Large Grocers Took Advantage of Pandemic Supply Chain Disruptions, F.T.C. Finds

Large grocery retailers took advantage of supply chain disruptions to beat out smaller rivals and protect their profits during the pandemic, according to a report released by the Federal Trade Commission on Thursday.

The report found that some large firms “accelerated and distorted” the effects of supply chain snarls, including by pressuring suppliers to favor them over competitors. Food and beverage retailers also posted strong profits during the height of the pandemic and continue to do so today, casting doubt on assertions that higher grocery prices are simply moving in lock step with retailers’ own rising costs, the authors argued.

“Some firms seem to have used rising costs as an opportunity to further hike prices to increase their profits, and profits remain elevated even as supply chain pressures have eased,” the report read.

The report’s release comes as the F.T.C. cracks down on large grocery retailers. Last month, the commission and several state attorneys general sued to block Kroger from completing its $25 billion acquisition of the grocery chain Albertsons. They argued that the deal would weaken competition and likely lead to consumers paying higher costs.

The independent federal agency’s actions have helped bolster the Biden administration’s efforts to address rising prices. In recent weeks, President Biden has taken a tougher stance on grocery chains, accusing them of overcharging shoppers and earning excess profits. Although food prices are now increasing at a slower rate, they surged rapidly in 2022 and have not fallen overall. As a result, the high cost of food has continued to strain many consumers and posed a political problem for the administration.

Mr. Biden has also tried to tackle the issue by fixating on food companies, denouncing them for reducing the package sizes and portions of some products without lowering prices, a practice commonly called “shrinkflation.” During his State of the Union address earlier this month, Mr. Biden again called on snack companies to put a stop to the practice.

In its report, the F.T.C. concluded that supply chain disruptions did not affect companies equally across the grocery industry. Compared with larger firms, small grocery retailers faced more difficulties getting products during the pandemic.

“The F.T.C.’s report examining U.S. grocery supply chains finds that dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve,” Lina Khan, the F.T.C. chair, said in a statement.

The report comes after the regulator ordered several companies in late 2021 to turn over “detailed information” that would help shed light on the causes behind supply chain snarls and how business practices could have worsened disruptions.

The report found that large firms put pressure on suppliers to gain access to scarce products by imposing strict delivery requirements and threatening suppliers with large fines if they failed to fill their orders. Because these measures helped large retailers boost their stock of products, they effectively helped them gain a competitive advantage over smaller rivals, according to the report.

“In some cases, suppliers preferentially allocated product to the purchasers threatening to fine them,” the report read.

Retailers did not have “unlimited freedom” to impose these penalties, however, since some suppliers already had contractually defined requirements in place, according to the report.

F.T.C. officials also argued that consumers are still “facing the negative impact of the pandemic’s price hikes,” given that retailers’ profits remain elevated.

Using public data on profits in the grocery retail industry, the F.T.C. found that in the first three quarters of 2023, food and beverage retailer revenues reached 7 percent over total costs. That was up from more than 6 percent in 2021 and the most recent peak of 5.6 percent in 2015.

“These elevated profit levels warrant further inquiry by the commission and policymakers,” the report read.

After the onset of the pandemic, the nation’s food supply chain saw vast disruptions. Households quickly shifted away from eating at restaurants, and panicked shoppers stockpiled food, boosting demand for groceries. Workers fell ill with the coronavirus, which strained labor supply in grocery stores, warehouses and meat processing plants. Truck drivers, who were already scarce before the pandemic, could not make deliveries fast enough. The confluence of those factors resulted in major product shortages and higher food costs.

In late 2021, there was an even bigger surge in food prices. As supply chain disruptions and labor shortages led to higher transportation and raw material costs, companies passed along cost increases to consumers for many products. In August 2022, annual food inflation reached a peak of 11.4 percent. Since then, food price gains have continued to cool. In the year through February, food prices climbed 2.2 percent.

Companies across the industry have said they are planning smaller price increases this year, in part because some consumers have started to push back and cut their spending, which has led to some firms experiencing drops in sales.