Tariffs promise to be a tailwind for grocery stocks. Albertsons is the proof that they are not

TARIFFS promise to be a tailwind for grocery stocks. Albertsons is the proof that they are not.

On July 23rd Albertsons, the fourth-largest US food retailer, cut its fiscal 2026 identical-store sales forecast to a decline of between 0.5% and 1.5%, from flat to 1% growth previously. Its adjusted earnings-per-share estimate was slashed to $1.75-$1.85, well below the $2.22-$2.32 it had projected in April. Shares fell 20% in premarket trading, one of the stock's worst days on record. BMO Capital Markets promptly downgraded the share to "Market Perform" and halved its price target from $23 to $12. As of August 1st ACI was trading around $11.58, down sharply from its levels of a year ago.

This is a useful moment to pause a fashionable piece of market thinking. With President Trump's tariff programme adding duties to roughly 71% of US goods imports, some analysts have argued that grocery stocks ought to rally. The logic goes that food is inelastic, supermarkets can pass costs through, and higher prices at the checkout are simply higher revenues on paper. The story about tariffs boosting grocery is not wrong in theory. It is wrong about which grocers benefit, when the benefits arrive, and how long the pain lasts for consumers who are already stretched.

The lag is the point

The Tax Foundation, a non-partisan tax policy group, calculates that in 2024 the US imported $221bn in food products, of which 74% faced Trump tariffs. Mexico, Canada, the EU, Brazil and China together account for 62% of the total. The USMCA free-trade agreement exempts approximately 63% of agricultural imports from Canada and Mexico — baked goods, beef, vegetable oils and various vegetables are among the beneficiaries. But coffee, fish, spirits and beer, worth $46.5bn in 2024, are not covered. Under the reciprocal tariff regime, rates on some categories are expected to exceed 30%.

Tariffs do not raise shelf prices on the day they are signed. The Federal Reserve has found that the pass-through rate for goods from China in 2025 was roughly 30%, meaning only about a third of the tariff cost was immediately reflected in retail prices. The rest was absorbed by retailers, delayed by excess inventories, or mitigated by exemptions. Industry analysts at Spins, a trade-data firm, put the typical lag at 12-18 months. Since the administration unveiled its "liberation day" duties on April 2nd 2025, the full financial fallout is now expected to flow through between April and October 2026. In other words, it is arriving just now.

The USDA's Food Price Outlook projects food-at-home prices will rise by 2.7% nationally in 2026. That is not a shock. It is a grind. And grinds are what distort consumer behaviour.

The trade-down, not the trade war

What tariffs are doing to grocery chains is not raising revenues across the board. It is accelerating the same trade-down dynamic that has been under way for two years. Consumers facing higher food and fuel bills are not buying the same things at slightly higher prices. They are changing where they shop and what they buy.

Moody's Ratings has maintained a negative outlook for the global retail sector in 2026, citing high prices, cautious consumers and a sluggish labour market. Within that gloomy picture, it identifies Walmart as the "biggest winner" in America, driven by value-seeking shoppers who include higher-income customers seeking respite from rising prices. Costco is positioned similarly: most of its EBIT comes from membership fees, which insulates it from the product-cost shock that tariffs create. Its business model does not depend on marking up every imported banana.

Albertsons' quarterly results tell the story from the other side. In the first quarter of fiscal 2026, which ended in June, identical-store sales fell 0.8%. CEO Susan Morris cited "softer industry unit trends and a more cautious consumer" putting pressure on core grocery. The company's response — "ACI Edge", a restructuring that collapses 11 divisions into four regions and centralises merchandise buying — is the kind of operational triage that a retailer undertakes when traffic is declining, not when it is celebrating tailwinds.

Kroger, the industry's largest conventional grocer, is not faring much better. Its first quarter of 2026 showed identical sales growth of just 1%, weighed down by an unfavourable 130-basis-point impact from the Inflation Reduction Act's drug-pricing rules. Gross margin fell from 23.0% to 22.7%, squeezed by higher transportation costs and planned price investments. Kroger has been shuffling its supply chain to sidestep tariffs, as the Wall Street Journal reported, but the effort itself is an admission of vulnerability, not a competitive advantage.

The structure of the tariff shock is what matters. Tariffs on goods that cannot be domestically substituted — bananas from Central America, Brazilian coffee, European cheese and olive oil — become pure pass-through costs. The Food Navigator warns of "quiet inflation": reformulation with cheaper ingredients, shrinking pack sizes, reduced promotions. These strategies protect margin but erode loyalty. The customer who notices a smaller pack or a missing brand goes elsewhere. The customer with less money to spend goes to Walmart, Costco or Aldi.

The USMCA complication

There is a second layer of uncertainty that the market has not yet priced in. On July 1st, the US announced it would not renew the USMCA in its current form, despite Mexico and Canada requesting a further 16-year term. The treaty remains in effect until 2036, subject to annual reviews, but the signal is unmistakable. Mexico supplies the US with $41.6bn in agricultural goods annually; Canada supplies $35bn. Approximately 88% of Mexican exports currently enter duty-free. The prospect of narrowing that exemption, even incrementally, adds a second vector of cost pressure to the supply side of American food retail.

For the farmers and distributors who rely on year-round Mexican produce, the uncertainty has already changed behaviour. The Council on Foreign Affairs reports that some producers are cutting planting by half to conserve capital. A 17% antidumping duty on Mexican tomatoes, which took effect in July 2025, is just one example. The USMCA renegotiation adds a question mark over what the next 12 to 18 months of food pricing might look like.

The investor implication

Albertsons' stock is not a tariff trade. It is a value-format trade dressed up as one. The company trades at around $11.58, near the $11 target assigned by a sell-rated analyst, after the BMO downgrade cut its price target by nearly half. Consensus earnings estimates, which had projected $2.22-$2.32 for the year, have been rewritten down to $1.75-$1.85. The gap between what the market expected and what management now believes is the tariff story's real content: expectations were wrong.

The broader lesson is structural. When a cost-push shock hits an industry with inelastic demand, the beneficiary is not the sector as a whole. It is the format that captures the displaced customer. Walmart wins because it is already the default low-price option for millions of households that have no alternative. Costco wins because its membership model makes product margins a secondary concern. Albertsons and Kroger lose because their format — full-service conventional supermarkets with higher operating costs and thinner promotional budgets — is precisely what trade-down consumers abandon first.

For investors, the question is not whether food tariffs are rising. They are, and the full effect is still arriving. The question is whether the companies they own have a business model that thrives when customers are poorer and more selective. Albertsons' guidance cut is not a temporary disappointment. It is a sign that the competitive sorting has already begun.