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Slashing food stamps hurts the poor. It also hurts their supermarkets

New York(CNN Business) Independent grocery stores and regional supermarket chains already face brutal competition and shrinking profits. Now, they are worried about losing out on a valuable source of sales: food stamp recipients.

A new Trump administration rule will require more low-income recipients to work in order to receive benefits from the Supplemental Nutrition Assistance Program, or SNAP. The change, which could save the federal government $5.5 billion over five years, could result in nearly 700,000 people losing assistance, the Department of Agriculture estimates.

The rule is set to go into effect in April. But a coalition of 14 states, New York City and the District of Columbia, have filed a lawsuit challenging the rule. The lawsuit notes that cuts to the $61 billion food stamp program will have a ripple effect on grocery stores.

Grocery stores often operate on 1% to 2% profit margins, and they rely on revenue from SNAP redemption spending. The rule change and lost sales from the program may mean grocers start pulling back on orders to their suppliers, reducing labor in stores or even closing down.

"When these folks have less SNAP dollars to spend, it certainly affects our total sales," said Kurt Schertle, chief operating officer at Weis Markets (WMK), a chain of 200 stores in the northeast. Ground beef, whole milk and bananas are the items SNAP recipients most frequently buy at Weis with their assistance.

"Folks are using these things for necessities," Schertle said. "It's not graft-taking. It is a belly-filling, sobering basket."

More than $24 billion, or around 40% of the total food stamp program, was redeemed at supermarkets and grocery stores in 2018. Superstores like Walmart (WMT), Costco (COST), Target (TGT) and others received 52% of SNAP dollars in 2018, and their share of the program has grown in recent years.

With cuts to SNAP, small chains or "single-store operators that are holding on as best they can" may be forced to close, said John Ross, CEO of Independent Grocers Alliance, a chain of more than 1,200 independent grocery stores in the United States.

Amit Patel, the owner of Vista Food in Bedford, Virginia, said cuts to SNAP would have "a devastating effect on the business" and may force him to close the store.

"If something happens to the store, there is not a close-by location to sustain the meat or the produce," he added. "It will create a meat desert around that area."

Around one-third of sales at Patel's store come from SNAP, a higher portion than typical American grocery stores receive through the program.

In 2018, food stamps accounted for 5% of sales at grocery stores that were authorized by the Agriculture Department to accept them, according to the Food Marketing Institute, a trade group.

At Karns Foods, a family-owed chain of nine stores in Pennsylvania, 6% of sales come from SNAP. One Karns Foods store receives as much as 10% of sales through the program.

"The cuts starting with the SNAP receipt will stretch far beyond the family receiving the funding support," said Andrea Karns, the company's vice president of sales and marketing. "We would expect to experience a decrease in sales and customer visits" if SNAP dollars dropped off.

Amit Patel, the owner of Vista Food in Virginia, says cuts to SNAP will have a "devastating effect" on his business.

Reductions to SNAP will hit Walmart, big-box chains and dollar stores, too. But those massive companies can absorb the hit. Dollar General (DG) receives around 5% of its sales from SNAP, and CEO Todd Vasos said in December that he does not expect changes to SNAP to impact business.

Grocers located in low-income neighborhoods in both rural and urban America will get hurt the most from the SNAP cuts, experts say. They can't suddenly make up lost sales from SNAP reductions. Some of those include Save A Lot, Ingles, Southeastern Grocers, Brookshire's, Stater Bros. Markets, Superior Grocers and Weis Markets, according to one analyst.

Alex Baloga, president of the Pennsylvania Food Merchants Association, an advocacy group, said around 10,000 retailers in Pennsylvania participate in SNAP. The changes are a "big issue for a lot of our members."

Another proposed regulation, which would tighten the rules governing who qualifies for aid, could end up stripping more than three million people of their benefits.

The changes to SNAP come at a time of vulnerability for traditional grocery stores. Competition from dollar stores, convenience stores and Amazon had squeezed profits. Aldi, the discount German grocer, is expanding rapidly around the country.

Karns Foods in Pennsylvania recieves 6% of sales from SNAP and is bracing for cuts to the program.

"This is another significant competitive pressure being experienced by traditional supermarkets," said Scott Moses, managing director at investment bank PJ Solomon. Supermarkets are "under assault" by dollar stores, drug stores, warehouses and "well-capitalized online grocery behemoths like Amazon, Walmart and Target."

Last year, sales at traditional supermarkets slipped 1.7% compared with 2017, according to Inmar Analytics. Traditional grocers lost market share to competitors last year, a trend that is expected to continue through the next several years.

The number of supermarkets in the United States also declined last year to under 25,000 as SuperValu, Southeastern Grocers, Tops and others shuttered stores. The number of US supermarkets will decline by 6% in the next five years, the firm predicted.

—CNN's Tami Luhby and Caroline Kenny contributed to this article.

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