Corporate takeover of groceries

Stacy Mitchell is the executive director of the Institute for Local Self-Reliance who studies the problem of big businesses eating the entire economy. An economy full of small businesses has

1. Less monopoly power which can mean lower prices.
2. Greater diversity of products and services because big businesses prefer standardization.
3. More economic freedom for entrepreneurs to own their own business. As the economy becomes more dominated by large corporations, it becomes impossible for small businesses to compete.
4. Less inequality because hierarchy is one of the main causes of inequality and big businesses are big hierarchies.
5. Healthier democracy because concentrated corporate power corrupts politics and even distorts mass media.

On the other hand, big business can achieve much higher productivity and fewer large corporations are much easier to unionize and regulate. Too much small business is ugly!

But Mitchell points out in the NYTimes that big companies (groceries in this case) can use their market power to get sweatheart deals from suppliers that are unfair to smaller grocery stores and put the small groceries out of business not due to greater efficiency of the big corporations, but due to their greater market power.

Major grocery suppliers, including Kraft Heinz, General Mills and Clorox, rely on Walmart for more than 20 percent of their sales. So when Walmart demands special deals, suppliers can’t say no. And as suppliers cut special deals for Walmart and other large chains, they make up for the lost revenue by charging smaller retailers even more, something economists refer to as the water bed effect.

This isn’t competition. It’s big retailers exploiting their financial control over suppliers to hobble smaller competitors…

In the 19th century, Congress barred railroads from favoring some shippers over others. It applied this principle to retailing in 1936 with the Robinson-Patman Act, which mandates that suppliers offer the same terms to all retailers. The act allows large retailers to claim discounts based on actual volume efficiencies but blocks them from extracting deals that aren’t also made available to their competitors. For roughly four decades, the Federal Trade Commission vigorously enforced the act. From 1954 to 1965, the agency issued 81 cease-and-desist orders to stop suppliers of milk, tea, oatmeal, candy and other foods from giving preferential prices to the largest grocery chains.

As a result,… Independent grocery stores flourished, accounting for more than half of food sales in 1958… This dynamism fed a broad prosperity. Even the smallest towns and poorest neighborhoods could generally count on having a grocery store. And the industry’s diffuse structure ensured that its fruits were widely distributed…

Then, [in] the late 1970s, the law fell into disfavor with regulators, who had come to believe that allowing large retailers to flex more muscle over suppliers would lower consumer prices. For the most part, the law hasn’t been enforced since. As a top Reagan administration official explained in 1981, antitrust was no longer “concerned with fairness to smaller competitors.”

This was a serious miscalculation. Walmart, which seized the opening and soon became notorious for strong-arming suppliers and undercutting local businesses, now captures one in four dollars Americans spend on groceries. Its rise spurred a cascade of supermarket mergers, as other chains sought to match its leverage over suppliers. If the latest of these mergers — Kroger’s bid to buy Albertsons — goes through, just five retailers will control about 55 percent of grocery sales.

The reality is even worse because HEB’ enormous market power is concentrated in Texas, Meijer’s market power is concentrated in the eastern Midwest, and Publix is concentrated in the Southeast. If we ignore Albertson’s control over many other grocery chains, 98% of Albertson’s brand stores are in just 11 states. If you live in other parts of the United States, you probably haven’t even heard about any of these giant supermarket chains. The truly national grocery chains include the three biggest: Walmart (#1), Amazon (#2), and Costco (#3) plus Target and the relatively small German-owned companies Aldi and Trader Joe’s.

As grocery retailers gained market power over food suppliers, they pressured food processors to merge to counterbalance retailer bargaining power and because big retailers prefer the simplicity of dealing with a few large suppliers rather than numerous small, local suppliers. As a result…

Supermarket aisles may seem to brim with variety, but most of the brands you see are made by just a few conglomerates…

… Meanwhile, the decline of independent grocers, which disproportionately serve rural small towns and Black and Latino
neighborhoods, has left debilitating gaps in our food system [called food deserts where the grocery chains and dollar stores have wiped out the market for small grocers and locate their large stores far away].

… We need to stop big retailers from using their enormous financial leverage over suppliers to tilt the playing field. By resurrecting the Robinson-Patman Act, we could begin to put an end to decades of misguided antitrust policy in which regulators abandoned fair competition in favor of ever-greater corporate scale. There is promising momentum. Last year an unusual coalition of Democratic and Republican lawmakers sent a letter to the F.T.C. urging it to dust off Robinson-Patman. The agency began a broad inquiry in late 2021 into grocery supply issues, which could uncover evidence of price discrimination. This year the agency opened investigations into soft drink and alcohol suppliers for possible violations of the act.

Unfortunately, the NYTimes put an inappropriate title on the article and claimed that high grocery prices are due to their monopoly power, and there is a grain of truth in that, because it is soaring corporate profits that really has been a major cause of inflation as they raise prices without raising wages, but overall, groceries are actually starting to get cheaper recently, so the inflation story is a bit more complicated than just monopoloy power.

Inflation was very low during 2020 when wage rose and then wages had been falling for most of a year when inflation started to rise in 2021 and soon fell below trend as they failed to keep up with inflation.

Meanwhile, corporate profits were unusually high and rising in 2021.

So greater corporate power relative to labor is increasing real corporate profits and reducing real wages, but higher inflation is caused by overall macroeconomic conditions and the main way that inflation is related to this episode of rising inequality is that higher inflation makes it easier to cut real wages.