State-Level SNAP Food Restrictions: Assessing Long-Term Profitability and Policy Risks for Grocery Retailers

The 2025 wave of state-level SNAP food restrictions-banning purchases of soda, candy, and processed foods in states like Iowa, Utah, and West Virginia-has triggered a seismic shift in the U.S. grocery landscape. While proponents argue these changes promote healthier diets, the ripple effects on retailers, consumer behavior, and long-term profitability are complex and fraught with risk. For investors, the interplay of policy, compliance costs, and shifting demand patterns demands a nuanced analysis of both immediate and structural challenges.

Immediate Financial Burdens on Retailers

The upfront costs of implementing SNAP restrictions are staggering. According to a report by the Food Marketing Institute (FMI), U.S. retailers face an estimated $1.6 billion in initial compliance costs, with convenience stores bearing the largest share due to their reliance on high-margin non-food items like soda and candy. Ongoing annual expenses are projected at $759 million, covering technology upgrades, staff retraining, and inventory adjustments. Smaller and rural retailers, already operating on thin margins, are particularly vulnerable. For example, supermarkets could see per-store weekly revenue losses of nearly $10,000, while convenience stores might lose over $1,000 weekly.

Walmart, which captures 24% of all SNAP spending, is expected to face the most severe impact. A Supermarket News analysis estimates the retailer could lose $2 billion in November 2025 alone if benefits are withheld entirely. Kroger and Costco, with 8.6% and 5.9% of the SNAP spending share respectively, also face significant declines, particularly as SNAP shoppers shift to staples and bulk purchases.

Shifts in Consumer Spending Patterns

SNAP households already spend 23% more on food and beverages than non-SNAP households, making them a critical driver of grocery sales. The new restrictions are likely to accelerate a shift toward lower-margin staples like grains, canned goods, and frozen vegetables. Retailers may see reduced trip frequency as shoppers consolidate purchases to avoid the hassle of navigating restricted items.

Data from Numerator suggests that SNAP shoppers historically respond to financial constraints by opting for lower-priced brands or buying in bulk. However, the loss of high-margin items like soda and candy could erode gross margins further, especially for convenience stores and dollar chains. Additionally, the One Big Beautiful Bill Act's work requirements-mandating 80 hours of labor or training per month for able-bodied adults-risk reducing the number of eligible recipients, compounding sales declines.

Long-Term Profitability Concerns

The long-term viability of grocery retailers under these restrictions hinges on their ability to adapt. For instance, Walmart and Kroger are investing in POS system upgrades to track restricted items and retraining staff to address customer confusion. However, these measures come at a cost. A 2026 study by the National Grocers Association warns that small and rural stores may struggle to absorb compliance expenses, potentially leading to closures and reduced food access in underserved areas.

Moreover, the economic ripple effects of reduced SNAP spending are significant. A dollar spent via SNAP generates $1.54 in economic activity, according to the USDA. If restrictions lead to widespread benefit reductions or administrative delays, the broader retail sector could face a prolonged downturn. For example, the 2025 government shutdown temporarily disrupted SNAP payments, causing an estimated $8 billion monthly loss for the grocery industry.

Policy Risks and Legal Challenges

The policy landscape remains volatile. Legal challenges are mounting, with states like Minnesota and Kansas contesting USDA data-sharing requirements tied to SNAP eligibility. Critics argue that restrictions stigmatize recipients and fail to address systemic issues like food deserts and benefit adequacy. If courts rule in favor of these challenges, states may face delays or rollbacks in implementing restrictions, creating regulatory uncertainty for retailers.

Legislatively, the One Big Beautiful Bill Act's work requirements and funding cuts have already drawn bipartisan criticism. While a 2026 bipartisan deal fully funded SNAP through September 2026, future budget battles could reintroduce volatility. Retailers must also contend with shifting state-level rules, which vary widely in scope and enforcement. For example, Iowa's ban on taxable foods like candy and prepared meals is far stricter than Utah's soda-only restriction, complicating compliance for national chains.

Strategic Adaptations by Retailers

To mitigate risks, retailers are diversifying product offerings and leveraging partnerships. Walmart and Kroger are expanding non-food items like lottery tickets and automotive products to offset lost revenue. Others are introducing grab-and-go fresh food options to align with healthier purchasing trends. For example, Costco has increased its focus on bulk produce and frozen meals.

Suppliers are also adapting, with some bundling healthier products with popular items to maintain margins. Meanwhile, partnerships with food banks and non-profits are helping retailers repurpose unsellable SKUs in waiver states, reducing waste while maintaining community goodwill.

Conclusion

The 2025 SNAP restrictions represent a pivotal moment for the grocery sector. While the policy aims to improve public health, the financial and operational burdens on retailers-particularly small and rural stores-are profound. For investors, the key risks lie in compliance costs, shifting consumer behavior, and the potential for legal or legislative reversals. Retailers that invest in technology, diversify product lines, and collaborate with policymakers may weather the storm, but the long-term profitability of the sector will depend on the balance between regulatory demands and consumer needs.