Examining Walmart's 'Rural Stranglehold'
Editor's Note: The Departments of Justice and Agriculture will hold a hearing in Washington, D.C., tomorrow, 12/8, on possible antitrust violations in the grocery business.
This will be the fifth hearing exploring competition in the business of agriculture. All of these hearings have looked at price margins at various stages of production and among various goods. This hearing will focus on how much of each food dollar is taken by retailers. For an agenda, look here.
In advance of this hearing, the United Food and Commercial Workers union issued a report on the power that Wal-Mart now wields in the retail marketplace. It's titled "Ending Walmart's Rural Stranglehold." As an introduction to the USDA/DOJ hearing Wednesday, we present excerpts from this report below. You can find the full report here.
At the first Justice/Agriculture hearing held in March 2010, Secretary of Agriculture Tom Vilsack cut to the heart of this issue when he said the central focus of these workshops was to determine if the marketplace was “providing a fair deal for all.”
These workshops have largely focused on the relationship between the food manufacturers and the producers (farmers), exploring whether the consolidation and partial vertical integration of manufacturers has unfairly disrupted their market relationship with producers.
In this paper, we suggest that just as important is the relationship in the food supply chain between retailers (dominated by Walmart) and food manufacturers.
We would note that only one segment of the meat supply chain has managed to snag an ever-increasing share of the consumer dollar— the retailer. It must be asked how did the distribution of the grocery store dollar get so skewed? What facilitated this shift? What impact has this shift had on workers and farmers? And what has this shift meant to rural agribusiness and rural economies?
We can’t underestimate the importance of these questions. Agriculture is an important driver of the U.S. and global economies. Meat production accounts for over half of the total annual receipts generated by U.S. agricultural economy, exceeding $100 billion in some years.
We believe that the increased power of America’s largest retailer, Walmart, has been one of the major driving forces pushing increased consolidation in the packing industry and decreased farmer and packer revenues since 1980. This would suggest that the existing Justice/Agriculture investigation should be broadened to include the Federal Trade Commission and specifically investigate the role of a dominant retailer in dictating economic conditions down the entire food supply chain.
It is our belief that crafting appropriate antitrust responses to this historically unprecedented consolidation in the retail sector is critical to ensuring a stable and competitive marketplace for agriculture. Without the development of such responses, we fear that antitrust initiatives pursued against meatpackers and other food processors will fail to effectively address the negative impacts of increasingly consolidated agricultural markets and would ultimately have a negative impact on hundreds of thousands of workers in our nation’s meatpacking and food processing plants.
Less Money For Farmers AND Packers
Much attention has been paid to the rapid consolidation in the meatpacking industry over the last three decades. Indeed the numbers are staggering, for red meat the four-firm concentration ratio (CR-4)—which measures the percentage of the market share of the top four firms—tripled from 19% in 1977, to 59% in 2002.
A superficial examination of this issue might conclude that meatpackers seeking the economies of scale—and associated increased efficiencies—is the only impetus for the consolidation trend. Indeed, in some instances, packers have sought and realized these gains.
However, it has not only been the farmer that has borne the costs of this growth drive by the packing industry. The risks for meatpacking workers in increasingly large, fast-moving and industrial meatpacking facilities have not lessened as multinational packers have continued to grow and increase their market share.
But the large packing companies do not exist in a vacuum and it is important to take a step back to examine the entire meat supply chain.
In the 1980s, consolidation sent shock waves across the retail industry. By the late 1980s and 1990s that trend had accelerated, aided by an emerging player on the national grocery retailing scene – Walmart.
Walmart hastened the trend of national retailers grabbing an ever-growing share of the consumer dollar by using its size to extract lower prices from suppliers. In fact, the concentration ratio for the top five food retailers (CR-5) doubled from 24% in 1997, to 48% by 2006.
Walmart has clearly been a major driver of that concentration. The company is by far and away the largest global retailer. It also is the largest retail grocer in the United States with revenues of $150 billion annually, dwarfing its nearest competitors.
Because of its sheer size, Walmart also has tremendous impact on the markets for all agricultural products. Walmart’s influence and its methodology for success are clear: use its strength and size in the market to drive down its costs by driving down the amount of money it pays its suppliers.
The influence on America’s agricultural economy has been staggering. In 1990 if you were to dissect the share of each consumer dollar spent on beef, it would have been distributed across the food supply chain as follows: $.59 for the farmer and rancher; $.08 for the packer and the packinghouse worker; and $.33 for the retailer.
By 2009, the economics of the industry had drastically changed and the distribution of the consumer beef dollar had been significantly altered:
Today, the rancher/farmer’s share has plummeted to $.42; the packer's share has risen slightly to $.09 (but still below their 1980 level) and the retailer’s share has risen to $.49.
A similar shift can be seen in the consumer pork dollar over the same time period. While packers saw modest increases in their share of the consumer dollar over this period, the only real winners were retailers that took an ever-increasing portion of the consumer meat dollar.
Prior to Walmart’s dramatic entry in the grocery retail market, meatpackers and workers in 1980 received 12% of the retail beef dollar and 19% of the retail pork dollar. Throughout the 1980s, however, the meatpacking industry had already begun to experience an initial phase of consolidation, which transformed the industry.
New corporate players bought out established companies. Specialization, centralization and other factors—such as an intentional systematic effort of packers to break meatpacking unions—closed old plants and opened new ones, resulting in lower worker wages and devastation to the rural communities that had historically depended on meatpackers. The unprecedented growth in meatpacker consolidation of 1980s continued throughout the 1990s and 2000s.
But despite this unprecedented consolidation, Walmart’s entry into the retail grocery market in the early 1990s, and the company’s meteoric rise to become the number one grocery retailer, gave it unprecedented buyer power over the packers to continue exerting strong downward pressure on prices paid to suppliers, preventing the meatpackers, workers and farmers from recovering their previous share of the consumer meat retail dollar.
Largest Retailer in the World
Walmart is the largest retailer (and the largest private-sector corporation) in the world, with total sales that are greater than the combined sales of the next five largest U.S. retailers: CVS Caremark, Kroger, Costco, Home Depot, and Target.
Walmart’s dominance also extends to the retail grocery sector. Walmart’s 2009 U.S. grocery sales of about $150 billion is almost twice the sales of its closest competitor, Kroger, and greater than the combined sales of its three closest competitors, Kroger, Safeway, and Supervalu.
Walmart has reached this dominant position in a relatively short period of time, growing from less than 6% of the U.S. grocery market in 1998, to its current 23% of the national grocery market.
Unfortunately, consistent data on Walmart’s grocery market share are not available prior to 1998. However, for the more than a decade for which data is available, Walmart’s stratospheric rise clearly parallels the rise in the amount of the consumer meat dollar that is kept by the retailer. Additionally, no retailer has managed to concentrate and use its power more effectively than Walmart.
In some states, Walmart controls more than 30% of the grocery market in every major region. In fact, in 29 markets across the country, Walmart’s share of the grocery market exceeds 50%.
This can be particularly crippling to perishable product suppliers located in these areas, such as dairies and dairy farmers, who may have no alternative sales outlets due to the temporary nature of their product. This domination by Walmart of the retail grocery market nationwide and in local markets makes the company an effective gatekeeper between food producers and consumers. Any food producer intending to sell their products nationally or in specific local markets needs to sell their products in Walmart’s stores in order to reach a sizable number of consumers.
This gatekeeper role explains why Walmart accounts for such large shares of the sales of major meatpacking and food processing companies, as documented below. It also explains why Walmart’s suppliers have no choice but to continue selling to Walmart in spite of the high-pressure negotiating tactics employed by the company.
No Choice but Walmart
Despite a reluctance to speak publicly about the tactics of their largest customer, meatpackers and industry analysts tacitly admit the negative influence Walmart has had on their industry and how they dictate and control every aspect of meatpacking operations.
When confronted by an activist farmer, John Tyson of Tyson Foods made it clear why Tyson believes they have to pay farmers less. “Walmart’s the problem,” he said. “They dictate the price to us, and we have no choice but to pay you less.”
Larry Pope, CEO of Smithfield Foods, admitted in a speech that meatpackers have trouble raising the prices they charge retailers even if costs increase because of Walmart’s intense pressure.
In the same article, Tom Johnston of Meating Place, a meat industry journal, described an increasing consensus in the industry about Walmart’s influence stretching beyond just prices: “[Walmart] is exerting even more leverage by demanding more information about how suppliers make their products and asking them to implement sustainable practices that don’t financially correlate with low-cost production.”
Walmart’s market power is such that despite their size, meatpackers are left with few other options. “Walmart today [is responsible for] anywhere from 15% to 30% of any supplier’s volume,” said retail analyst Neil Stern. “They are such a dominant force that as a supplier you can push back or say, ‘Hey, I’m not happy with this,’ but if you want that volume ... what are you going to do?”
Raoul Baxter, a former Sara Lee and Smithfield executive, acknowledged the tough spot the meatpackers find themselves in because of Walmart’s pressure. “Meat is really tough. You have such unbelievable, never-ending capital requirements, product uncertainties ... and then how much cheaper is it possible to go? Just to have the honor of saying, ‘I’m selling to Walmart but not making any money.’ Walmart is smart; they know they have to allow suppliers to live as long as their competitors are choking. And people wonder why packers have shrunk.”
Additionally, those who might doubt Walmart’s influence on the meatpacking industry would do well to mind the cautionary tale of the produce industry. National retailers have forced increased consolidation to such a level that the top two bagged salad companies grow and bag 76% of bagged salad for grocery sales.
Retailers increasingly buy from these grower-shippers, cutting out what middlemen and small operators that previously existed in the industry.
In fact, a USDA study concluded that retailers were able to hold shipper prices below competitive levels for grapefruit, apples and tomatoes, and consumer prices in excess of purely competitive prices for apples, oranges, grapefruit, fresh grapes, tomatoes and lettuce.
Union Calls for Action
The Agriculture and Justice Departments and Federal Trade Commission should look beyond the relationship between processing and packing companies and farmers when considering the state of consolidation of agriculture markets.
We urge the Obama Administration to include in this investigation an assessment of the role that the retail grocery sector is playing in driving consolidation in various agricultural markets. This means that the involvement of the Federal Trade Commission in this process is critical, and they should be involved in examinations of agricultural consolidation going forward.
Walmart’s actions affect every level of our nation’s food supply chain— and the company’s continuing conduct strongly indicates they have no intention of loosening their tight chokehold on our food production and distribution systems.
To secure its rural stranglehold, Walmart uses its enormous footprint, coupled with its pricing power, to literally dictate how whole industries must operate. They reach deep inside a company, effectively influencing every aspect of a supplier’s business operations. We believe that this inevitably leads to lower wages for workers, less money for farmers, growers and ranchers and fewer choices for consumers.
Instead of providing rural economic development, Walmart stores become wealth extraction points that bleed our rural communities dry.
Walmart’s pricing strategy leads to incredible pressure on producers, customers, competitors, farmers and workers. It squeezes workers’ wages and means less money in the pockets of hardworking farmers. It inevitably drives industry concentration and leads to the elimination of healthy competition in the marketplace—on products ranging from poultry to pet food.
If Walmart’s actions are not addressed, if the downward pressure they put on workers, businesses, growers and farmers is not vigorously challenged, we will continue to see a destructive race to the bottom that will destroy rural communities and wipe out good jobs that are the backbone of our nation. There is more than enough wealth in the food supply chain to provide all stakeholders an equitable share.