2 Supermarket Stocks Positioned to Navigate Industry Challenges

The Zacks Retail – Supermarkets industry continues to navigate a complex operating environment shaped by cautious consumer behavior, elevated competitive intensity and structurally higher operating costs. While demand for food remains relatively stable, shifts in shopping behavior — toward value, convenience and private labels — are reshaping the industry’s earnings profile and putting pressure on conventional profitability models. 

In this landscape, companies with diversified revenue streams, advanced digital capabilities and well-integrated omnichannel platforms are better positioned to absorb cost pressures, defend market share and generate more resilient cash flows. Within the industry, scale-driven operators such as Walmart Inc. WMT and The Kroger Co. KR appear well-placed to adapt to these evolving dynamics and pursue long-term growth.

About the Industry

The Zacks Retail – Supermarkets industry includes supermarket retailers that offer grocery, health and beauty aids, household chemicals, electronics, stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, entertainment products, home furnishings and more. Players in this industry operate through various formats such as supermarkets, multi-department stores, retail stores, discount stores, supercenters, hypermarkets and warehouse clubs. Food retail accounts for a chunk of their business. The industry has undergone a significant transformation over the years, with e-commerce playing a strong role. Given consumers’ rising preference for online shopping, industry participants have enhanced pickup and delivery services and are offering easy payment options.

Major Trends Shaping the Future of the Supermarket Industry

Value-Focused Consumers Pressure Margins: The supermarket industry continues to be shaped by a consumer who remains highly selective and value-driven. Shoppers are increasingly prioritizing price, convenience and necessity over brand loyalty or discretionary add-ons. This has led to a sustained shift toward private labels, smaller baskets and more frequent trips, all of which pressure average transaction profitability. At the same time, heightened promotional activity across the sector is compressing pricing flexibility, forcing retailers to compete on affordability rather than differentiation. Even with steady traffic, the sales mix is less favorable, creating ongoing pressure on margins.

Higher Costs Weigh on Profitability: Supermarket companies continue to face a higher cost structure. Labor costs remain elevated as retailers balance wage pressures with the need to keep stores well-staffed while supporting faster delivery and expanded services. Shrink, supply-chain challenges and higher spending on technology add to cost pressures. At the same time, the shift toward omnichannel retail has made operations more complex, with stores serving both shoppers and online orders. While these investments are necessary to stay competitive, they continue to pressure near-term profitability.

Diversified Revenues Improve Stability: A key positive for the supermarket industry is the move beyond traditional grocery sales. Leading companies are building more diversified business models by expanding into areas such as retail media, data-driven advertising, private brands and loyalty programs. These businesses generate more stable and higher-quality earnings that are less affected by food price swings and heavy promotions. In addition, better integration of digital platforms with physical stores is improving customer engagement and personalization. Over time, these strategies are helping supermarket players ease margin pressure in core grocery operations and strengthen their competitive positioning.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Retail – Supermarkets industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #174, which places it in the bottom 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. 

Let’s look at the industry’s performance and current valuation.

Industry Versus Broader Market

The Zacks Retail – Supermarkets industry has outperformed the S&P 500 and the broader Zacks Retail – Wholesale sector in the past year.

The industry has surged 30.6% over this period compared with the S&P 500’s growth of 20%. Meanwhile, the broader sector has advanced 11.6% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 37X compared with the S&P 500’s 23.51X and the sector’s 25.94X.

Over the last five years, the industry has traded as high as 37X and as low as 17.55X, with the median being at 22.15X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

2 Supermarket Stocks to Keep a Close Eye On

Walmart: The Zacks Rank #3 (Hold) company remains well-positioned to navigate a challenging supermarket environment, supported by its scale, value leadership and diversified business model. WMT continues to benefit from strong omnichannel execution, with stores and digital platforms reinforcing each other to drive traffic and convenience. Ongoing investments in faster delivery, automation and supply-chain efficiency are strengthening Walmart’s competitive moat. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

The company’s expanding ecosystem, including advertising, third-party marketplace and membership offerings, is contributing additional, higher-quality revenue streams that help offset margin pressure in core grocery. This combination of price leadership, operational efficiency and alternative profit growth supports Walmart’s long-term earnings strength. The Zacks Consensus Estimate for WMT’s current and next fiscal year earnings per share (EPS) has increased by 0.4% and 1.4% to $2.63 and $2.96, respectively, in the past 60 days. Shares of Walmart have rallied 31.3% in the past year.

Price and Consensus: WMT

The Kroger Co.: The company’s strength lies in its focus on disciplined execution, customer loyalty and margin stability in a highly competitive grocery landscape. The Zacks Rank #3 company continues to leverage its strong private-label portfolio and data-driven loyalty platform to deepen customer engagement and drive repeat spending. Kroger’s digital ecosystem, supported by personalization and targeted promotions, enhances traffic quality while supporting profitability. The company also remains focused on cost control, operational efficiency and supply-chain optimization to navigate elevated expenses. 

While near-term pressures persist, Kroger’s emphasis on owned brands, data monetization and operational discipline positions it to generate steady cash flows and improve profitability over time. The Zacks Consensus Estimate for KR’s current fiscal-year EPS has remained unchanged at $4.79 in the past 60 days, while the consensus mark for the next fiscal year has increased 0.8% to $5.30. Kroger shares have risen 6.6% in the past year.

Price and Consensus: KR

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

 
Walmart Inc. (WMT): Free Stock Analysis Report
 
The Kroger Co. (KR): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research