The Middlemen

Consolidation in the grocery retail sector directly affects not only consumers but also workers, farmers, and other producers of consumer goods. Power in this sector is increasingly concentrated in just a few companies. In 2019, the top five retailers, Walmart, Kroger, Albertson’s, Ahold-Delhaize, and Publix, commanded 46% of the American grocery market. Walmart alone commands over a quarter of grocery sales. Together, the top twenty chains take in two-thirds of all sales while smaller independent chains sell a quarter of all groceries.

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In much of the country, regional retail concentration is even greater. In 2018 Walmart sold more than half of all groceries in one out of ten cities and one out of three “micropolitan” areas. In 38 regions, Walmart captured 70% or more of grocery spending and in many small towns, a Walmart or Dollar General may be one the only grocer for miles.

The retail landscape wasn’t always so concentrated. The grocery industry was once comprised of a variety of different retailers, including corner stores, public town markets, co-operative groceries, and medium-sized regional supermarkets. As recently as 1997, American consumers bought only 20% of their groceries from the then-largest four retailers.

This landscape of locally owned stores and small regional chains was partially the result of laws passed in the 1920s and 1930s at both the state and federal level. Many states, for instance, taxed large chain stores at higher rates. In 1936, Congress passed the Robinson-Patman Act, which cracked down on loss leading and discriminatory treatment of suppliers, making it easier for smaller retailers to compete. Rigorous antitrust enforcement also prevented chains from buying one another for market power. The effects of these laws were so dramatic that in 1966 the Supreme Court blocked a merger that would have given one corporation a 7% share of a single metropolitan region’s grocery business.

But a spate of mergers in the late 1990s sharply cut the overall number of competitors in the retail sector. Fifteen of the top 20 national grocers in the 1980s either merged or were acquired by the 2000s. Just between 1996 and 1999, there were 385 mergers in the grocery industry, and the top four grocers’ market share doubled in under a decade.

The industry has steadily consolidated ever since. In 2014, Kroger bought the mid-size southeastern chain, Harris Teeter, for $2.4 billion. In 2015, Albertsons’s completed a $9.4 billion merger with Safeway. That same year the Dutch company Ahold (owner of Stop & Shop, Giant, and Peapod) and Brussels-based Delhaize (owner of Hannaford, Food Lion, and others) announced a $28 billion merger. And in 2017 e-commerce monopolist Amazon sent shock waves through the grocery industry with a $13.7 billion takeover of Whole Foods and plans to open an Amazon Fresh grocery chain.

Another critical factor in the trend towards grocery concentration was the phenomenal rise of Walmart. Sam Walton opened the first Walmart in 1962. Walmart only began to sell groceries and produce in 1990. Yet by 2000 Walmart had become the largest food retailer in the nation.

Walmart leverages its massive size to influence all corners of the grocery industry. Walmart exercise enormous ‘monopsony’ buyer power, or the ability to dictate prices and terms to many of the companies that stock its shelves. Over the years many suppliers have complained that Walmart’s decrees can be hard if not impossible to meet. In 2015, Walmart implemented new rules requiring all suppliers to pay for using Walmart’s distribution centers and warehouses. The change evoked outcry and refusal from many suppliers, who argued Walmart’s low prices were already cutting deeply into their profit margins.

Even the biggest corporations do not have the power to bargain with a goliath such as Walmart, and pursuit of this bargaining power drives even more mergers. For example, Proctor & Gamble’s 2005 acquisition of Gillette for $57 billion was widely seen as an attempt to consolidate sufficient power to resist Walmart’s relentless efforts to wring more profit out of its suppliers.

Grocery store workers also suffer from less negotiating power and benefits as non-union shops, such as Walmart and Amazon-Whole Foods, drive unionized stores out of business.

According to the Labor Department, membership in the largest grocery union, United Food and Commercial Workers, is down more than 9 percent since 2002. While part of this trend stems from right-to-work legislation and increased automation, some analysts argue that consolidation and store closures also play a role.

Research also suggests that fewer, powerful buyers can suppress workers’ wages along the supply chain. One study found that the longer a supplier depends on just one or two large buyers, the more the suppliers’ workers’ wages tend to fall over time. This big buyer squeeze contributed to an estimated 10 percent of wage stagnation since the 1970s.

Farmers also feel the squeeze of fewer big buyers. According to USDA data, in 1990 ranchers received 59% of each dollar spent on beef, and retailers received 33%. Just two decades later in 2009, after retailers dramatically consolidated, farmers received only 42% of each dollar spent on beef, while retailers received 49%.

Another way retailers control the supply chain is by charging fees to get on their shelves. Such “slotting fees” can require a supplier to pay as much as $2 million to one retailer to get a new product in front of buyers. Consequently, the slotting fee system favors very large food processors that can pay for prime shelf space, and puts small, independent producers at a disadvantage.

Further, many retailers delegate the task of choosing how much shelf space to allot to a particular product, and what price to charge for that product, to one of the dominant producers of that product. The theory behind such “category captains” is that the biggest processors in a sector – such as Colgate or Anheuser-Busch InBev – best understand how to maximize profits from sales of toothpaste and beer. In practice, these captains tend to favor their own products and those of one or two other top-tier companies and to create barriers to entry for smaller or newer competitors. In 2001, the Federal Trade Commission expressed great concern about the practice. In 2013, Clemmy’s, a small ice cream manufacturer, sued Nestle for allegedly abusing its position as a category captain to keep competitors off grocery store shelves.

But increasingly massive retailers are cutting suppliers out of the picture altogether and completely vertically integrating supply chains for staple products, such as milk and meat. Costco is getting into the chicken business, Walmart opened a beef plant, and Walmart, Kroger, and Albertson’s all own milk bottling plants. While a new buyer in a consolidated market may seem welcome, dominant retailers can use their market power to impose the same specific demands of farmers as they do of suppliers and this limits who can work with them. Competition from Big Box giants also drives existing suppliers out of business or pressures them to tighten their belts. For instance, roughly 100 dairy farmers lost milk contracts when Dean Foods lost business to Walmart’s milk plant, but only a fraction of those farmers went on to supply Walmart or find new buyers.

Grocery consolidation also leaves communities without ready access to affordable and healthy food. As major chains merged, they also closed stores, particularly in urban and rural areas. These closures exacerbated a long history of “retail redlining,” in which grocers avoided building stores in communities of color and developed the supermarket business model around white suburban families. Across U.S. metro areas, approximately 17.7% of predominantly Black neighborhoods lack supermarket access, compared to just 7.6% of white neighborhoods – and this racial disparity persists regardless of income.

Walmart and other Big Box stores also use their financial might to sell items at a loss and drive out independent competitors. This is a particular concern in rural areas, where independent grocers say Big Box stores are their biggest threat. Over the past few years, another loss leading chain, Dollar General, has dramatically expanded its footprint in urban and rural areas without full-service grocery stores. While some argue that any store is better than none, Dollar General and other discount chains offer little to no fresh foods and sometimes charge more per-ounce, albeit at a lower price tag, to exploit cash-strapped buyers. Concentrations of dollar stores also dissuade full-service grocers from setting up shop.

On occasion, Walmart has made deals with local governments to build stores in left-behind neighborhoods. But the chain has often reneged on its promises. In 2013, Walmart made a deal with the city of Washington, D.C. to build five stores in the District, three in wealthier parts of town, and two in lower-income areas. But in early 2016, Walmart backed out of the deal after completing the three stores in higher-income areas. Despite having razed local businesses to make way for the new stores, Walmart was able to walk away with no consequences.

Many large corporations stand between the farmer and the eater. Among the most powerful are the corporations that “process” food by turning raw ingredients into the products the consumer eats. Many of the best-known food processors – including Anheuser-Busch InBev, Kraft Heinz, Nestle, Coca-Cola, and Grupo Bimbo – dominate entire markets. Each of these companies has built or bolstered its dominant position through mergers and acquisitions. Apart from the occasional divestiture, large food and beverage companies have largely been allowed to expand as swiftly as they want, with little antitrust scrutiny.

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Consider Anheuser-Busch InBev, formed by the 2008 takeover of Anheuser-Busch by InBev – itself a combination of Belgium’s Interbrew and Brazil’s AmBev. ABI purchased its then-largest competitor, SABMiller, in 2015 for $106 billion, creating a company that now controls 45% percent of the American beer market and 30% percent of the global market. ABI is also the second largest beer distributor in the country, just behind Chicago-based Reyes Beverage Group. Recently, ABI has also sought to grow its market share by moving into the craft-brewing sector, with the high-profile acquisitions of Goose Island in 2011, Blue Point in 2014, and Elysian Brewing in 2015, among others.

Such market dominance gives processors immense power both over rival producers and over their own suppliers. ABI, for instance, has the power to squeeze out smaller competitors from the distribution channels it owns. ABI also has the power to dominate markets for hops, aluminum cans, and other inputs. ABI is so large that it appears to have the power to raise the price consumers must pay for their beer. In 2008, shortly after InBev acquired Anheuser-Busch, ABI and MillerCoors began to raise prices simultaneously. At the time, the United States was mired in the deepest recession since the Great Depression and beer consumption had fallen dramatically.

Kraft Heinz dominates numerous aisles of the grocery store. The corporation is the third-largest food processor in the United States, and the fifth largest in the world. Among its most well-known brands are Oscar-Meyer, Jell-O, Velveeta, Cool Whip, Capri-Sun, and, of course, Kraft macaroni and cheese and Heinz ketchup. Here too, the company’s immense size gives it the power to charge buyers more and to pay suppliers less. In 2015, the Commodity Futures Trading Commission charged Kraft with manipulating wheat prices through futures speculation beyond the permissible limit established by the CFTC and the Chicago Board of Trade.

Coca-Cola is the largest beverage company in the world. In 2014, it controlled about 42% of the U.S. soda market. Its brands include Sprite, Odwalla, Dasani, Honest Tea, and VitaminWater. The company has used its size and influence to sway regulation and law at even the lowest level of government. Coca-Cola has been involved in lobbying extensively against legislation such as bottle recycling laws and soda taxes that would in any way raise the price of soda, believing that higher prices will reduce consumer demand. A 2015 report from the Center for Science in the Public Interest showed that Coca-Cola, PepsiCo, and the American Beverage Association (a soda industry trade group) spent at least $106 million from 2009 to 2015 on lobbying and advertisements to fight local, state, and federal public health initiatives. The company also has funded seemingly grassroots organizations, sometimes called “astroturf” groups, to sway voters on soda taxes and other policies that might threaten soda sales.

In the bakery and bread sector, processors have rolled up a marketplace where until recently power was widely dispersed. A decade ago, the bread market was distributed among eight major players; today three giants control it. The largest is Grupo Bimbo, which alone controlled over 30% of the U.S. market for bread in 2013, and is the world’s largest baking company. The next largest, Flower Foods, is closely tied to Walmart, the U.S.’s largest food retailer, with sales of nearly $600 million to Walmart in 2011. Flower Foods’ familiar brands include Nature’s Own, Wonder, Whitewheat, Tastykake, and Sunbeam.

Though their products may appear to be more wholesome, organic food processing companies are consolidating in a similar fashion to traditional food companies. Hain Celestial Group, the second largest organic food processing company after Dean Foods, has grown through over a dozen mergers and acquisitions in the past 20 years. Hain Celestial is itself the product of the 2000 merger of Hain Foods and Celestial Seasonings. The majority of Hain Celestial’s sales are through Whole Foods, itself a major player in the food processing sector through its private 365 Everyday Value brand.

The giant food processors sometimes work together to divvy up the marketplace. Practices like category management, in which retailers delegate stocking and shelving responsibilities to the largest suppliers in a sector, only further reinforces the market power of the largest food processors. Large food processors can use their direct or de facto control of shelving and distribution to keep newcomers out of stores. Executives at Honest Tea struggled for years to access distribution channels and shelf space that were controlled by the giant soda retailers. When in 2011 Honest Tea’s owners sold their business to Coca-Cola, the company’s products soon were made much more widely available.

Price discrimination is the practice of charging one customer more than another for the same goods and services. For decades, Americans have recognized the need to ban price discrimination that threatens equal opportunity, or that concentrates dangerous amounts of wealth and power. Americans have been especially vigilant about outlawing price discrimination by monopolies and other corporations that dominate all or most of a particular line of business, such as railroads and giant retailers.

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There are three types of price discrimination. First-degree price discrimination entails charging different prices to different customers based on past purchases or other data that helps a retailer discern how much a customer is willing to pay. Second-degree price discrimination entails offering deals to customers contingent on certain behaviors, such as a buy-one-get-one-free deal or special pricing for bulk items. Third-degree price discrimination entails offering different pricing to members of different groups, such as seniors or students. Of these three types, first-degree price discrimination is the most politically dangerous, due mainly to its arbitrary nature, and has been most carefully regulated against.

Early legal protections against price discrimination came in the form of the Interstate Commerce Act of 1887 and the Sherman Antitrust Act of 1890. The aim of these laws was to ensure transparent, uniform pricing in the delivery of railroad, telegraphy, electrical power, and other services. The laws were designed to protect Americans both as buyers of goods and services, and as producers of goods and services.

Yet over the last 40 years, many of these laws and regulations were systematically undermined. This has led to increasingly abusive pricing practices in industries including health care, cable television, insurance, and even seed genetics.

In animal agriculture, monopolists discriminate mainly among the people who provide them with the animal products they handle and sell. In the chicken industry, for instance, giant corporations like JBS and Tyson’s routinely pay farmers varying amounts of money for the same work, in a practice that is know as the “tournament system.”

Under the tournament system, farmers who sign contracts to sell their chickens to large packers are, in theory, paid according to how well they compete with one another. Depending on how large and healthy their birds are at the end of a growth cycle, farmers will be paid different amounts per pound. Defenders of the system say it rewards farmers for good stewardship and efficient work.

In reality, however, this system is opaque to farmers and, in most instances, entirely unaudited and unregulated. This means that actual payments are determined by factors entirely outside the control of the farmer, many of which depend on the whims of the company or even the company foreman. For instance, if the company delivers sickly chicks or inferior feed to a farmer, it is likely the farmer will end up with a lower pay per pound. Compounding the problem, most companies refuse to allow the farmer to witness the weighing of the grown chickens. The companies also routinely prohibit farmers from sharing the terms of their contracts with one another.

In recent years, many farmers have reported being punished by packers for speaking out against the tournament system. Such punishments can range from providing lower quality inputs, to lowering the reported weight of their grown chickens. In some instances, companies appear to have cut farmers entirely off from the market for periods of time.

Discrimination also happens at the retail level. Many large retailers will charge producers “slotting fees” for prime shelf space. One consequence is that smaller producers find it hard to compete with larger producers for shelf space. Another consequence is that larger producers often end up, over time, paying retailers – especially dominant retailers like Walmart – more and more for carrying their products. While some companies deny paying slotting fees, the practice is well documented in the retail industry. Retailers can also require exclusive contracts for certain products, as has been uncovered at Whole Foods.

Dominant retailers also leverage a combination of data analytics and customer identification and tracking tools to offer real-time individual pricing and promotions, both online and in-store. Sellers have long offered different prices to different groups of people, whether through senior and student discounts or lower airline fares to people who have Saturday layovers. But until recently, retailers rarely had the means to offer different prices to different individuals based on personal characteristics, that is, engage in true first-degree price discrimination. Individualized prices could make goods more affordable for some, but they also allow sellers to extract the maximum amount that each individual is willing to pay and raise concerns about discrimination.

In the seed industry, giant corporations like Bayer (formerly Monsanto) have long engaged in regional price discrimination, charging farmers in different parts of the country different amounts of money for the same seeds. In their 2010 paper “An Analysis of the Pricing of Traits in the U.S. Corn Seed Market,” the authors found that the prices charged by the seed giants reflects “spatial differences in farmers’ willingness-to-pay and demand elasticities.” In other words, the companies charge whatever they can, which makes it easier for them to capture profits that in the past would have remained in the hands of the independent farmer. The growing use of Big Data is fast increasing the ability of dominant seed companies like Bayer to track farmers’ planting and harvesting schedules in ways that enable them to price discriminate even more effectively in the future. Bayer even introduced a new “outcome-based” seed and chemical pricing program in 2019 that adjusts the cost of its seeds or agrichemicals based on how well its products perform. Farmers worry that Big Ag will use their farm performance data to estimate their profits and price products at exactly what they are able to pay.

Parts of this essay are excerpted from “Exposing Anticompetitive Price Discrimination” by Barry Lynn, Phillip Longman, and Sascha Meinrath.