FTC issues unfavorable report on grocery supply chain during COVID-19

The Federal Trade Commission (FTC) last week issued a harsh condemnation of the U.S. food industry’s performance during the COVID-19 pandemic saying a handful of large retailers may have profiteered off the country’s misfortune.

The FTC report - called Feeding America in a Time of Crisis - states Walmart Inc., Amazon.com Inc., and The Kroger Co. among others exacerbated supply chain disruptions at the expense of consumers through brazen non-competitive behavior.

The FTC claims that the retailers pressured suppliers with fines if they did not deliver scarce goods, increased profits beyond fair market levels, and contemplated cornering supply chain control.

“As the pandemic illustrated, a major shock to the supply chain can have cascading effects on consumers, including the prices they pay for groceries,” said FTC Chair Lina M. Khan. “The FTC’s report examining U.S. grocery supply chains finds that dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve.”

The companies’ conduct warrants further inquiry by the Commission and policymakers, the FTC said. Amazon, Kroger, and Walmart did not respond to AJOT requests for comment.

In addition to the giant grocery retailers, the FTC demanded information about COVID-19 supply chain breakdowns from wholesalers C&S Wholesale Grocers, Associated Wholesale Grocers, and McLane Co. as well as food producers Procter & Gamble Co., Tyson Foods Inc., and Kraft Heinz. The report focused principally on senior executives’ documents and documents used in negotiations with trading partners.

Food industry in the Administration’s Crosshairs

President Biden has squarely put the nation’s food industry in his Administration’s crosshairs during this election year as rising prices for essential groceries have frustrated U.S. consumers. Last month, the FTC and several state attorneys general sued to prevent Kroger’s $25 billion purchase of grocery behemoth Albertsons. Biden also has publicly accused grocers of squeezing consumers to generate excess profits.

The FTC said the Federal Trade Act of 1914 prohibits it from disclosing trade secrets or confidential financials, so the respondents provided the information on an anonymous and aggregate basis. The FTC, charged with ensuring corporate competitiveness while protecting consumers, is comprised of five commissioners appointed by the President and confirmed by the Senate. Currently two positions are vacant.

“Our examination yielded several key insights regarding market structure, business conduct, and effects on consumers,” the report says. They include:

Grocery retailer profits rose and remain elevated - publicly available data on general grocery retail patterns reveal that during the pandemic, one measure of annual profits for food and beverage retailers—the amount of money companies make over and above their total costs—rose substantially and remain quite elevated. Specifically, food and beverage retailer revenues increased to more than 6% over total costs in 2021, higher than their most recent peak, in 2015, of 5.6%. In the first three-quarters of 2023, retailer profits rose even more, with revenue reaching 7% over total costs. This casts doubt on assertions that rising prices at the grocery store are simply moving in lockstep with retailers’ own rising costs.

Some large purchasers pressed their suppliers for favorable allocations of products in short supply. To gain access to scarce products and therefore a competitive advantage, some companies—most often larger ones—used policies that imposed strict delivery requirements on their upstream suppliers and threatened fines for noncompliance. Walmart even tightened the delivery requirements its suppliers had to meet to avoid fines as the pandemic went on. In some cases, suppliers preferentially allocated product to the purchasers threatening to fine them, which may have affected competition between the companies that threatened these fines and those that did not.

Companies came to recognize that excessively consolidated supply chains were a liability. The stark impact of the supply chain disruptions during the pandemic prompted some firms to recognize the risks associated with having few suppliers available. During the pandemic some retailers sought to diversify their supplier base, particularly of private-label (or store-branded) goods. Some larger firms …began exploring whether to build or acquire manufacturing capacity to reduce their exposure to concentrated markets. These efforts have the potential to leave the remaining buyers even worse off if those large customers buy one of the few remaining producers…markets that are fragile because of concentration may only further consolidate.

Immediately after the FTC released the report, the National Grocers Association, which represents small to medium food retailers, called for Congressional hearings on the issue.

“…These findings necessitate further investigation and consideration of legislative remedies to foster a fairer marketplace in the U.S. supermarket sector,” wrote Chris Jones, NGA Chief Government Relations Officer and Counsel in a letter to Senate leaders.

The 20-page report briefly addresses transportation and trucking disruptions during the pandemic.

It states disruptions in transportation were a substantial challenge at all levels of the grocery supply chain. Respondents reported that demand for shipping products by truck far outstripped the available supply of both trucks and qualified truck drivers during the pandemic…companies in this study also said they were impacted by reduced production of new trucks due to chip shortages.

“Although companies in our study generally had existing contingency plans for trucking disruptions, those plans were ill-suited for a long-term disruption of nationwide scale,” the FTC reports.

Grocery Supply Chain “Brittle”

Faced with these issues, the companies in this study increasingly used expensive third-party contract carriers, expanded their private fleets, and offered signing bonuses and training to new drivers, incurring notable new costs. In turn, third-party trucking companies significantly increased freight rates and struggled to deliver orders to retailers on time. Even companies that operated their own fleets struggled to retain drivers and maintain internal service levels,” the report states.

FTC Commissioner Kelly Slaughter issued a statement accompanying the report calling the U.S. grocery supply chain “brittle.”

“By relentlessly optimizing for leanness in our supply chain, businesses chose again and again short-term savings over our long-term resilience.”

Slaughter requested further research.

“…the indications that profits may have increased during the same time and remain high may be further indication that consumers are not benefitting from competitive markets in the ways they should when they do their grocery shopping,” she said.