South Dakota’s grocery industry is settling into what Nathan Sanderson, executive director of the South Dakota Retailers Association, calls an “average year,” with consumers trading down on proteins and store brands, convenience stores grabbing more food sales and big-box retailers delivering groceries at a loss into rural communities.
Sanderson told The Shelby Report that business owners remain generally optimistic even as consumers turn a bit pessimistic.
“I don’t know if there’s any overriding theme right now … I don’t know that there’s any really clear signs of, oh yeah, things are going to be great,” he said.
The assessment marks a subtle downshift from a year ago, when Sanderson described the industry as “pretty strong.”
“I’d say grocers are, again, generally optimistic, but aren’t expecting a banner year,” he said.
South Dakota’s economy enters 2026 showing resilience, though the volatility of its agricultural sector and shifting federal trade policy continue to create uncertainty.
The state’s real gross domestic product – output adjusted for inflation – totaled $58.14 billion in the second quarter of 2025, according to the Dakota Institute’s analysis of U.S. Bureau of Economic Analysis data.
Finance and insurance lead state output at $8.03 billion, nearly double agriculture’s contribution, reflecting South Dakota’s decades-long cultivation of a banking-friendly regulatory environment.
The state’s economy contracted 3.1 percent in the first quarter of 2025, driven by trade disruptions and tariff uncertainty, before rebounding sharply to 5.2 percent annualized real GDP growth in the second quarter – outpacing the national rate of 3.8 percent – according to the Dakota Institute.
Retail trade declined for the second consecutive quarter in Q2 2025, which the Dakota Institute attributed to continued consumer caution.
The state’s unemployment rate stood at 2.1 percent in April 2026, according to the U.S. Congress Joint Economic Committee, matching the prior month’s figure and significantly below the national rate of 3.7 percent. The labor force participation rate also outpaces the national average at 67.5 percent, compared with 62.2 percent nationwide, the committee reported.
A market analysis from Morrissey Goodale, a consulting firm, assigned South Dakota an overall grade of A- for its economic performance and outlook, citing an A+ for workforce and an A for financial and fiscal health. The firm noted that for every unemployed worker in the state, there are about three job openings.
However, the firm’s grade was tempered by a D+ rating for the state’s overall economy, reflecting its small scale. Its economy and population both rank 47th nationally.
Top concern
Affordability has become the No. 1 issue for grocers, Sanderson said, displacing tariffs and supply chain pressures that dominated industry conversations in 2025.
“For consumers, affordability is probably the No. 1 thing that they’re watching right now,” he said. “And so for business owners, certainly cost and cost controls would be something that they’re focused on.”
Tariffs, while still monitored, have fallen to a lower tier of concern.
“I don’t think that it is a top one or two item right now,” Sanderson said. “Overall consumer confidence, I would say, would be a key thing that grocers are interested in.”
Supply chain pressures remain “on the radar but manageable,” he added.
South Dakota consumers are responding to higher prices in multiple ways, Sanderson said. Shoppers are trading down from beef to chicken or pork, shifting from brand-name items to generic or store brands and cutting back on nonessentials.
“Certainly, there’s some trade down, particularly in the protein,” he said. “Consumers are also being very cost conscious, and so they’re trimming down the want to have and focusing more on the need to have kind of situation.”
The Consumer Price Index for the Midwest region indicates a loaf of bread averaged $1.97 and a gallon of milk $2.57, according to the Joint Economic Committee. Nationally, the CPI-U inflation rate stood at 3.4 percent in the most recent data, with core inflation at 3.9 percent.
Sanderson noted these trends are noticeable but manageable.
“It’s certainly an issue, and it’s definitely something that business owners are concerned about, but it also isn’t catastrophic or anything like that,” he said.
Double squeeze on independents
The most significant structural shift in South Dakota grocery retail, according to Sanderson, is the double squeeze on small, independent grocers from above and below.
“Convenience is king for consumers,” Sanderson said. Convenience store chains are adding more fresh fruits, meat options and grocery items, cutting into traditional grocery store sales.
At the same time, large big-box retailers are delivering groceries into rural areas – sometimes 30 miles one way, according to anecdotal reports Sanderson has heard – at what he said appears to be a loss.
“There’s no way they’re making any money on that delivery,” Sanderson said. “We’re seeing that pop up in various locations as well.”
Sanderson described the changing nature of the industry as the No. 2 concern for grocers, behind affordability.
“The bandwidth that they have for the consumer seems to be shrinking a little bit on both ends of the spectrum,” he said.
Rural succession, store closures
The transfer of grocery stores from Baby Boomer owners to a new generation continues across South Dakota, with some stores closing when no buyer emerges.
The trend is most acute in smaller rural communities.
“Are there areas of the state that have access issues? Yeah, we have that right now,” Sanderson said. “We’re a small population, relatively large geographic state. And so absolutely, it’s a long way to go to a store for a fair number of our citizens.”
Where sales occur, buyers are typically small to mid-size regional chains with eight to 12 stores, Sanderson said, rather than large national operators. “That seems to be largely the approach that is taking place – they’re selling out to those small to mid-size, certainly regional chains.”
South Dakota’s unemployment rate has remained below 2 percent for extended periods in recent years, according to state labor data cited by Sanderson, and that continues to strain grocery hiring. “Workforce is certainly going to continue to be an issue,” he said.
And there is no single solution. Successful strategies vary by location and include hiring high school students, summer workers and, in some cases, offering ownership shares that could lead to eventual succession.
“I don’t think that there’s any silver bullet to solve the workforce issue,” Sanderson said.
Shop local has limits
South Dakota has a strong shop-local culture, Sanderson said, but that loyalty has limits – especially when price and convenience diverge.
“The consumer interest in shopping local comes down to what is the cost difference between point A and point B, and how convenient is it for me to actually shop local?” he said.
If a local grocer is relatively on par with larger competitors and offers convenient hours, shoppers will support it. But a large price gap erodes that goodwill.
“There’s absolutely a willingness to pay a little bit more,” Sanderson said, “but I put an emphasis on the little bit more – not a lot.”
He added that convenience is always “churning in the background of price.”
Session brings tax changes
The 2026 South Dakota legislative session produced several tax changes affecting grocers, including a new requirement to seek a federal waiver for SNAP soft drink purchases.
House Bill 1056, which takes effect July 1, 2026, requires South Dakota to request a waiver from the U.S. Department of Agriculture to exclude soft drinks from SNAP eligibility. The state has until Sept. 1, 2026, to submit the request. If granted, implementation would take six months, likely pushing full effect to 2027, Sanderson said.
He noted that the SDRA is monitoring the waiver process.
More broadly, grocers face a series of sales tax changes. The state sales tax rate is scheduled to return to 4.5 percent on July 1, 2027, from its current reduced rate. Additionally, each of South Dakota’s 66 counties may now adopt a half-percent county option sales tax to reduce owner-occupied property taxes, under legislation passed in 2026. Municipalities may also adopt a 1 percent optional sales tax for capital improvement projects.
Depending on location, Sanderson said, grocers could see sales taxes increase by as much as 1.8 percent.
The SDRA opposed the package. “We wanted to use the 0.3 percent increase to go toward property tax relief, and then call it good,” Sanderson said. “As I’ve said to others for a number of years, property taxes have been an issue and the legislature didn’t do anything. This year, they decided to do everything.”
Looking ahead, Sanderson said the intersection of cost and convenience will determine which grocers thrive.
“People will pay a little bit more to support local, but it also has to be convenient,” he said. “The grocers that are able to deftly manage those two things are going to be those who are going to be successful.”
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