This is another in a series of posts on how people are dealing with inflation and how they have been affected by it. Related posts are listed below.
See The Mysterious Fees Inflating Your Grocery Bill: Some food makers complain of a flood of obscure charges from distributors; ‘Is that price gouging or costs going up?’ by Jesse Newman of The WSJ.
In the print edition the title of the article was "Middlemen Inflate Grocery Bills." But in many cases the article states that stores and manufacturers get services for the fees the distributors charge. In other places the article indicates that distribution is a very competitive business, which would leave little room for inflating prices. I highlighted those in red.
Here are the excerpts from Newman's article:
"The
price of a bag of coconut-cashew granola at Whole Foods jumped last year
from $5.99 to $6.69. Why that happened defies simple explanation.
The
granola maker, Wildway Foods, said the cost of making the cereal hasn’t
gone up that much, and that it isn’t pocketing more profit. It jacked
up the price, it said, in large part to offset fees that piled up from a
little-known link in the supply chain: grocery distributors. There were
charges for processing grocery promotions, others for potential
spoilage and still more related to alleged shipping glitches."
"Many small manufacturers that have raised their prices have another
explanation. They say they also are being squeezed by the distributors
who act as gatekeepers to many supermarkets.
Distributors are the middlemen of the grocery business. They buy
products from food makers—many of them too small to run their own
distribution networks—then store, sell and ship them to supermarkets. A
small number of them, including KeHE Distributors, C&S and United Natural Foods, or UNFI, sell to grocery stores nationwide."
"Fees and
other charges levied on food makers, such as for late or partial
shipments, have long been a part of the grocery business. Grocers impose
many of their own fees for things like promotion and shelf space, which
distributors pass on to food companies. Distributors charge extra for
processing those fees, and levy others themselves.
Launching
a new flavor for an existing product? There’s a fee for that. Running a
promotion at retail? Distributors charge for that, too. If distributors
buy too much and products expire before hitting store shelves, they can
deduct spoilage fees. But if food makers short an order, aiming to
avoid spoilage charges, distributors can ding them for that.
Many
smaller food makers complain they are being gouged, and that fees and
other charges that stream in from distributors have forced them to raise
their prices to stay in business.
Distributors operate on razor-thin profit margins, with limited ability
to offset rising operating costs. Food executives said grocers have
enormous power to dictate terms with distributors, and that small food
companies can be naive about the costs involved in building a brand and
getting it to store shelves."
"The national distributors handle tens of billions of dollars worth of
packaged food each year. They are a key route to the grocery shelf for
thousands of small food makers, and provide much of the merchandise
found in the aisles of independent grocers."
"“It’s almost impossible to make money as a distributor,” said James
Curley, a food industry veteran who has worked for both manufacturers
and distributors. “It’s just the nature of the business.”"
"Distributors deduct fees and other charges from the checks they write to
food makers, often leaving smaller manufacturers with a fraction of
their anticipated revenue."
"Deb Conklin,
chief executive of KeHE, said food distribution is costly and complex,
especially when it involves smaller brands with lower sales volumes. She
said three-quarters of the fees KeHE charges are passed on from
grocers.
“There
are costs to doing business,” she said, noting that KeHE moves some
80,000 different products to 35,000 stores. “We don’t charge for the
sake of charging.”
Conklin
said KeHE’s practices are spelled out in contracts signed by food
makers, and that small brands often don’t fully understand the terms
they agree to with distributors and grocers. Since she took over at KeHE
last year, she said, supplier success has been a key part of its
strategy. It has hosted seminars to help suppliers better understand how
food distribution works, and it is trying to help them improve their
shipping systems."
"To win business, distributors often bid against one another to be the
primary supplier of food brands to grocers. The resulting contracts
typically limit how much distributors can mark up prices on goods they
buy from food makers. In practice, what large supermarkets pay
distributors frequently doesn’t cover their costs.
That leaves distributors reliant on so-called inside income, or revenue generated from food manufacturers."
"Distributors’ rules and charges are a symptom of pressures rippling
through the supply chain, according to current and former grocery and
distribution executives. Grocers are competing with one another to win
shoppers with lower prices. Big food sellers have gained market share,
giving them more leverage in negotiations with distributors.
Distributors also have consolidated, absorbing smaller and regional firms, leaving food makers with fewer alternatives."
"Greg Ferrara, CEO of National Grocers Association, which represents
independent grocers and distributors, said there is still plenty of
competition in both the grocery and distribution sectors.
Some
food makers raised their prices after UNFI introduced a new policy for
suppliers earlier this year. UNFI began charging a 2.5% fee on
purchases, in return for consolidating various fees and providing access
to sales data and insights.
“Fee
consolidation will reduce friction, increase transparency, and improve
predictability, resulting in time and cost savings,” UNFI said in a
February letter to suppliers."
Related posts:
Inflation Has Cooled, but Americans Are Still Seething Over Prices: Many people—though not all—saw wage increases that kept pace with the pandemic’s rapid price hikes, but the psychological toll remains (2024)
Child Care, Rent, Insurance: Where Inflation Hits Hardest Now (2024)
Why do workers dislike inflation? (2024)
Inflation
Usually Hits Harder for Poor Families. For a Couple of Years, It
Didn’t. New research on how inflation varies between the poor, middle
class and rich paints a different picture of poverty and inequality (2024)
The
Haves and Have-Nots at the Center of America’s Inflation Fight: There’s
a growing gap between Americans who are battered by high inflation and
interest rates and those who are actually benefiting (2024)
An Increase in Uninsured Drivers Is Pushing Up Costs for Everyone Else (2024)
Inflation has caused consumers to choose what they need to cut back on (insurance)
Costco and Sam’s Club Aisles Are Full of Gen Z Shoppers (2024)
Consumers are buying in bulk to save money by getting a lower per unit price
Inflation is mentally taxing (2024)
Inflation is mentally taxing. Dealing with a straitened budget exacts a psychological toll as well as a financial one
Store Brands Are Filling Up More of Your Shopping Cart (2024)
People are on the look out for cheaper alternatives due to inflation
Consumers Fed Up With Food Costs Are Ditching Big Brands (2024)
After
years of price increases, food companies say more consumers pull back;
fast-food chains and snack makers plan new deals and flavors
Are Americans Worrying Too Much About Inflation? Two opposing views (2024)
The Era of One-Stop Grocery Shopping Is Over (2024)
One
thing that I always talked about with inflation was that one of its
costs was all the things we had to do to avoid it. Consumers are making
8% more trips to different retailers as inflation continues to upend
household budgets. They are going to more stores to find lower prices.
But it costs time to do that and probably more money on gas.
When workers were paid twice a day and given half-hour shopping breaks (Germany, 1923)
By
mid-1923 workers were being paid as often as three times a day. Their
wives would meet them, take the money and rush to the shops to exchange
it for goods. However, by this time, more and more often, shops were
empty. Storekeepers could not obtain goods or could not do business fast
enough to protect their cash receipts. Farmers refused to bring produce
into the city in return for worthless paper. The requirements to
calculate and recalculate commercial transactions in the billions and
trillions made it practically impossible to do business in paper Marks.
