There’s no place in America more communal than the local grocery store.
We humans have to eat and the vast majority of people visit their local grocery store once a week (or more) to fill up their refrigerator and pantry with items from the store.
And the prices of things inside the store are so familiar to us that any increases in the prices of things that we buy on a regular basis, such as milk, eggs and meat, are enough to change the outcome of elections.
As inflation has become a larger and larger topic both in the economy and around the kitchen table, grocery stores have found themselves under harsher lights than ever before. And why wouldn’t they? Since in 2022, food prices rose faster than any year since 1979. From 2020 to 2024, they rose more than 20%.
While we’ll get into inflation and how stocks in this section have been doing lately, let’s first admire the modern grocery store.
The average U.S. grocery store carries 40,000 items that are safe to eat (this does not mean the same as healthy, of course), are pretty much always fresh and are fairly diverse. It’s somehow both impressive and boring at the same time. (Chains like Costco, Trader Joe’s and Sam’s Club, by comparison, carry about 4,000 items.)
This is why I thought that it would be interesting to take a deep dive into how grocery stores work and the role they play in our lives and our economy.
In his book “Grocery: The Buying and Selling of Food in America”, Michael Ruhlman traces the dawn of the modern grocery store back to a company called The Great Atlantic & Pacific Tea Company (quickly shortened to just A&P) that was founded in 1859 and died after a long decline in 2016.
The A&P succeeded thanks to customer rewards in the form of glossy photos as give aways and then because of the invention of branded products that people could trust, then in tin cans to keep things sealed and fresh.
Before branded products, shoppers would go to a general store and ask for some flour and then have the flour shoveled from a barrel of flour. They didn’t know what level of quality or safety they were getting in these kinds of transactions and so A&P started offering branded bags of flour and the like so that people could have some more peace of mind when buying their goods.
Another invention that helped them with the logistics of running such a complex enterprise was cardboard boxes (invented by accident when an operator used a cutting machine wrong and thus invented something we all know well -- from all of the Amazon boxes on our front porches.)
Stores grew in size through the 60s and 70s as more people bought cars and the suburbs sprawled outside of cities. Most stores went from 3k square feet to 30k square feet. Most grocery stores today are 90k square feet.
The book then goes into how confusing it is to find healthy products in our grocery stores. And how bad American diets are. I’ll save you all of the preaching and let you know that the primary solution is this: cook more at home. It’s healthier, involves fewer chemicals and additives and will probably lead to better health. Another good rule of thumb: if the ingredients on the side of the box are things you can buy in the store then it’s probably good for you. If not, no.
Anyway, on to the business aspects of grocery stores.
First off, profit margins are razor thin for grocery stores thanks to all of the costs involved with running them. According to Ruhlman’s book, we’re talking around 1% profit margin after everything and everyone is paid (although things looks a little better according to the analytical tools we have here at Baird).
Below are some stats about publicly traded grocery stores.
As of mid-February, Costco has $280 billion in annual revenue over the past trailing twelve months and that’s on an upward trend, rising from $226 billion in the summer of 2022 to $275 billion in the summer of 2025. The stock is up 182% over the past five years but down 5.4% for one year. As of September of 2025, the company’s net sales for the fiscal year increased 8.1%, to $269.9 billion, from $249 billion in 2024.
As of August of 2025, Costco’s gross margin was 12.9% for last 12 months. Other competitors, by comparison, have substantially higher margins. Walmart’s same margin was 24.9% and Target’s was 27.8%.
Net margin (which is what’s left over everything is paid) is just under 3%. The main concern with Costco’s stock, in terms of whether or not it’s a fairly priced stock, is the P/E ratio.
The P/E ratio stands for price divided by earnings. From Investopia: “The P/E (Price-to-Earnings) ratio is a valuation metric that measures a company’s current share price relative to its earnings per share (EPS). It indicates how much investors are willing to pay for every $1 of a company’s profit, helping to assess if a stock is overvalued or undervalued.”
So the lower the better in most cases, or else you’ll be paying for future earnings that may or may not happen.
Costco has a trailing P/E of 54.5 and a forward P/E of 50.25, according to Yahoo Finance.
By comparison, the cutting-edge growth stock Nvidia has a trailing P/E ratio of around 45 and a forward P/E of 24 or so. Meta (aka Facebook) has a trailing P/E of around 27 and a forward P/E of 21 or so. Google’s trailing P/E is 28 and forward P/E of 27.
So while Costco might be the place for bargains, it’s stock (and the P/E of 54.5) sure seems pricey, at least in the short term and so that’s one reason the stock has hit cruising altitude.
Meanwhile, Kroger’s trailing P/E is 63.05 and the forward P/E is 13.32. That’s a very wide difference and not one you really like to see. And here’s why: According to Yahoo Finance details on Kroger, the company has a net margin of 0.53%.
By the way, Kroger’s stock is up around 100% over the past five years (integrating AI into their operations has been a big boost) and is up about 4% over the past 12 months.
Let’s look at just one more place where a lot of people in rural areas buy food. (Good job hanging in there through all these numbers by the way!)
Dollar General has a trailing P/E of 26.57 and a forward P/E of 21.64. (Now these are more down to the earth numbers for a grocery chain!) DG has a net margin of 3%, which is higher than the average net profit for food retailers in 2024, which was 1.7%.
So how has DG’s stock been doing lately? Well, for one year it’s up more than 100% and down 25% over the past five years, as of mid-February.
As always, investing can be a tricky game and that’s why it’s smart to always read the ingredients -- both in stocks and in the items you buy during your next trip to the your local grocery store.
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While current at the time of the date of this publication, this information is subject to change and ongoing interpretation and is for informational purposes only. The opinions are those of the speaker and author and not necessarily those of Baird. This does not provide information or advice that is sufficient on which to base an investment decision.