Politics

Big Grocers Profited From Pandemic Supply Chain Disruptions, FTC Says

Large food retailers have taken advantage of supply chain disruptions to beat smaller competitors and protect profits during the pandemic, according to a report released Thursday by the Federal Trade Commission.

The report found that some large companies “accelerated and distorted” the effects of supply chain disruptions, including by pressuring suppliers to favor them over competitors. Food and beverage retailers also posted strong profits at the height of the pandemic and continue to do so today, casting doubt on claims that rising food prices simply move in step with the rising costs for retailers, the authors say.

“Some companies appear to have used rising costs as an opportunity to further raise prices to increase profits, and profits remain high even though supply chain pressures have eased,” the report said. report.

The report's release comes as the FTC cracks down on big grocery retailers. Last month, the commission and several state attorneys general sued to block Kroger to finalize its acquisition of the Albertsons grocery chain for $25 billion. They argued the deal would weaken competition and likely lead to consumers paying higher costs.

The actions of the independent federal agency helped strengthen the efforts of the Biden administration to cope with rising prices. In recent weeks, President Biden has taken a tougher stance on grocery chains, accusing them of overcharging buyers and making excessive profits. Although food prices are now increasing at a slower pace, they have increased rapidly in 2022 and have not fallen overall. As a result, the high cost of food continues to weigh on many consumers and poses a political problem for the administration.

Mr. Biden has also tried to tackle the problem by focusing on food companies, calling them out for reducing package sizes and portions of some products without lowering prices, a practice commonly referred to as “shrinkage and inflation.” During his State of the Union address earlier this month, Mr. Biden again called on snack companies to end the practice.

In its report, the FTC concluded that supply chain disruptions did not affect businesses in the grocery industry equally. Compared to large businesses, small grocery retailers have had more difficulty obtaining products during the pandemic.

“The FTC report examining U.S. food supply chains reveals that dominant companies have taken advantage of this moment to gain an advantage at the expense of their competitors and the communities they serve,” said Lina Khan , president of the FTC, in a press release.

The report comes after the regulator ordered several companies at the end of 2021 to submit “detailed information” this would help shed light on the causes of supply chain problems and how business practices might have made the disruptions worse.

The report reveals that large companies are pressuring suppliers for access to scarce products by imposing strict delivery requirements and threatening suppliers with heavy fines if they fail to fulfill their orders. Because these measures helped large retailers increase their product inventory, they effectively helped them gain a competitive advantage over their smaller competitors, according to the report.

“In some cases, suppliers preferentially allocated products to buyers, threatening to fine them,” the report said.

Retailers did not have “unlimited freedom” to impose these sanctions, however, since some suppliers already had contractually defined requirements in place, according to the report.

FTC officials also argued that consumers are still “facing the negative impact of pandemic price increases” as retailers' profits remain high.

Using publicly available food retail industry profit data, the FTC found that during the first three quarters of 2023, revenues for food and beverage retailers grew 7% over to total costs. This is an increase from more than 6% in 2021 and the most recent peak of 5.6% in 2015.

“These high profit levels warrant further investigation by the commission and policymakers,” the report said.

After the start of the pandemic, the country's food supply chain experienced widespread disruption. Households quickly abandoned restaurant dining and panicked shoppers stockpiled food, boosting demand for groceries. Workers have fallen ill with the coronavirus, straining labor supplies at grocery stores, warehouses and meat processing plants. Truck drivers, already in short supply before the pandemic, could not make deliveries quickly enough. The confluence of these factors has led to significant product shortages and rising food costs.

At the end of 2021, food prices saw an even greater spike. As supply chain disruptions and labor shortages have led to rising transportation and raw material costs, companies have passed on the rising costs to consumers for many products. In August 2022, food inflation peaked at 11.4 percent. Since then, the rise in food prices has continued to slow. In March, food prices rose 2.2 percent.

Companies across the sector said they plan for lower price increases this year, in part because some consumers began to react and cut back on spending, leading to lower sales for some companies.

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