In mid-December, the Departments of Justice and Agriculture held a discussion on food prices, grocery consolidation, the return to farms and rural communities, and the "elephant in the room....Walmart."
EDITOR’S NOTE: Who gets your food dollar? The farmer? The processor? The grocery?
Just before Christmas, the Departments of Justice and Agriculture held a one-day hearing on the discrepancies between the prices for food paid to farmers and the prices for food paid by consumers at the grocery.
The hearing was one of five held in 2010 that explored competition in the agriculture markets. The federal government is asking if the markets are fair, or if some companies have accumulated enough market power to alter competition and prices.
The Department of Justice said it intended to take legal action if it found violations of anti-trust laws.
This last hearing was largely about how prices are set in grocery stores. The session lasted all day and a transcript fills nearly 400 pages. You can get a full copy here.
We pulled out just one section: a discussion of how consolidation in the grocery business affects farmers, consumers and rural communities.
In particular, the discussion revolved around the entrance of “big box” stores in the grocery business, companies exemplified by Walmart.
The following is a discussion among
•Howard Shelanski, Deputy Director of the Bureau of Economics at the Federal Trade Commission.
•Wenonah Hauter, Executive Director of Food & Water Watch.
• Erik Lieberman with the Food Marketing Institute.
•Mary Hendrickson, a rural sociologist and Director of Food Circles Networking Project at the University of Missouri.
• Kyle Steigert, an economist at the University of Wisconsin.
• Al Vincent, a Vice President at the United Food and Commercial Workers Union.
• Bob Young, economist at the American Farm Bureau.
The discussion begins with HOWARD SHELANSKI:
Consolidation has been an ongoing process in grocery retailing for many years.
USDA data show that the top 20 retailers accounted for about 39 percent of U.S. grocery sales in 1992. Between 1997 and 2000, more than 4,000 stores were acquired, amounting to almost a fifth of all U.S. supermarkets, and that trend of consolidation has continued.
The top 20 grocery stores today account for roughly 65 percent of U.S. grocery store sales, so a tremendous increase from that 1992, 39 percent figure.
And sales by the 20 largest food retailers totaled approximately 725 billion dollars in 2009, according to Supermarket News.
One important contributor, other than mergers and acquisitions, to the increased volume and share of the top 20 retailers over the past two decades has been the rapid growth of what are often called nontraditional grocery retailers like Walmart, Target and Costco.
Walmart’s food and nonfood grocery sales amounted to an estimated 258 billion dollars in 2010 according to Supermarket News, making Walmart the largest U.S. retailer of grocery products.
In comparison, second place Kroger, which is the largest traditional grocery retailer, had estimated sales of 77 billion dollars in this 2010 year.
Many studies and commentaries show that this growth and consolidation has helped food retailers to reduce costs and made grocery retailing more efficient.
Nontraditional grocery retailers have prices that are on average seven and a half percent below the prices of traditional supermarkets for identical products and packaging, according to a USDA economic research service study.
Consolidation and growth through productivity increases may make it harder, however, for smaller grocery stores to stay in business and may decrease the margins earned by suppliers to large grocery chains, and I include in suppliers not just farms and manufacturers but those of you who supply your labor to those chains.
Smaller chains and independents have been seen to exit some markets in which Walmart has entered.
The available evidence we have examined does not show that changes in the retail grocery markets have been bad for consumers when measured in terms of consumers’ food bills.
The consumer price index for food at home, which roughly includes all food, prepared and otherwise, sold by grocery stores, has tracked closely but just below the overall consumer price index for the U.S. economy over the last 30 years.
The producer price index for retail grocery stores has risen steadily but modestly for the past decade, which is as long as the Bureau of Statistics has reported data on grocery retailing.
One question that might arise from the fact that the retail grocery services PPI is above the farm products and crude food stuffs PPIs is whether grocery retailers have gained market power that allows them to squeeze the margins of their suppliers without passing through the savings to consumers.
The economic evidence, however, suggests some other explanations for the retail grocery producer price index.
First, supermarkets have increased their provision of value added services over time. The price index for farm products includes lettuce, cucumbers, corn, wheat, et cetera.
The price index for supermarkets a generation ago included such commodities but now captures much more items such as bagged salad, processed foods, salad bar sales, prepared meals and gourmet items. One would therefore expect the price index based on supermarket sales to diverge over time from the price index for farm goods because what supermarkets sell has diverged increasingly from farm goods over time.
Second, the wholesale costs that [the Bureau of Labor Statistics] subtracts from revenues to measure the margin on retail grocery services do not include an important set of available costs, notably processing and food preparation costs, a grocery retailer itself incurs. So the cost of in-store baking, cooking or other food preparation may not be counted in the higher grocery retailing PPI.
As a result, the retail grocery producer price index may appear artificially high. Retail grocers have in fact been increasing the total proportion of total sales made up of post-wholesale value added products.
This increase in sales of retailer prepared food is consistent with data showing that consumers have been steadily increasing the proportion of commercially prepared food in their overall food at home budgets.
Compared to the producer price index for other links in the chain of food supply from farmers to consumers, the retail PPI lies far below the PPIs for food manufacturing and finished consumer goods for example. Changes in the market structure for retail groceries therefore do not translate into a simple story of increased market power over consumers, even if the power of those increasingly large buyers, that is to say the grocery retailers, may be felt in various upstream markets.
If one measures consumer welfare by the variety of products and services consumers receive from retail grocers and from the prices they are charged, we do not see evidence of a general decrease in consumer welfare from retail grocery consolidation.
A broader set of policy considerations might take into account important issues related to the effects of consolidation on market structure in other parts of the food supply chain and address food security and safety, labor and environmental concerns.
The consolidation of the last two decades has created a food chain that’s shaped like an hourglass.
We have a large number of very powerful companies that stand between 300 million citizens and two million farmers, and the retail consolidation is one of the tightest links in that chain.
The dominant grocery stores of the 1980s were gobbled up in the 1990s as we’ve heard from Howard, and we had about a hundred mergers a year.
By 2009, Walmart, Kroger, Costco and SUPERVALU controlled more than 51 percent of sales, more than double the more firm concentration of a dozen years earlier. And on the local level, that consolidation and lack of competition is even higher.
In 1998, the four largest retailers controlled 72 percent of sales in the hundred largest metro areas. Today that figure is considerably higher. Walmart alone has more than 50 percent market share in 29 markets, and consumers haven’t benefitted from this increased efficiency that’s been touted by the industry.
And I’d like to begin by correcting a misimpression that I think Erik left us with this morning, that figure, that 5.5 percent of a consumer’s budget is spent on food. This figure is of food eaten at home and it also includes earned income along with noncash benefits, things like food stamps and rent subsidies.
Nine percent of all food – that’s home and restaurant — rather, nine percent of income is spent on all food, home and restaurant, and that’s earned and noncash benefits. If you’re looking — if you subtract the noncash benefits from that – that’s the food stamps and rent subsidies — eleven percent of consumer’s dollars are being spent at the grocery store, and if you look at people in the United States who make under $39,000 — and that’s 40 percent of Americans — 15 percent of their income goes to food. And this is a very poor measurement anyway because we’ve had much higher health care costs, much higher housing costs and much higher energy costs.
So if people are spending less on food, it’s because they’re spending more on these essential things.
In fact, consumer spending on groceries has been on the upswing. Real expenditures in food have risen 12 percent over the past decade and food inflation was especially high during 2007 and 2008.
These growing prices are especially difficult for low income consumers.
According to a 2008 Congressional research service report for Congress, even a four or five percent increase in the price of food has a significant impact on lower income consumers.
Today with 40 percent of households earning $39,000 or less, a small increase can dramatically erode food security, and USDA recently reported that one out of seven households are suffering from hunger and one out of four children do not have enough food to eat.
At the other end of the food chain, farmers are also suffering. Real inflation-adjusted prices that farmers receive for livestock and crops has been falling for decades, but the savings is not passed on to consumers.
In 1990, the farmer received 24 cents of the grocery store dollar. It’s now 19 cents. That’s a 21 percent decline. In 1990, out of every dollar spent on beef, 60 cents went to the producer. Now it’s 42 cents. Down by a third.
In 1990, a pork producer received 46 cents out of a dollar. They now receive 25 cents — down by almost 50 percent.
And fruits and vegetables have experienced the same decline. Farmers get only 35 cents of the strawberry dollar and 14 cents of the orange dollar, and they’ve fallen about a third since the 1990s.
And dairy is a good example of consumer prices increasing while farm gate prices decrease. When milk prices fell during the latter half of 2009, the consumer price of milk fell only by 22 percent, and the price of cheese actually went up five percent.
So sometimes prices rise slightly, but consumer prices rise much faster. For example, ground beef prices increased 24 percent between 1999 and 2008, but cattle prices rose less than 5 percent, a third as fast as retail.
But you know we can throw out all of our statistics and all we need to do is ask our friends and family, “Does your grocery store dollar go as far as it used to?”
First, let me say that whether the number’s 6 percent, 11 percent or 12 percent in terms of what the consumers are spending on food, it seems to me like that’s a pretty good deal, that they’ve received a pretty good deal for a number of years and, you know, I think that’s just a fact of life.
Let me follow up on some of the points that Howard made if I could, and also that Wenonah made as well. Farmers’ share of the food dollar has shrunk substantially over the course of the last 40 years. It was 37 percent in 1973 and the percent that Wenonah discussed in 2006. Most recently, it’s kind of crept back up into the 22 percent level in the last few months or so.
But I’d also tell you out loud to this group the changes in the value of farmer’s share is not really particularly indicative of much of anything at all when it gets right down to it.
We buy a very different package mix today in the grocery store than we did in 1973. Let’s think about chicken as a particularly good example. We don’t typically buy all that many fresh whole broilers as our primary source of poultry anymore.
Now, the real story in my family is my wife trying to instruct my son over the phone as to how to cut up a whole broiler when he was in seventh grade, and this would have been about 20 or so years ago, trying to get the evening meal put together.
Let’s also never forget that in 1973 we were kind of just beginning the whole microwave boom. I can remember buying our first microwave in 1974. Think about how much shelf space we dedicate today in the grocery store to microwave-ready products as opposed to how much shelf space we dedicated in 1973.
Our consumers are spending much more on service today, and if we look only at market share or our slice of the pie, we’re failing to recognize that with product invasion the whole pie is bigger today than would have been the case without that product innovation.
Even so, within product categories, farmer’s share can show some market resiliency. In 2000, the farmer’s share of the beef dollar was 48 percent. For 2001, it’s probably going to average 47 percent. For 2000, the farm share of dairy averaged 30 percent and for the first half of 2001 it has averaged 30 percent.
Finally, let me say that in 1973, labor and farm supplied input combined to account for about two thirds of the consumer food dollar. The farm share was about 37 percent. Labor accounted for about 29 percent.
In 2006, the last easily available set of data, the two combined to account for about 57 percent of the food dollar.
Agriculture’s share in that year was 18 percent, while labor’s share had ballooned to 39 percent.
This is not a poke at the labor sector of food processing. Rather, it’s to point out that we are providing much more of the food processing out of the home today than used to be supplied in the kitchen in days past.
Let’s not get too hung up about these changing share values because they’re really not telling you very much about what’s going on in the various different processing levels. I will also tell you that they’re not necessarily telling you all that much about what’s going on at the farm level either, and we need to make sure we understand what’s happening to the size of the pie as we go through these changes as well.
My first thought when I was — we were kicking around this idea of what is the impact of increased concentration, and it’s — my answer to that thought is really where is this concentration really coming from? That’s the fundamental point that I would like to make here before I talk about pricing per se.
Really, what got the ball rolling in terms of all the public outcry in the retail sector has been the emergence of Walmart and Targets in these larger warehouse store formats. That put in motion several other events that have really impacted the food market.
One of those points is the exit of the smaller, localized grocers and smaller supermarket chains around the country, and that’s had a pretty big impact in my estimation on poor people, people living in rural sectors, poor people living in, say, blighted urban regions, et cetera. It’s required those people, many of them that don’t have cars, to get their food source maybe by taking a bus or driving with a friend or something like that.
So that’s had a pretty big impact on those lives. The other consequences of the arrival of these large warehouse store formats has been increased consolidation in sort of the more general supermarket sector. What we’re talking about here is large chains such as Kroger, Safeway, et cetera.
These chains have been involved in mergers. Other chains have been involved in mergers, sort of consolidation across large urban sectors, and the pattern there we’re observing is for higher prices in that part of the market.
Now, you say, higher prices in that market, that must mean market power. Well, not per se. These companies are smart. They know they can’t just raise prices in every context, so they’ve also offered a lot more services. They’ve increased their store ambiance and things along that nature, so there may be an exercise in market power. The crystal ball begins to look a little foggy at that point. There may be market power at play here, but there’s also some changing in their strategies.
The other issue I want to address on the issue of Walmart and warehouse store formats has been one that’s been studied and talked about a lot at the University of Wisconsin, and that’s this issue of buyer power. That stands to me right now as the relatively more important issue in terms of the food system, because a company like a Walmart has come in and they’ve really flown under the radar of any of the antitrust authority’s sort of criteria for evaluating markets.
The concern at the Department of Justice is largely on consumer welfare. There’s been a lot of push — and I think one of the members of our audience, Peter Carstensen here today has been making that point for quite some time — that we really need to broaden our perspective on what constitutes power.
And his point is very relevant to this audience because one of the, one of the issues with a company like a Walmart is their ability to push down prices through the food system all the way to the farm sector.
And so — and I would encourage the Department of Justice, United States Department of Agriculture, Federal Trade Commission to really broaden their scope a little bit here. We’re really dealing with a vertical sector that has been hammered over the last 10, 20 years, and I think it’s pretty relevant in terms of income distribution and the way rural sectors have participated in the larger economy and the way urban areas have been impacted as well.
We’ve been narrowly focused on consumer welfare as price and we’ve been focused on what does market power do to the price, and I think we have to really expand both our definitions of what is consumer welfare and then where does power reside in the food system.
And as a sociologist, this is critical for us, because power is about can you control your life chances.
Some actors in the food system have more power over their life chances than others, and this is particularly important for farmers and for workers. And how does this power come about? It’s not just about the economic definitions of power. Power comes from lots of different places.
We talked a little bit about food safety and so on, but those food safety standards are now being set largely in the private sector and the people that can help farmers and workers don’t actually get to be at the table in this — in much of that standard setting, and I would argue a lot of consumers aren’t either.
And so we also have powers accumulated in access to markets, and this is really critical for farmers. It’s also critical for consumers, but I think also the big elephant in the room that we’re not talking about too is access to capital.
Capital’s really the name of the game, and how capital plays out in the food industry I think is really important. Bob Taylor from Auburn has done some really interesting research on return on investment. Return on investment’s really return on capital. It’s a much better way to gauge what’s happening in the system for farmers, for producers, than some of the other things we’ve been talking about, and the farmers haven’t done very well in that.
So let’s talk about consumers for a minute. Access. Kyle started to talk about rural areas. What I think that the power is translated into is some entities have the ability to impose their business models on others, and these business models have really left out rural areas and they’ve left out inner-urban areas quite frequently.
I’d give you an example of my home town of Schickley, Nebraska, population 350 people.
There is still a grocery store in that town, but it’s hard for them to get deliveries. Because of the restructuring, the consolidation that’s happening in the grocery industry and the restructuring that’s happened among distributors, it’s really hard for them to get the deliveries.
My 80-year old mother is spry enough to still drive. Others can’t. So what happens if they go out of business?
But the same situation exists in Old North St. Louis within view of the arch, and folks there, it’s at least three miles to grocery stores and they live in a food desert.
The quality of things that they can get in Old North, the quality of things that we can get in my hometown of Schickley, are vastly different than — and a lot of this is due to the restructuring of2 what’s happened in the grocery industry, and I think those are really important things to point out and think about power in much broader terms in impacting people on the ground, producers, labor, consumers on the ground, and it’s not just about prices.
There’s no question that the marketplace has changed dramatically in the past several decades. Thirty or forty years ago, consumers pretty much had to purchase all of their groceries at conventional supermarkets, but today the marketplace is much more diversified.
Shoppers can purchase items through so many more retail channels now. You have super centers, warehouse club stores, limited assortment stores, convenience stores, chain drugstores, natural and organic stores, and even online retailers are now selling groceries, and all of these retail channels are competing vigorously with one another.
Competition is extremely robust. I would say it’s more robust than it was back in those days, and this is resulting in low prices for consumers and more convenience too.
Many stores are open 24 hours, and the variety of items that are carried in stores has expanded. And there’s not only competition on price. There’s very vigorous competition on services now too. More stores are offering prepared foods. This provides value to the consumer. It saves them time. Sushi, gourmet bakeries and top notch delis are more commonplace.
Stores are even offering cooking classes, wine tastings, flower arranging classes and dieticians on site, and our latest poll found that store satisfaction is rising and nine out of ten shoppers would recommend their primary store.
Yes, absolutely. Well, supermarkets exert power over consumers based on location, and so consumers have to spend their time and their travel dollars to get to a store.
Research has shown that women spend twice as much time shopping as men, and women often also have jobs outside of the home, so they don’t have time to travel around to different stores to get the best deal, and probably at least 60 percent of Americans don’t have an iPhone with an app on it to find the best deal.
As far as the food deserts go, I think there’s some really interesting information from some studies on rural nutrition that show that, as we would think, in these food deserts in rural counties, there’s not enough nutritious food, fruits, vegetables, dairy products. But the study also found that many local grocery stores actually charged lower prices for basic food products that are important to a healthy diet than the super stores did.
I think also that we really — we have this illusion of choice, and grocery stores rent this illusion by having many, many similar products sold by only this handful of companies. So there may be 50 kinds of potato chips, but 75 percent are sold by the top four firms, or there are enough kids’ cereals to take up a whole aisle, but they’re sold by the same four companies.
So this gives the illusion of choice, but what’s actually happening is that the food and retailing industry is — largely, they’re marketing machines and they often target children, which is really contributing to the epidemic of childhood obesity with all of these marketing tie-ins. So foods are targeted at children by placing them at eye level, and then they’re cross-marketed with cartoon or movie characters that kids recognize.
And a recent Yale study found that the number of products with these commercial tie-ins to other kid friendly products increased 78 percent between 2006 and 2008.
And then I guess the other elephant in the room is what is the food that’s actually being sold. I think that Dr. David Kessler, who is the former Surgeon General, had some very important points about this in his book The End of Overeating. He basically documented that the food industry, industry scientists have developed this formula that is based on sugar, fat and salt that alters the brain’s chemistry and compels people to overeat, and grocery stores along with the food processors have every incentive to sell this highly processed food because that’s the most profit making — those are the most profit-making items.
And then I guess I would have one more point around concentration and food safety. When there are only a few companies that are providing the ingredients for an entire food system, we have a real problem. So we’ve seen it with the egg factory and the salmonella outbreak. We’ve seen it with peanut butter. Peanuts are in all sorts of products, and so it ends up destroying all sorts of food items and poisoning people. And as others have noted, many of the food companies and the farm marketers have merged in part because they’re responding from the pressure from the big supermarket chains.
So we’ve seen this kind of consolidation and these other food products that comprise the processed foods that we eat. We have two firms, for instance, that control all bagged, leafy greens and they’re mostly produced in two counties in California. So when there is an E. Coli problem in spinach, it means that most spinach has to be pulled off the grocery store shelves.
These are the impacts that aren’t generally — that people, even consumers, aren’t generally aware of.
Let’s really talk about the elephant in the room.
If, as Howard said, the top 20 companies make up 725 billion dollars in sales, let’s look at Walmart. They comprise 150 billion dollars of those sales. So when you talk about their size, let’s really talk about their size.
[img:walmartgrowth.gif]Their percent of the grocery industry went from six percent in 1990 to 23 percent in 2009. If you look at their — if you look at the top five U.S. companies, Walmart makes twice as much as their closest competition, which is Kroger as Howard pointed out, but they make more than Costco, Home Depot, Target, CVS, combined. So really they’re not — when we talk about consolidation, when we talk about the Krogers and Safeways, they’re not the ones wielding the power. Walmart’s wielding the power.
Talk to any supplier off the record and one-on-one in a closet usually, but they will tell you that it’s not been a fun ride. The best example is one that’s familiar to everyone in this room which is Vlasic pickle, Vlasic pickle — many suppliers2 find themselves in the same situation.
They go to Walmart. They’re really happy to get the contract with Walmart, but they don’t know what’s happening until they really get in and they become dependent. It’s like the drug.
They’re dependent. They’re set. They hire based on this business, and then Walmart takes — dictates the price. In the example of Vlasic pickle, Walmart said we will pay you $2.97 for a gallon of pickles, so for a short period of time it looked like great business, until their other sales in sliced pickles, cut pickles, started to decline. And so Vlasic went to their biggest contract and said look, we need a little help here. We need you to raise the price on one of these items or else let us cut the cost of this gallon product from the $2.97.
Walmart refused and basically said if you try to change the price, we won’t sell any of your products. That’s bully tactics. That’s not how the supply chain should work. That’s why we need the FTC to stand in here, come in here and ensure the fairness in the supply chain.
Farmers are not getting enough of this pie. If you look at what farmers got in 1990, they got 59 cents of the consumer beef dollar. If you look at what they got in 2009, it was 42 percent. If you go back to these communities where the Vlasics exist, Vlasic has to go back to the workforce and say you no longer have jobs. The only way we can compete now that we’ve lost our biggest customer is to cut jobs, cut labor costs. And if you don’t think that that reverberates into the community, then we’re all kidding ourselves.
So really the question here is, as we look at the supply chain, is we’ve kind of had a missing link. We’ve had no oversight over the retail grocery sector. But with that said, let’s put a little asterisks on that because we’re really just talking about Walmart. They’re the only ones that control the process. They control the biggest employer in the United States, biggest private sector employer, and they’re dictating to suppliers, to farmers, to everyone down the chain.
It is the number one issue that we hear at the bargaining table in negotiations from these supposedly thriving competitors. They don’t look at it that way.
So if I say anything here today, it’s that the FTC has to remain a true partner in this process. We can’t let this be the final stop in terms of bringing quality and fairness into this process. Unfortunately, I have example after example of suppliers that have just about totally cut out of this process, so let’s — one last note, just to give you one more piece of information about how big Walmart is.
Walmart controls — has a 30 percent market share in 168 markets across the country. In 29 markets they have 50 percent market share, and probably the best resource to talk about how we should handle that was former Walmart CEO Lee Scott himself who said that any company that has over 30 percent of the market share should surely have oversight and investigation by the government.
So I’ll use Walmart’s own CEO’s words in saying it’s time for us to have action because everybody else we talk about, it’s not a waste of time, but we’re not talking about the real issue if we’re not talking about the power that Walmart wields in this arena.