The COVID-19 pandemic created many unprecedented dynamics — including images of barren grocery store shelves. As consumers scrambled to secure essential items and retailers scrambled to restock, many were stunned that the grocery supply chain could so abruptly fall apart.
In a root cause analysis of sorts, the Federal Trade Commission (FTC) conducted an in-depth study to identify underlying factors that fueled the disruption. Its recently released report identifies four related dynamics — including concerns the agency says warrant further investigation.
Report: Feeding America in a Time of Crisis
In its report, Feeding America in a Time of Crisis: FTC Staff Report on The United States Grocery Supply Chain and the COVID-19 Pandemic, one dynamic the FTC uncovered was that pandemic-related supply chain disruptions had a greater impact on smaller businesses — and that larger companies may have taken advantage of the situation for their own benefit.
According to a press release announcing the results, the report revealed that “large market participants accelerated and distorted the negative effects associated with supply chain disruptions.”
Findings revealed that the negative impact consumers experienced from pandemic-induced price hikes are still being felt, since “some in the grocery retail industry seem to have used rising costs as an opportunity to further raise prices to increase their profits, which remain elevated today,” the FTC says.
“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 in a statement. “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.”
Overall, the FTC says the report’s findings reveal the role of supply chain bottlenecks in exposing markets to major supply chain shocks — which made it possible for big players to “entrench their dominance.”
How disruptions impacted competitive dynamics
The report underscored four key takeaways about market structure and business conduct among grocery retailers, wholesalers, and producers — as well as the impact on consumers.
- Grocery retailer profits rose & remain elevated: “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, casting doubt on the assertions of some companies that rising prices at the grocery store are the result of retailers’ own rising costs.”
- Large purchasers sought favorable supplier allocations: “Some companies, most often larger ones, re-imposed strict delivery requirements on their upstream suppliers during the height of the pandemic and threatened fines for noncompliance, pressuring suppliers to favor them over rivals. In some cases, suppliers preferentially allocated product to the purchasers threatening to fine, giving larger companies a competitive advantage over smaller retailers at a time when having products in-stock was a critical advantage for attracting customers.”
- Excessive consolidation recognized as a liability: “During the pandemic, some retailers sought to diversify their supplier base, particularly of private label goods, as firms recognized the risks associated with having few suppliers available. Some firms buying goods in markets with few suppliers even began exploring whether to build or acquire manufacturing capacity to reduce their exposure to concentrated markets. The report warns, however, that moves by larger customers to buy one of the few remaining market participants rather than building that capability from scratch could leave the remaining buyers, notably smaller competing firms, even worse off.”
- Decrease in promotional spending: “During the pandemic, manufacturer promotional spending on items in short supply declined. Companies employing the more traditional grocery retailing model that relies on manufacturer promotional spending to lower prices for products sometimes faced higher prices compared to other companies. Companies that used an ‘Every Day Low Price’ (EDLP) strategy, in which producers consistently provide low wholesale prices rather than short-term promotional price reductions, were less affected when manufacturer promotional spending was curtailed.”
In a statement, Commissioner Rebecca Kelly Slaughter commented on pre-pandemic business models that prioritized an “optimized” grocery supply chain — which included “just-in-time” stocking and sourcing from a limited number of suppliers to keep costs down.
“But these systems were incredibly brittle,” Slaughter said. “By relentlessly optimizing for leanness in our supply chain, businesses chose again and again short-term savings over our long-term resilience. In 2020, we saw the profound costs of these choices. This study shows many of the severe impacts that supply shocks had on this brittle, ‘efficient’ system. Widespread, substantial, sustained shortages, sometimes of critical goods that American families relied upon.”
However, she underscored a bright spot in report results: once companies realized the critical need for resilience, many pivoted to give it priority — often by diversifying their supplier base.
High prices — and high profits
Slaughter also highlighted an area of concern which is being considered for further research.
“The study found some indications that higher prices at the grocery store, which continued after the worst of the pandemic supply chain disruptions were resolved, were not simply mirroring the higher costs retailers faced, but actually may be reflective of higher profits for those retailers,” she explained.
“I was glad to see the study recommend this subject for further research. Since the study found that some aspects of the supply chain disruptions we faced during the pandemic may have been harmful to competition, 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.”
In a statement issued after the report’s release, the National Grocers Association (NGA) agreed with the need to dig deeper into these dynamics.
“This study confirms what independent grocers and their customers experience firsthand: dominant national chains or so-called ‘power buyers’ are abusing their immense economic power to the detriment of competition and American consumers,” said NGA President and CEO Greg Ferrara. “In communities nationwide, independent grocers strive to compete on price, quality, service, convenience, and product range. However, decades of lax antitrust enforcement enable grocery power buyers to coercively squeeze suppliers to comply with their trade demands, unfairly disadvantaging smaller competitors. The result – confirmed by the FTC’s study – is a less efficient consumer supply chain where buyer power dictates priority distribution of high-demand products and special pricing arrangements.”
“Covid-era disruptions and food price inflation have made the grocery supply chain literally a kitchen table issue for millions of Americans,” added Chris Jones, NGA chief government relations officer and counsel. “This report highlights the urgent need for the Federal Trade Commission and Department of Justice to enforce existing laws like the Robinson-Patman Act, and for Congress to pass new laws that would level the playing field for grocery competitors for the benefit of the American consumer.”
Writing for Progressive Grocer, Bridget Goldschmidt notes that the NGA also sent a letter to congressional leaders.
“In a letter addressed to Sens. Amy Klobuchar, D-Minn., and Mike Lee, R-Utah, of the Senate Subcommittee on Competition Policy, Antitrust and Consumer Rights, and Reps. Thomas Massie, R-Ky., and Lou Correa, D-Calif, of the House Subcommittee on the Administrative State, Regulatory Reform and Antitrust, the trade organization representing the independent grocery sector called for hearings in the short term, subsequently backed up by meaningful legislative reform,” Goldschmidt writes.
