Major grocers benefited from pandemic supply chain disruptions, FTC finds
Major supermarkets took advantage of supply chain disruptions to beat smaller rivals and protect their profits during the pandemic, according to a report released Thursday by the Federal Trade Commission.
The report found that some large companies “accelerated and distorted” the impact of supply chain disruptions, 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 claims that higher grocery prices are simply keeping pace with retailers’ own rising costs, the authors reasoned .
“Some companies appear to have used rising costs as an opportunity to raise prices further to boost profits, and profits remain high even as pressure on the supply chain has eased,” the report said.
The publication of the report comes at a time when the FTC is cracking down on major supermarkets. Last month, the commission and several attorneys general filed a lawsuit seeking to block Kroger from completing its $25 billion acquisition of the Albertsons supermarket chain. They argued that the deal would weaken competition and likely result in consumers paying higher costs.
The independent federal agency’s actions have helped bolster the Biden administration’s efforts to tackle rising prices. In recent weeks, President Biden has taken a tougher stance on supermarket chains, accusing them of overcharging customers and making excessive profits. Although food prices are rising at a slower pace now, they have risen rapidly in 2022 and have not fallen overall. As a result, high food costs continued to put pressure on many consumers and posed a political problem for the government.
Mr Biden has also tried to tackle the problem by fixating on food companies, denouncing them for reducing pack sizes and portions of some products without lowering prices, a practice commonly called ‘shrinkflation’ named. During his State of the Union address earlier this month, Mr. Biden again called on snack companies to end the practice.
In its report, the FTC concluded that supply chain disruptions are not equally impacting companies across the food industry. Compared to larger companies, small supermarkets had more difficulty sourcing products during the pandemic.
“The FTC’s report examining the U.S. food industry’s supply chains finds that dominant companies have used this moment to get ahead at the expense of their competitors and the communities they serve,” said Lina Khan, FTC President , in a statement.
The report comes after the supervisor commissioned several companies at the end of 2021 to transfer ‘detailed information’ that would help shed light on the causes behind the supply chain problems and how business practices could have exacerbated the disruptions.
The report shows that major companies are pressuring suppliers to gain access to scarce products by imposing strict delivery requirements and threatening suppliers with large fines if they do not fulfill their orders. Because these measures helped major retailers increase their product inventory, they effectively helped them gain a competitive advantage over smaller rivals, the report said.
“In some cases, suppliers have preferentially allocated products to buyers, threatening to fine them,” the report said.
However, retailers did not have “unfettered discretion” to impose these fines because some suppliers had already established contractual requirements, according to the report.
FTC officials also argued that consumers continue to “face the negative impact of the pandemic’s price increases” as retailers’ profits remain high.
Based on public data on grocery retail profits, the FTC found that food and beverage retailers’ revenues accounted for 7 percent of total costs in the first three quarters of 2023. That was an increase from more than 6 percent in 2021 and the most recent peak of 5.6 percent in 2015.
“These increased profit levels warrant further investigation by the commission and policymakers,” the report said.
After the outbreak of the pandemic, the country’s food supply chain experienced massive disruptions. Households quickly moved away from eating at restaurants, and panicked shoppers stocked up on food, driving up demand for groceries. Workers became ill due to the coronavirus, putting pressure on the labor supply in supermarkets, warehouses and meat processing plants. Truck drivers, who were already in short supply before the pandemic, could not deliver fast enough. The convergence of these factors resulted in major product shortages and higher food costs.
At the end of 2021, there was an even bigger increase in food prices. As supply chain disruptions and labor shortages led to higher transportation and raw material costs, companies passed on cost increases for many products to consumers. In August 2022, food inflation peaked at 11.4 percent. Since then, food price increases have continued to cool. In March, food prices rose by 2.2 percent.
Companies across the industry have said they are planning smaller price increases this year, in part because some consumers have started to reduce their spending and cut back, which has caused some companies to see sales decline.