Sky-high grocery prices – brought about due to supply chain disruptions during the Covid-19 pandemic – are persisting, and retailers may be price-gouging, according to a 22 March U.S. Federal Trade Commission report.
The report, “Feeding America in a Time of Crisis: FTC Staff Report on The United States Grocery Supply Chain and the COVID-19 Pandemic,” calls out the largest retailers for raising prices and limiting competition.
The FTC report also echoes statements made by U.S. President Joe Biden during his recent State of the Union address in which he expressed concern about grocery prices and shrinkflation. A recent analysis by the White House Council of Economic Advisers found grocers have maintained the higher profit margins they began generating following the onset of the pandemic.
“Consumers are still facing the negative impact of the pandemic’s price hikes, as the [council’s] report finds that 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 report said.
The agency reviewed the business practices of Walmart, Amazon, and Kroger, along with wholesalers C&S Wholesale Grocers, McLane Company, and Associated Wholesale Grocers. It also reviewed information from Procter & Gamble, Tyson Foods, and Kraft Heinz, three of the country’s largest suppliers.
“As the pandemic illustrated, a major shock to the supply chain can have cascading effects on consumers, including the prices they pay for groceries,” FTC Chair Lina M. Khan said in a press release. “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 supply chain disruptions during the pandemic provided insight into the overall competitive dynamics of the grocery industry. Limited competition can lead to bottlenecks that increase the impact of supply chain shocks on different businesses and consumers while inhibiting fair competition, the FTC said in the report.
“The potential for powerful retailers to distort product allocations during a shortage suggests that crises may create an opportunity for some firms to entrench market power,” it said.
A change in retailers’ on-time and in-full delivery (OTIF) policies during the early days of the Covid pandemic harmed competition in the grocery sector, the FTC found. A November 2022 McKinsey survey found that many large retailers increased the demands they place upon their suppliers, with more than half of consumer packaged goods companies reporting that retailers had tightened their OTIF requirements, and 63 percent of those surveyed reporting new delivery requirements or increased fines. As one example, Walmart tightened its OTIF requirements in September 2020, requiring suppliers to achieve 98 percent OTIF compliance to avoid fines of 3 percent of the cost of goods.
“As the pandemic continued and disrupted supply chains, the surging importance of simply having products in stock caused some wholesalers and retailers to adjust their OTIF requirements and penalize suppliers for incomplete or late deliveries,” the FTC said. “These policy changes pushed producers to shift product away from competing buyers in order to avoid penalties. Competing wholesalers and retailers receiving less products as a result of enhanced OTIF requirements were at a competitive disadvantage.”
Larger customers generally imposed more stringent OTIF requirements and penalties on their suppliers than smaller customers did.
“This may reflect greater bargaining leverage or bargaining power on the part of larger customers, who can therefore successfully pressure suppliers to accept more onerous terms than can their smaller rivals,” the FTC said.
The policies caused some suppliers to shift product allocations to favor the buyers with OTIF policies in place and away from other buyers without similar policies.
Supply chain disruptions did not equally impact every retailer, wholesaler, or producer. Instead, smaller firms – especially smaller grocery retailers – disproportionately faced difficulties obtaining products compared to larger firms. And some larger firms were better able to protect their product supply compared to smaller competitors, according to the report.
“As supply chains were disrupted, we observed firms across the supply chain beginning to examine alternatives to their existing suppliers with a new and more critical eye. Where concentration was highest, we observed retailers looking to protect themselves from markets that were excessively concentrated by considering vertically integrating to better control their supply of products,” the FTC said. “Retailers saw that they needed to increase the resilience of their supply chains when they faced markets with few producers, recognizing the value that markets with many producers bring to securing supply. As supply chains normalize, some of these symptoms may subside, but the underlying issues remain.”
The pandemic also prompted some larger firms to consider buying manufacturing suppliers, “which potentially threatens to make certain supply chains even more concentrated in the future,” the FTC said in the press release.
“Taken together, the report’s findings reveal how supply chain bottlenecks can leave markets exposed to major supply chain shocks – and that those shocks, in turn, can allow major firms to entrench their dominance,” the FTC said.
