- US December inflation edged up 2.9% y/y with urban food and beverage prices up 2.4%
- Cautious and value-driven consumer sentiment will favour retailers like Walmart and Costco
- Diversified supply chains & a reduced dependence on Chinese suppliers help cushion impact of tariffs
- Favour leading major players for strength in groceries, private-label offerings, omni-channel growth
A resurgence of inflation? US inflation rose 2.9% y/y in Dec 2024 with urban food and beverage prices up 2.4%, following a 25 bps Fed rate cut in Dec 2025. Trump’s potential tariff policies could also lay further pressure on inflation. Market projections of 2.5% inflation for 2025/2026 may be overly optimistic, given that the National Retail Federation estimated price hikes (ranging from 6.4% to 36.3% in key categories like apparel, toys, furniture, household appliances, footwear, and travel goods) under a milder tariff scenario.
On a positive note, Trump’s tariff increases are expected to be implemented gradually amid recent decision to delay full tariffs on China which suggest that the new administration will adopt a less aggressive approach than previously proposed. Furthermore, Trump’s administration has proposed corporate tax cuts (from 21% to 15%) and reductions in individual income taxes; measures that could potentially boost business activities and consumer spending.
Rising consumer demand for affordable goods; retailers diversifying supply chain amid rising tariff threats. Given the potential resurgence of inflation, consumers are likely to shift spending from discretionary items to essentials and groceries, mirroring a trend seen during 2H21 till 1H23. Given prevailing economic uncertainties, cautious and value-focused consumers favour players like Walmart and Costco which dominate the affordable grocery category and are steadily gaining market share from higher-income households.
Historically, excluding COVID panic-buying effects, Walmart and Costco’s comp sales had shown strong positive correlation with US inflation (0.8 and 0.7 respectively), while Target’s correlation is slightly negative. Since 2021, Walmart and Costco have been gaining market share from other US retailers. This shift has driven growth in private labels which enhance customer loyalty and offer higher gross margins (up to 11% higher, per CB Insights). Walmart, for example, also recorded growing private-label penetration in 2023.
In preparation for tariff impacts, Walmart has diversified its supply chain, increasingly sourcing from India instead of China since Trump’s last term. Its exposure to Chinese suppliers has declined from 80% in 2018 to 60% in 2023 with further reduction expected in 2024. Additionally, two-thirds of goods are now made, grown, or assembled in the US. Similarly, less than 25% of Costco’s non-food business is sourced from China. Given these adjustments, the overall impact on earnings will remain manageable for these players.
Omni-channel growth. E-commerce continues to thrive in the US, driven by delivery convenience. Costco posted a 13% y/y growth in e-commerce comp sales in the quarter ending Nov 2024, while Walmart’s e-commerce grew 25% y/y in the quarter ending Oct 2024. Leading retailers are also embracing AI, moving beyond basic item searches to advanced tools that enhance demand forecasting, inventory management, and supply chain infrastructure. We favour major players with strong grocery presence and omni-channel capabilities as they are better positioned to navigate inflation and the shift in consumer behaviours.
Figure 1: Quarterly comparable sales growth of selected players vs US inflation
Source: Company data, Bureau of Labor Statistics, DBS
Note: Numbers of Walmart and Costco are comparable sales growth in the US
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