costco are from overseas. BJ’s Wholesale Club has a 70 per cent grocery mix and only a 3 per cent exposure to China, according to TD Cowen.
Broadly speaking, grocers have more flexibility to change their inventory mixes than most. If avocados become too expensive to sell, stores can stock up on Idaho potatoes instead.
Size also matters. The largest retailers, such as Walmart and Costco, have the heft to negotiate with suppliers and demand price reductions. At the same time, both companies can count on other revenue streams to cushion the impact of tariffs. Walmart’s side hustles run the gamut from digital advertising to running a third-party online marketplace. These side businesses generated $15.8bn in revenue — or 2 per cent of group revenue last year. However, they accounted for more than 22 per cent of group ebit.
Meanwhile, wholesales clubs, such as Costco and BJ’s, have millions of customers who pay an annual membership fee for the privilege of buying goods on the cheap. Costco boasts 140mn members worldwide, with a 90 per cent renewal rate. The $4.8bn in membership fees it took in last year drove most of its profits.
Safety does not come cheap. Costco, despite last week’s sell-off, trades at 47 times forward earnings. Walmart is on a multiple of 31 times while BJ’s is on 22 times. Yet with these retailers poised to get bigger at the expense of smaller rivals, their shares should at least hold up.
pan.yuk@ft.com
