Retailers-01

 

Consolidation in the grocery retail sector directly affects not only consumers but also farmers and other producers of consumer goods. Power in this sector is increasingly concentrated in just a few companies. In 2012, over 50% of American retail food spending went to the four largest retailers: Walmart, Target, Kroger’s, and Safeway (which was itself purchased by Albertson’s in 2014). Walmart alone was responsible for almost a third of food sales that year.

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In much of the country, the concentration is even greater. In 35 cities, Walmart accounted for more than half of grocery spending in 2011. In 231 cities, the big four retailers accounted for more than 80% of grocery spending. In many small towns, one of these giants is often the only grocery retailer for miles.

The retail landscape wasn’t always so concentrated. The grocery industry was once comprised of a variety of local and regional retailers, ranging from corner stores to co-operative groceries to medium-sized 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 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. 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. Just between 1996 and 1999, there were 385 mergers in the grocery industry. Recent years have seen extensive consolidation as well. 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. And in the 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.

Another factor in the trend of 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.

One result of such size is that Walmart today exercises influence on all corners of the grocery industry. This company has enormous ‘monopsony’ power, which means it has 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 suppliers have objected to the way Walmart uses its concentrated buying power. 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.

And a growing number of studies show that retailers that enjoy monopsony power capture a greater percentage of each food dollar. This appears to have especially affected farmers and ranchers. According to USDA data, in 1990 ranchers received 59% of each dollar spent on beef, and retailers received 33%. By 2009, farmers received only 42% of each dollar spent on beef, while retailers received 49%.

Another way the USDA calculates how much retailers are profiting from livestock sales is through a farm-to-retail or farm-to-wholesale price spread. The price spread shows the difference between the farm price and the retail price of food. The following charts, which show the wholesale-to-retail and farm-to-wholesale price spread for beef, demonstrate how retailers have made increasingly higher profits on the sale of beef over the past 20 years, while the farmer’s take has remained about the same:

Another way retailers control the supply chain is by charging fees for shelving. 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 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 category captain to keep competitors off grocery store shelves.

Giant retailers such as Walmart have also contributed to the emergence of “food deserts” in many urban and rural areas. Such food deserts began to emerge in the late 20th Century as a few retailers came to dominate the grocery business, and as they built larger stores. Giant retailers like Walmart pay suppliers less for the goods they sell, which over time has driven many smaller traditional retailers out of business. These giants have also tended to locate their newer stores mainly in suburban areas, because of the large plots of land required by box stores.

The USDA defines a food desert as a community “without ready access to fresh, healthy, and affordable food.” Those living in urban areas more than a mile from a supermarket without access to a car, and those living in rural areas more than 10 miles from a supermarket, live in food deserts. About 23.5 million Americans fit this description. 

On occasion, Walmart has made deals with local governments to build stores in struggling 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.

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Photo by Wilson Ring/Associated Press.