Are Middlemen Inflating Grocery Bills?

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.