Who Owns the Food?

National Grocers Association Questions Walmart’s Relationship with PepsiCo

Economics 101 teaches that economies of scale and bulk purchasing power tend to drive prices down for companies and with the competition that savings gets passed on to consumers. In the grocery sector these concepts are increasingly scrutinized for their reliability to offer consumers fair prices on food.  Are these large retailer’s wielding their purchasing power undermine competition?  If so, then a handful of mega grocery store chains hold a lot of sway over how much money Americans spend on food.

The National Grocers Association (NGA) is shedding new light on an old antitrust lawsuit involving Walmart and PepsiCo, drawing attention to price discrepancies that could be harming shoppers.  Small retail chains operating just a handful of stores were once able to compete with super grocers like Kroger, Costco, and Walmart. Today, it's become virtually impossible for regional grocers to come anywhere close to offering matching price points for popular products.  According to the NGA, last year’s dismissal of a Federal Trade Commission antitrust lawsuit against PepsiCo hasn’t reassured small grocers or consumers that consolidated retailers are playing above the line.

Is There a Grocery Monopoly in the United States?

A large grocery store chain has the ability to buy in bulk, spread fixed costs over more units and move inventory quickly. The agility should have the effect of keeping prices consistent and afford them greater opportunity to offer promotional deals than their small store competitors. Using the Consumer Price Index as a metric, cost of living then ebbs and flows with inflation variables. If $100 goes half as far as it did a year ago then we assume that grocery stores lost some of their purchasing power, or the financial flexibility to buy in bulk. 

Prices rarely return to pre-inflation average living costs, but the rate of increase should slow down.  Competition can act as a regulator of fair pricing, driving both large chains and small localized stores to keep food prices affordable. The NGA is petitioning for further investigation into why competition appears to have dried up.  According to one small grocer who used to go toe to toe with local Walmarts, price gaps have become so great that they have already started the process of closing store locations.  They have no way to bring the prices of their groceries down into the same range that Walmart is offering.

Meanwhile, consumers haven’t seen food become more affordable. The situation suggests that mega grocery chains are wielding their purchasing power to create pricing floors that strategically push small grocery retailers out and keep food prices fixed.  If a grocery can’t even sell a product for the wholesale purchasing price, then we have an unnatural exit of small retailers. 

The previous antitrust lawsuit specifically targeted the relationship between PepsiCo and Walmart. If PepsiCo offered Walmart special wholesale deals that directly influenced competition and forced the closure of small grocery chains, then they would be in violation of the Robinson-Patman Act (RPA).  The accusation is significant because 60% of our grocery spending occurs in 5 chains. Walmart single handedly controls 30% of the market. 

Every decision a chain like Walmart makes will either give or deny suppliers access to a huge consumer base.  It is far beyond the cost of a can of Pepsi at the local general store versus the Walmart down the road. Walmart, specifically, has been praised for being one of the few grocery retailers to claim more market share during inflation than other large chains or small groceries. They point to purchasing power, vertical integration, enhanced technological efficiency and their own generic lines of soda and snack products. 

The NGA thinks it may have more to do with the five major grocery store retail chains brokering strategic deals with food manufacturers to force further consolidation and fix food prices.  If PepsiCo sells the majority of their products inside the doors of a Walmart and gives them special preference to increase those sales, it's a violation. Since Walmart continues to make money while small food retailers continue to go under it warrants further investigation.  The NGA believes the Walmart-PepsiCo behavior is only the beginning, and an extensive investigation could reveal widespread violations.

Why Isn’t the Robinson-Patman Act Being Enforced?

Opponents of the RPA believe this type of behavior between grocery entities should be considered normal. The fact that Walmart offers access to a huge consumer market and food manufacturers benefit from selling in bulk to reliable retailers naturally leads to mutually beneficial relationships. Even if pricing floors exist, consumers still benefit from purchasing power and cost reducing efficiencies that come with scale. Competitive advantage naturally shifts and companies go out of business all the time because they don’t have the flexibility to weather supply and demand changes.

Advocates of the act see the behavior as detrimental to more than just the grocery industry in the U.S.  When small grocery store owners have to close a location, it can have a harmful impact on an entire community that depends on the jobs and economic momentum the retailer provides.  Fewer locally owned stores are also believed to contribute to the rise of food deserts. Without competition, the mega retailers can control where food is sold and how much it is sold for.

But the RPA says Walmart isn’t allowed to ask for special favors just because it has greater purchasing power and manufacturers like PepsiCo are not allowed to offer them without also offering them to competitors vying for the same consumers. Skeptics argue the issue isn’t whether or not Walmart is acting in violation because the price gaps speak for themselves. The real issue is that the Robinson Patman Act is not being enforced.  

A 1970’s decision to stop enforcing the RPA stemmed from the fact that there was no documented evidence that enforcing the act increased competition and reduced prices for consumers. Only extreme cases made use of RPA. The language and scope of the act is broad enough that it could encompass a variety of supplier and retailer relationships.  The belief was that it added complexity rather than clarity. Lengthy litigation processes are also harmful to the consumer.  However, increasingly large price gaps in the food industry suggest the RPA might be put into play again to protect small businesses and increase competition.