The National Grocers Association (NGA) is urging federal lawmakers and regulators to clamp down on big-box and online grocery “giants,” claiming these and other large chain retailers engage in anticompetitive behavior that puts independent grocers at a marked disadvantage in supply and pricing.
In a virtual press conference today, independent grocery industry stakeholders said small food retailers are being squeezed by big players such as Walmart, Amazon, Costco Wholesale, Target and Dollar General, among others, that use their scale to command more favorable supply terms, lower pricing, special product package sizes and first call on high-demand items.
The disparity came to the fore during the COVID-19 pandemic, they noted, as independent grocers' customers frequently encountered empty shelves and higher prices for staple products, whereas large competitors were able to procure sought-after items and sometimes even offer them at promotional discounts.
“Our members compete in markets that are increasingly dominated by a handful of national and international chains who wield tremendous economic power to the detriment of America’s food supply. Independent grocers are increasingly struggling in the face of growing influence of so-called ‘power buyers,’ dominant retailers who act as gatekeepers to grocery shelf space and control terms of trade in our industry,” NGA President and CEO Greg Ferrara said in the press event.
“These power buyers exercise their market power to demand lower prices and packaging deals, securing advantages for themselves. They also exercise market power to demand better products and better service at the expense of rivals,” he said. “Independent grocers are told they cannot get popular products or popular SKUs that are available on the shelves of dominant firms.”
Retail power buyers, Ferrara explained, have used their market leverage to demand “on-time, complete orders” from suppliers, in some cases securing excess supply of “must-have products” such as paper goods, cleaning products, hand sanitizers, canned soup and other shelf-stable items that consumers stocked up on amid the coronavirus crisis.
“The COVID-19 pandemic has unfortunately exacerbated this problem against independent grocers,” he said. “A year into the pandemic, our members are still struggling to stock store shelves with key products their customers are demanding. Yet, when you walk into the closest big-box store, you may find those same products not only fill the store shelves, but in some cases they are on promotional displays,” he noted. “Not only have independents lost access to popular products, but they’ve also lost promotional opportunities that allow them to compete on price, discounts and sales.”
A “disproportionate impact” has been felt in rural areas and inner cities, which are predominantly served by independent grocers, according to Ferrara.
“Consumers now must travel longer distances to find the products they need at more crowded chain retailers,” he said. “Other rural and inner-city communities without grocery stores — without grocery access, often known as food deserts — were impacted by this problem way before the pandemic ever struck. And that’s because dollar stores have been able to use their influence in the marketplace to secure exclusive product offerings tailored to low-income customers. These tactics push out independents and leave communities without access to fresh and healthy offerings.”
Case of ‘economic discrimination’
In a white paper released Tuesday, titled “Buyer Power and Economic Discrimination in the Grocery Aisle: Kitchen Table Issues for American Consumers,” NGA described the market dynamics of grocery retail power buyers as “economic discrimination.” The twofold impact on small competitors creates what economists call a “waterbed effect”: Power buyers gain more advantageous terms for themselves, and in turn rivals end up with higher purchasing costs and/or other disadvantages as suppliers try to make up for the favorable terms extracted by big buyers.
“We've seen the impact that these power buyer chains have on our industry,” said David Smith, president and CEO of Associated Wholesale Grocers (AWG). “The outcome we’ve observed isn’t really good for consumers or America’s communities [with suppliers] under the threat of losing business from those power buyers, which in some cases have 35% to 40% or more of the manufacturers’ total sales in a business with razor-thin margins.”
The nation’s largest food wholesale cooperative for independent grocers, Kansas City, Kan.-based AWG encompasses about 1,100 family-owned companies with approximately 3,000 community supermarkets. But even with that market reach and purchasing scale, AWG and its members are forced to take a back seat to the grocery power buyers, according to Smith.
“An unfortunate misconception is that dominant retailers provide lower prices because they’re more efficient. Yes, there are efficiencies of scale, and we too buy products in the most efficient way possible by the truckload and multiple truckloads, just like those largest competitors,” he said. “The issue is purchasing scale, which decades ago was transparent and available to any company that achieve those brackets. That’s no longer evident in companies like ours that don’t have targets to shoot at to remain competitive. It’s what happens when the largest companies control a consequential share and can dictate terms to suppliers.”
AWG’s member retail sales total about $22 billion annually, which would rank the aggregate operation as the sixth- or seventh-largest U.S. grocery retailer, Smith reported. “While we’ve achieved the scale and size to keep our costs down for customers, even then the power buyers are multiples of those sales and command the vast majority of many of the suppliers sales,” he said. “So they command access to product, price and promotions that many of us are never offered.”
The unlevel playing field has especially stood out during the pandemic, as AWG and its customers have scrambled to meet the demands of stockpiling consumers.
“We’re reminded weekly about the unfair allocation of products while our orders are being prorated or shorted altogether on critical COVID items like disinfectants, disinfecting wipes, bath tissue and paper towels. We see in the supercenters and club stores that they had pallets of product,” Smith said. “When we asked the suppliers, we were told that those types of retail businesses are a different class of trade, and they support health care workers in the front line. So they received the first preference. Well, I guess the theory here is that none of those workers are in communities that we serve. These anticompetitive tactics by dominant food retailers make it challenging, to say the least, for member stores.”
NGA represents more than 1,600 independent grocery retailers, which operate 9,000 stores nationwide. The independent grocery sector includes 21,000 stores generating $131 billion in annual sales, accounting for 25% of retail grocery sales.
But the trade group noted that its members are “feeling the heat more than ever” in the wake of supply chain disruptions triggered by COVID-19. Retail giant Walmart captures one of every $4 that Americans spend on groceries, NGA said, while many independents can’t procure essential products and face supplier prices up to 53% higher than what big competitors are selling the product for at retail.
Jimmy Wright, owner of Wright’s Market in Opelika, Ala., explained in the press event the challenges confronting independent grocers since the coronavirus outbreak.
“I could not keep my shelf stocked with items my customer need. Opelikans were forced to make an extra trip to the nearest big chain when they prefer to shop locally. Even when products were limited across the supply chain, my competition received some of the high-demand items, such as paper and cleaners, while we were received none. My customers were forced to make an extra shopping ship when many of them were concerned for their health and safety and wanted to limit their trips to public places,” according to Wright.
“This also resulted in a loss of business for Wright’s Market,” he said. “For years, we’ve only been able to get discounted prices on certain items every eight to 12 weeks, whereas our big-box competitors are getting that pricing every day. For us to compete, we must buy large quantities of these key items while the discount pricing is available, which ties up cash that we could better use to reinvest in our business, our employees and our community.”
In its white paper, NGA cited instances of packaging and supply discrimination. For example, one NGA member wanted to carry a 36-count jumbo pack of a popular toilet paper brand regularly available at Sam’s Club, but the manufacturer said the independent grocer could sell the product only if it committed to 2,380 pallets, a volume that would have exceeded its sales of that brand in the previous year. Similarly, NGA said Dollar General has used its buying leverage to sway manufacturers to provide “cheater size” products, which contain smaller amounts in a package sold at a lower price, leading shoppers to think they’re getting a bargain for the same product they see at independent grocers.
“We’re also not offered certain package sizes that we see in our competitors,” Wright said. “This is especially prevalent in dollar stores. We asked for these products, and we were told that we are in a different channel of trade than the dollar stores and those products are not available to us.”
Lax enforcement of existing controls
NGA said in its white paper that current U.S. antitrust laws — including the Sherman Act (outlawing monopolies), Clayton Act (barring anticompetitive business practices) and the Robinson-Patman Act (prohibiting price discrimination by suppliers against retailers) — provide the tools needed to curb discriminatory practices by dominant retail chains. However, since the late 1970s, enforcement by antitrust agencies and courts has waned, which NGA said may require new legislation from Congress to bolster anticompetitive protections.
“The dominant firm power buyers make the rules for everybody else. Their size and market power alone enable them to secure advantages for themselves and harm the smaller players in the food retail marketplace. The pandemic has put this structural issue on full display, as everyday Americans who rely on Main Street grocers still can’t access the products they need to feed and support their families,” Christopher Jones, senior vice president of government relations and counsel at NGA, said in the press call.
“The very reason that antitrust laws were written is to protect competition and to protect consumers, but they are not achieving these primary goals for two main reasons,” he explained. “No. 1, the laws that would prevent economic discrimination in grocery are no longer enforced by regulators or in the courts. And No. 2, the current assumptions of antitrust enforcement are flawed. They assume that the problem of economic discrimination can be chalked up to efficiency gains — the idea that big-box retailers should get a free pass because their actions can be explained by business efficiency and is therefore good for consumers.”
Congressional investigations and hearings could “shine a bright light” on anticompetitive practices in the grocery arena, namely the negative impact on rural and urban consumers, producers and businesses, according to NGA. Stronger oversight by Congress, as well as use of its authorization powers, also could prod antitrust enforcers to more actively check retail buyer power and its impact, the association said.
“Suppliers and independent grocers cannot lean on the antitrust laws to push back on these demands because the relevant antitrust laws haven’t been enforced in a generation,” said Jones. “[Suppliers] have no choice but to charge independents higher prices and to limit their product offerings. That means that if you’re an American consumer who shops at an independent grocery store, then you are forced to pay more while dominant food retailers claim higher margins.”
NGA also urged the Federal Trade Commission, Department of Justice and state attorneys general to probe arrangements between grocery power buyers and suppliers to determine if “dominant retailer bargaining leverage” is creating discriminatory prices, terms and supply on independent grocers. That includes immediate use of the FTC’s authority under 6(b) of the Federal Trade Commission Act to assess competition and concentration in the grocery supply chain and the impact on independent grocers and producers like farmers and ranchers.
“It’s time for Congress and the federal government to reassert the principles of antitrust law so that it can restore competition to an industry on which every single American relies,” Ferrara said. “Antitrust is not just a Big Tech issue. It’s literally a kitchen table issue.”
The Small Business Administration, Department of Agriculture and other federal agencies also can address anticompetitive issues in food retailing, NGA said, by studying the benefits of small business to competition and the role of independent grocers, farmers and ranchers in ensuring wide access to nutritious foods.
“We need to put the power back in the hands of suppliers so they can say no to this squeeze of the power buyers and the costly and unjust demands of those large companies that could put them out of business,” AWG’s Smith said. “There’s a lot of attention right now on social media and Big Tech. That influence is real, but look at its reach versus the most essential of consumer goods: food. While some believe it to be untrue, you can live without Facebook, Instagram and Twitter. But you can’t live without food.”