Who should a price-gouging crackdown hit, the stores or the brands?
Selling food to a grocery store is generally more lucrative than running one.
Grocery stores are worried they’re going to be caught in the crossfire as talks of a price gouging ban take aim at corporate greed.
Vice President Kamala Harris proposed a ban on price gouging on food and groceries, a policy proposal that comes when high prices have Americans on edge. Importantly, she didn’t specify what “opportunistic companies” the proposal would target, leaving it to speculation.
That’s an important distinction: Food suppliers, which operate at higher margins, tend to be the ones being accused of raising prices to unreasonable levels. Grocery stores, which already operate on razor-thin margins, think this proposal is pointing the finger at them.
The National Grocers Association, a trade group that represents independent grocers, called the proposal “a solution in search of a problem.” The Food Industry Association, which represents food retailers, said Harris was conflating inflation with price gouging.
Grocery stores have reason to believe the government may be coming for them. The Federal Trade Commission has challenged a proposed merger between Kroger and Albertson's, two of the country's largest grocery chains, in part because it believes it would lead to higher prices. The FTC has also started probing "surveillance pricing" at grocery stores.
But feeling sticker shock while shopping for groceries doesn’t necessarily mean that the store itself is responsible for that.
A grocery store like Safeway or Walmart buys its products from a manufacturer like General Mills or Kelloggs. If the manufacturer raises its prices (as they have) then the grocery stores have to as well, or else they lose money. The stores also have some ability to negotiate those prices.
To be clear: low margins does not necessarily mean a lack of profit. Grocery stores rely on selling a high volume of products at low margin to keep profits up. But for a grocery store working with margins often lower than 2%, there isn't as much room for them to set prices any lower than what they bought an item for.
No single entity is to blame for food prices soaring more than 20% since the pandemic, and it's a question economists will likely continue to study for years to come.
Food manufacturers like Kellogg’s and Coca-Cola started raising their prices in 2020 because their input costs rose. Many told analysts they would continue raising prices until they hit a ceiling, which they did this year.
Miguel Patricio, CEO of Kraft Heinz, in Aug. 2023: I would do everything again. I mean, we had very high inflation. And we are leaders in the vast majority of categories where we play. And it’s our role as leader to try to compensate this inflation with price increases.
So, I would do everything again. I mean we can always go back on price if we think we have to or when we have to. But we had to lead price increases.
Grocery-store chains feel the price increases from food suppliers, too.
Carrefour, a French grocery giant, earlier this year dropped PepsiCo products because prices were “unacceptably” high. Tesco, a UK supermarket chain, pulled Kraft Heinz products from shelves amid a public pricing dispute.
In the US, grocery chains like Walmart have also quibbled about their costs increasing because of manufactures.
Douglas McMillon, CEO of Walmart, on Aug. 15, 2024: In dry grocery, processed food consumables are where inflation has been more stubborn. And as we mentioned, we still have slight inflation even in last quarter in the food categories.
So, I’m hoping that what we see from our branded suppliers is investment in price, and we’re seeing that from some of them and not others.
Isabella Weber, an economist at the University of Massachusetts Amherst who studies price gouging, said those strategies should target all levels of the supply chain, not just the first or last node.
"This is a question of fairness, disaster preparedness and wise economic policy," she said.
Some states have price-gouging laws that are triggered during a crisis, but because they are local in nature, they aren't built for larger-scale emergencies like Covid-19. "Markets for most commodities are not local, and the effect of pricing decisions of giant corporations are felt across the country, and beyond," Weber said.
Weber, who is best known for proposing price caps on gas in Germany that were eventually adopted, said hiking prices when there is a shortage of a product does not do anything to remedy the shortage.
"During an emergency, supply often cannot increase even if the prices do," Weber said. "You cannot immediately expand port capacity because freight rates are soaring. Sky-high egg prices cannot bring back hens killed by bird flu or make eggs hatch faster."
