Greedflation at the Supermarket is Real
The Federal Trade Commission recently put out a report confirming what many suspected about the role of profiteering in driving up food prices and aggravating shortages during the COVID-19 pandemic.
The report, released two weeks ago, analyzed a combination of public data and information that the FTC requested in 2021 from Walmart, Amazon, Kroger, C&S Wholesale Grocers, Associated Wholesale Grocers, McLane, Procter & Gamble, Tyson Foods, and Kraft Heinz.
The agency found that, across the economy, food retailers’ profit margins rose between 2020 and 2023 and remain elevated today, suggesting that companies used the temporary rise in the cost of their inputs as a pretext for jacking up not just prices but profits. The report also reveals how the biggest grocers commanded a larger share of scarce goods from their suppliers to the detriment of smaller retailers.
“The FTC’s report examining U.S. grocery supply chains finds that dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve,” FTC Chair Lina Khan said, in a statement.
To be sure, the pandemic and its aftermath created genuine disruptions and higher input costs for food manufacturers and retailers. Outbreaks closed plants and food workers began to reject stagnant wages that haven’t kept up with productivity growth, leading to labor shortages and wage increases. Demand for trucking and food packaging also exceeded supply, gnarled ports created shipping delays, and shuttered restaurants meant the market needed fewer 20-pound bags of pre-cracked eggs and more 12 egg cartons.
Retailers could have chosen to eat these higher costs and weather lower profit margins, but instead, the FTC found that on aggregate retailers passed all higher costs onto consumers and raised prices even more to increase their profit margins, too. This finding isn’t totally new, several economists and researchers (including me) pointed out this trend at the time.
Looking at publicly available census data, the FTC found that food and beverage retailers’ markup percentages (the amount of money companies made over and above their total costs) rose in 2021, 2022, and into 2023, from just over 5% to 7%. The agency did not delve into the cause of this trend but noted that food company markups rose and remained elevated even as supply chain disruptions subsided and input costs settled.
In addition to taking advantage of consumers, the report suggests that large grocers used their market power to take advantage of their vendors and get a leg up on their smaller grocery competitors.
“To gain access to scarce products and therefore a competitive advantage, some companies—most often larger ones—used policies that imposed strict delivery requirements on their upstream suppliers and threatened fines for noncompliance,” the report says.
The agency reviewed several contracts between food manufacturers and retailers and found that larger buyers “generally imposed more stringent [on time and in full] requirements and penalties” than smaller buyers. “This may reflect greater bargaining leverage or bargaining power on the part of larger customers,” the agency concluded.
For instance, starting in September 2020, Walmart began to demand that its suppliers deliver 98% of their orders on time and in full or pay a fine of 3% of the cost of goods. At the time, inbound supply from most manufacturers was only at 85% of pre-pandemic levels, according to David Smith, former president of Associated Wholesale Grocers, in his 2021 testimony to the Senate judiciary committee. “The impact of this requirement is clear—suppliers are forced to prioritize Walmart’s orders over the orders of Walmart’s competitors,” he said.
The FTC’s report does not weigh in on what the agency can do to stop the predatory behaviors it documents. However, last week a group of 14 lawmakers led by Senator Elizabeth Warren and Representative Mary Scanlon urged the FTC to enforce one relevant law, the Robinson-Patman Act. The Robinson-Patman Act makes it illegal for dominant retailers to extract prices or better terms (like 98% on-time delivery) simply because they have the clout and bargaining power to do so.
What We’re Reading
An inquiry from the Department of Justice prompted Chiquita to abandon its acquisition of Dole’s fresh vegetable division. Chiquita owns the Fresh Express salad brand, and this proposed deal would have shrunk the number of major packaged salad providers from three to two. (Department of Justice)
The largest U.S. egg producer, Cal-Maine, culled 3.6% of its flock after finding birds infected with avian flu. This strain of bird flu has also infected cattle dairy herds across the country and one person in Texas who had contact with cows. (Associated Press and Reuters)
Oregon recently joined other states that have passed Right to Repair laws. Oregon’s bill goes a step further than others to prevent companies from requiring that new parts must be verified through encrypted software checks before they’ll function. (Ars Technica)
Open Markets is participating in an impact campaign as part of the premiere of Food Inc. 2. The film spotlights the harms of corporate consolidation in the food system. (Associated Press)