By Errol Schweizer
Anti-trust movements are making a rapid comeback in grocery retail. As Amazon AMZN +1.2% continues to expand its grocery reach, overtaking Wal-Mart in apparel sales, and retail giants like Wal-Mart, Target TGT +0.3%, Costco and Dollar General DG +3.3% dominate market share across the board, a distinct cohort of independent grocers and NGO’s are coming to similar conclusions in documents released this week and this past February. The consolidated buying power and market penetration of big food retailers hurts competition, manipulates consumer choice, stifles better health outcomes and product innovation, and needs greater public oversight.
The Center for Science in the Public Interest helped get this party started a few years back. In 2016, they dropped a bombshell report called Rigged, detailing the vast monetization of retail space in stores and how the deep pockets of big food companies get them preferred placements in stores and online. And just this past February, CSPI built on this fact-finding exercise, releasing a searing letter to regulators and members of Congress calling for greater oversight and regulation.
In the letter they state, “CSPI requests that the FTC investigate and issue guidance concerning trade promotion, category captain, and online retail practices in the grocery retail industry. These practices impact competition in the grocery aisle, dictate the choices available to consumers, and undermine the health of millions.”
The common practices of retail category management and trade promotions generates more than $50 Billion a year in revenue. Chains charge brands for shelf placement, and at checkout counters, online, on endcaps and other displays. These revenue streams by retailers are budgeted, and merchandising staff must come up with the necessary dollars lest they miss their financial targets and face disciplinary action. The result is a system that favors bigger brands with deep pockets, who are able to afford $100,000 or more for displays or up to $1 million for national placement.
For the consumer it means that demand is manufactured. Towering stacks of soda, chips and sandwich cremes greet customers at the end of aisles, in entryways and at check-stands. For food producers without deep pockets, not flush with speculative capital or in categories that don’t budget in trade allowances, particularly fresh fruits and vegetables, it means they are at a competitive disadvantage. And if you have ever wondered why there have been so few BIPOC-owned brands in mainstream retail, these practices that favor incumbent brands are a major obstacle to change who owns, controls and profits from food production.
And trade spend stifles innovation by retailers. At one point in my previous life, one of our top brand partners was doing $120 million in annual sales and was forking over $20 million right back to us for trade spend. A small, new brand getting an elbow in the door for a new product line or a creative line extension therefore means a calculated risk for the retailer. They lose access to the easy money for that space on shelf from incumbents.
In my previous life, every time my team would launch a new startup brand in high velocity categories like snacks or energy bars, the leading brands would remind us how much of their trade dollars we would be missing out on for every slot not handed over to them. For a retailer to turn down this money, they would have to either have a strategic mandate to push innovative and local items, fresh produce or more healthy options, or they would need to be told to do so by a regulatory agency or antitrust laws.
And just this week, the National Grocers Association, a coalition of over 21,000 independent retailers across the country, has released a white paper in partnership with the 1,100 member Association of Wholesale Grocers. The document calls for federal investigation and oversight into what they describe as economic discrimination by grocery power buyers.
According to the white paper, mass market chains used the Covid-19 pandemic to leverage their market share and supply agreements to get first dibs on household essentials, effectively locking many competitors out of the supply chains. Independents who did not have the scale or purchasing power of national chains were not able to secure inventory of toilet paper, canned soups, cleaning products, and other popular items as easily. Or, they were overcharged by wholesalers, to the extent that independents could sometimes find inventory of such items cheaper at their mass market competitors than from their own distributors.
Looking at this from the brand angle, CPG companies segment out their retail customers by “channel of trade”, in industry parlance, like mass, convenience, independent, or natural/specialty. Brands have different pricing, promotions and ad programs depending on the cost structures and distribution models of retailers in these channels, in order to hit certain growth targets and revenue thresholds. The market power of mass chains also enables them to negotiate deeper, more frequent promotional deals, harvesting billions in trade spend, while getting priority for national new item placement or line extensions. “Economies of scale” is just shorthand for throwing your weight around to pressure suppliers to meet your terms and volume needs because they cannot afford not to. So when a brand is able to receive a six figure purchase order versus four figures, it factors into their partnership decisions.
Independent retailers, while still falling prey to the trade promotions hustle, have nonetheless been able to differentiate themselves by better catering to local tastes, supporting start-up’s and homegrown brands, and putting more efforts into marketing fresh products. They carry the obscure, homespun, authentic items that you can only find in particular cities or states, made by producers in it for life, livelihood and community, as opposed to the quick cash-out, underwritten by venture capitalists hoping to fuel the next hot acquisition by Big CPGs.
But these points of differentiation are not always enough to keep the lights on. The independents also live and die by their ability to stock necessities and popular items, while still pricing competitively with the mass merchants down the road. Unlike Whole Foods WFM 0.0%, which faced similar challenges years ago, the independent retailers aren’t looking to get acquired by the monopolists. They are instead going in swinging.
The independents led by NGA and AWG are calling for investigations into the monopoly practices of mass retail and stricter oversight by regulators who have been out to lunch. They are demanding vigorous enforcement of Robinson-Patman, Sherman Anti-trust, the Clayton Act and state level regulations to curb what they call economic discrimination. They want FTC and DOJ to look under the hood of the cozy relationships between Big Retail and Big CPG, “to determine whether dominant retailer bargaining leverage is imposing discriminatory prices, terms, and supply on independent grocers.”
These recent anti-trust developments signal a sea change in attitude towards the grocery retail sector. The laissez-faire approaches of regulators and public officials has enabled a system that favors consolidation and integration, hurting local economies, competition and consumer choice, while stifling innovation and better health and wellness options at retail. With the trauma of Covid-19’s food insecurity, supply chain disruptions, and mass merchant profiteering still fresh in everyone’s mind, there couldn’t be a better time for regulators to wake up and get to work.