Grocers exploited supply chain disruptions, FTC finds
Large grocery retailers took advantage of supply chain disruptions to beat out smaller rivals and protect their profits during the pandemic, according to a report released by the Federal Trade Commission on Thursday.
The report found that some large companies “accelerated and distorted” the effects of supply chain snarls, including by pressuring suppliers to favor them over competitors. Food and beverage retailers also posted strong profits during the height of the pandemic and continue to do so today, casting doubt on assertions that higher grocery prices are simply moving in lock step with retailers' own rising costs, the authors argued.
“Some firms seem to have used rising costs as an opportunity to further hike prices to increase their profits, and profits remain elevated even as supply chain pressures have eased,” the report read.
The report's release comes as the FTC cracks down on large grocery retailers. Last month, the commission and several state attorneys general sued to block Kroger from completing its $25 billion acquisition of the grocery chain Albertsons. They argued that the deal would weaken competition and would most likely lead to consumers paying higher costs.
The independent federal agency's actions have helped bolster the Biden administration's efforts to address rising prices. In recent weeks, President Joe Biden has taken a tougher stance on grocery chains, accusing them of overcharging shoppers and earning excess profits. Although food prices now are increasing at a slower rate, they surged rapidly in 2022 and have not fallen overall. As a result, the high cost of food has continued to strain many consumers and has posed a political problem for the administration.
Biden also has tried to tackle the issue by fixating on food companies, denouncing them for reducing the package sizes and portions of some products without lowering prices, a practice commonly called “shrinkflation.” During his State of the Union address this month, Biden again called on snack companies to put a stop to the practice.
“President Biden knows grocery prices are still too high for hardworking families,” Jon Donenberg, a deputy director at the National Economic Council, said in a statement after the report's release. “We're cracking down on corporations that engage in price gouging and deceptive pricing, from food to health care to housing.”
In its report, the FTC concluded that supply chain disruptions did not affect companies equally across the grocery industry. Compared with larger companies, small grocery retailers faced more difficulties getting products during the pandemic.
“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,” Lina Khan, the FTC chair, said in a statement.
The report's findings are partially based on information the FTC obtained from nine large retailers, wholesalers and consumer good suppliers: Walmart, Amazon, Kroger, C&S Wholesale Grocers, Associated Wholesale Grocers, McLane Co., Procter & Gamble, Tyson Foods and Kraft Heinz.
The regulator ordered the companies in late 2021 to turn over “detailed information” that would help
shed light on the causes behind supply chain snarls and how business practices could have worsened disruptions.
The report's findings about large companies pressuring suppliers were primarily based on the information the FTC received from those companies. The report did not examine whether those specific companies increased their prices by more or less than their cost increases, but rather looked at general industry data on profits.
“We will continue to operate with the highest ethical standards in collaboration with our partners to maintain the integrity and resilience of our nation's supply chain,” Alicia Downard, a spokesperson for McLane, said in a statement.
C&S Wholesale Grocers and Kraft Heinz declined to comment. Amazon, Kroger, Associated Wholesale Grocers, Procter & Gamble and Tyson Foods did not respond to an immediate request for comment.
According to the report, some large companies tried to gain access to scarce products by imposing strict delivery requirements and threatening suppliers with large fines if they failed to fill their orders. Walmart, for instance, tightened the delivery requirements its suppliers had to meet to avoid fines as the pandemic went on, the report found. Because these measures helped large retailers increase their stock of products, they effectively helped them gain a competitive advantage over smaller rivals, the authors argued.
Walmart did not respond to a request for comment on the report's findings.
“In some cases, suppliers preferentially allocated product to the purchasers threatening to fine them,” the report read.
Retailers did not have
“unlimited freedom” to impose these penalties, however, since some suppliers already had contractually defined requirements in place, according to the report.
FTC officials also argued that consumers are still “facing the negative impact of the pandemic's price hikes,” given that retailers' profits remain elevated.
Using public data on profits in the grocery retail industry, the FTC found that in the first three quarters of 2023, food and beverage retailer revenues reached 7% over total costs. That was up from more than 6% in 2021 and the most recent peak of 5.6% in 2015.
“These elevated profit levels warrant further inquiry by the commission and policymakers,” the report read.
After the onset of the pandemic, the nation's food supply chain saw vast disruptions. Households quickly shifted away from eating at restaurants, and panicked shoppers stockpiled food, increasing demand for groceries. Workers fell ill with the coronavirus, which strained labor supply in grocery stores, warehouses and meat processing plants. Truck drivers, who were already scarce before the pandemic, could not make deliveries fast enough. The confluence of those factors resulted in major product shortages and higher food costs.
In late 2021, there was an even bigger surge in food prices. As supply chain disruptions and labor shortages led to higher transportation and raw material costs, companies passed along cost increases to consumers for many products. In August 2022, annual food inflation reached a peak of 11.4%. Since then, food price gains have continued to cool. In the year through February, food prices climbed 2.2%.