Unemployment is low, real wages are up and the economy is growing. Inflation is down but food prices are still really high. Coupled with the elimination of pandemic-era social programs such as the Child Tax Credit and emergency SNAP allotments, things just don’t feel that great for millions of Americans. Food inflation could be the rocket fuel that instigates big changes in the food industry.
Inflation, or the rate of annual price increases as measured by the consumer price index (CPI), has slowed to low single digits. But grocery prices are up over 30% since 2019. Over 90% of consumers are concerned with high food costs and 70% are financially stressed. The share of income spent on food increased 13% to the highest rate in 30 years. Food insecurity rose 18% in the last 2 years, affecting 17% of all Americans. And 37% of 18-44 year old are skipping meals. Market research firm dunnhumby pulled no punches reporting that, “our research has also shown that 18-44 year-olds are at the epicenter of a food and financial insecurity crisis that shows no signs of abating.” How did we get here?
A primary cause of price inflation is profiteering enabled by grocery market concentration. It is nearly impossible to not buy food from grocery and consumer packaged goods (CPG) oligopolies. Processed foods make up over half of what is sold in the $850 billion grocery sector. Whether it is meat, poultry, bread, cereals, canned soup, snacks, condiments or beverages, these categories are typically dominated by 3 or 4 companies with multiple brands. We all know and love them: Oreos, DiGiorno, Sprite, Cheetos, Lucky Charms. They are formulated to hit the bliss point and built to limit competition through aggressive marketing and by literally paying for shelf space. This dominance enables a small handful of brands to price signal. So when one category leader raises prices to protect their profit margins from rising costs, the rest follow without fear of losing customers.
From 2021-2023, these wink and nod price hikes meant that consumers paid for cost increases above and beyond what brands received from their suppliers, enabling historically high profits. According to Nielsen IQ, CPG prices outpaced the rate of inflation by several points for the last two years, with the gap actually growing more recently as the CPI cooled off. This “price over volume” strategy lowered industry unit volumes, meaning consumers are buying less while spending lots, lots more.
This has been coined “seller’s inflation” by University of Massachusetts professor Isabella Weber, “Publicly reported supply chain bottlenecks and cost shocks can also serve to create legitimacy for price hikes and create acceptance on the part of consumers to pay higher prices, thus rendering demand less elastic.” In other words, pricing had little to do with supply or demand, which is why interest rate hikes made no sense.
Retailers took advantage of the inflationary moment. One CPG brand selling to an Amazon
The chief global economist at UBS AG called this “profit-led inflation”. The European Central Bank, the OECD and the European Commission all published studies on it. Going one step further, the International Monetary Fund linked corporate profits to 40% of price inflation while the Economic Policy Institute documented over 50%.
This is why grocery industry comparative sales have, not surprisingly, cooled significantly. Sales growth of 3-4% is barely level with inflation. Discounter chains on the other hand are going gangbusters as consumers look to stretch their dollars. Leading discounter chain Aldi just acquired 400 Winn Dixie stores, seeing long term market share potential by underselling Publix. Over 9 in 10 consumers are bargain hunting and private label sales have soared to over $230 billion a year. But the grocery industry also has an image problem, with 4 out of 5 consumers believing that brands are involved in “greed-flation”. Shoppers believe that grocery chains have over 35% profit margins, nearly 14 times their actuals.
So will the grocery industry lower prices as input costs cool? That depends. Many high profile retailers have asked suppliers to stop pushing cost increases. One promising example came from Town and Country, a family owned chain in Seattle. In April 2023, the head of purchasing called on suppliers to partner together to lower prices and “to find ways to give all members of our community access to the best food options for their families.”
Retailers have other tools at their disposal to mitigate price increases. They can negotiate everyday low costs on best sellers. They can eliminate slotting fees and require brands to instead invest the funds in lower costs. They can break up CPG monopolies on their own shelves and spur competition. They can also choose to invest in lower prices out of their own gross margins. But that doesn’t mean prices will come down to 2019 levels.
Any price reductions will have to be tracked closely so they are not cannibalizing top-line sales and gross margins. If average input costs drop 30% to 2019 levels, retail prices should come down by 30%. But that would also mean revenue would drop by 30% unless there was a corresponding increase in units. That elasticity in demand would be asking a lot of cash strapped customers.
As input costs come down, grocers will instead play with pricing to spur demand. They will run more short term price promotions. They will expand store branded private label to enhance their value image. And CPG’s will play with “price-pack architecture” to create illusions of value. It will just be rearranging deck chairs.
Until the Covid-19 pandemic, the whole point of the profit-driven capitalist food system, of Big CPG, large scale food processing and consolidated grocery, was cheap, abundant, convenient food for everyone. Despite the (ahem) occasional externality, it worked really well for a long time. Is that really the case anymore? Food is expensive, not always accessible, but still quite profitable.
The Biden era has not just been characterized by high inflation, but also by policy aligned with growing union support, greater antitrust sentiment and action, and some meaningful new USDA programs. Along these lines, maybe all major companies should be required to have board seats reserved for rank and file workers. This could enable some oversight over pricing and profit taking. And U.S. antitrust policy such as Robinson Patman is built around pricing. It is meant to regulate how retail chains leverage scale to extract greater discounts from suppliers at the expense of competitors. Enforcing Robinson Patman alongside the new FTC/DOJ draft merger guidelines could be a healthy start.
Price controls are a logical next step. In the UK, price control debates have followed similar policies in France, Hungary and Bolivia, among administrations with vastly different ideologies. The centrist French government has secured lower pricing pledges from 75 food conglomerates that make over 80% of groceries. The French administration has threatened to claw back profits from violators. The socialist Bolivian government has negotiated stable prices with producers and the conservative regime in Hungary froze prices on hundreds of basic items. In the U.S, it would not be difficult for regulators to access syndicated pricing data to protect consumers, penalize price gougers and spur greater demand.
And with the Farm Bill up for renewal, it’s time again to look at how public subsidies prop up industrial food. The Vilsack USDA has made moves to reform supply chains, particularly in meat processing, regional food marketing and organic crop production. GMO corn and soy tend to get a lot of well-deserved scrutiny in these debates, but food security is a much bigger USDA program. Over $100 billion in SNAP and WIC redemptions were rung up by grocery retailers last year. So while healthy food is still considered a luxury by most Americans, why not instead make it free for everyone?
As researcher Ken Kolb states in Retail Inequality, “Instead of supply-side solutions that subsidize businesses, we should use those funds to improve the buying power of community members”.
One possibility is “single payer produce”. Public funds could fully subsidize the point of sale price of fresh and minimally processed fruits and vegetables, above and beyond SNAP and WIC. This could be transformative. It would mean operationalizing healthy food as a human right without reinventing supply chains. And public oversight with Good Food Purchasing standards could require farmers to be paid fair prices and in turn be required to pay fair wages. Single payer produce could offset much of the price inflation from processed foods and radically change consumption habits. And grocery stores would have to evolve their merchandising priorities, staffing and layouts to reflect the uptick in fresh product sales.
Profit driven price inflation has been a huge burden to consumers. It may have permanently disrupted the status quo of cheap and convenient industrial food. But assuring fresh, healthy groceries for all could transform the industry into something new and wonderful.