By David Wainer

A weakening economy is already pressuring consumer spending, with shoppers cutting back on snacks and cigarettes. Now, benefit reductions for low-income consumers could pile on still more pressure.

While tax cuts could put more money in the pockets of middle-class and wealthy families, Congress might pair them with reductions to programs including Medicaid and the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps. That would hit the monthly budgets of some 40 million Americans on food benefits. The impact could be felt by manufacturers such as Kraft Heinz and General Mills and discount retailers such as Dollar General.

Republicans are divided on how deeply they should cut government spending to offset tax reductions. A Republican budget framework adopted by the House of Representatives in February called for the Agriculture Committee to cut $230 billion over 10 years, implying deep decreases to SNAP funding, which currently runs at about $94 billion a year.

But drastic cuts would be politically risky when inflation and tariffs are already straining low-income budgets. Evercore ISI analysts estimate that SNAP reductions could range from $50 billion to $150 billion over the next decade.

In 2023, SNAP benefits fell back from elevated levels after pandemic-era emergency allotments expired, triggering a sharp drop in grocery spending. "In hindsight, the entire industry underestimated the importance of these support payments," former Nestlé CEO Mark Schneider acknowledged in early 2024.

The fallout won't be limited just to food makers and grocery stores, because lower-income consumers might shift spending priorities, for instance by devoting more disposable income to groceries while cutting back on dining out.

An Agriculture Department study found that every $1 billion in new SNAP benefits increases gross domestic product $(GDP.UK)$ by $1.54 billion -- suggesting that a reduction in aid could drag on economic growth.

While the proposed cuts would be modest relative to total food spending, they could come at a particularly bad time if they coincide with an economic drag from tariffs, said Arun Sundaram, senior equity research analyst at CFRA Research.

Consumers with tighter budgets are likely to first pull back on nonessentials such as snacks and cakes before they cut back on milk, vegetables or chicken. A recent shift to private label products could also intensify. Some brands are more exposed than others.

Kellanova, which markets Pop-Tarts, and Kraft Heinz, which sells such products as Mac & Cheese, derive about 19% and 21% of their sales respectively from lower income households, according to a JPMorgan analysis (Mars agreed to buy Kellanova last year for $30 billion, though the deal has yet to close). For Oatly, a maker of pricier nondairy milk, these households account for only 13.5% of sales.

The pain could be even worse for manufacturers of sugary and processed foods if efforts to restrict SNAP purchases of soda gain traction and spread to other indulgences. In the past, states have pushed to exclude soda from food stamp eligibility, but the Agriculture Department has historically rejected such proposals.

Trump Agriculture Secretary Brooke Rollins has signaled she might grant waivers allowing states to impose restrictions. TD Cowen analyst Robert Moskow warns that defining "unhealthy" foods could be a challenge: "Would it apply to zero-calorie sodas?" he says. "The higher probability is they just make cuts to the program and ask questions later."

On the retail side, discount chains such as Dollar General and Dollar Tree would be hit hardest, followed by Walmart, which serves a broad customer base but still has a significant portion of lower-income shoppers, according to Bernstein analysts. In contrast, Target and Costco, whose customer bases are generally higher income and less price-sensitive, would see less of an impact.

Consumers have already been cutting back on snacks, though analysts aren't sure if that is primarily because of health concerns or tighter budgets.

Both General Mills, maker of Chex Mix and Nature Valley bars, and Campbell's, which sells Goldfish crackers, recently cut their guidance amid weakness in the snacks business.

PepsiCo, owner of the giant Frito-Lay snack business, reported last month that salty and savory snack categories underperformed amid the "cumulative impacts of inflationary pressures and higher borrowing costs on consumer budgets."

Food companies are already being pressured by a struggling consumer. General Mills, Kraft Heinz and PepsiCo are down by an average of 16% over the past year, compared with an 8% gain for the S&P 500.

It is likely to get worse.

Write to David Wainer at david.wainer@wsj.com

(END) Dow Jones Newswires

March 23, 2025 05:30 ET (09:30 GMT)

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