Concentration and Power in the Food System (part 2)

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The last post provided an overview of Philip Howard’s book.  This one will focus on concentrations of power in food retailing, distribution, and what Howard calls “engineered consumption.”

Retailing

In the last few decades, the grocery industry has moved from considerable fragmentation to a high concentration of power in the hands of a few firms. Economists commonly measure this with a “concentration ratio,” which is simply the sum of the market shares of the leading companies. Often they base the calculation on the top four companies, and the resulting measure is called CR4. “Most institutional economists suggest that when four firms control more than 40 percent or 50 percent of a market, it is no longer competitive.” For supermarkets, Walmart, Kroger, Safeway and Supervalu have a combined market share of 51%. For fast food retailers, McDonald’s, Yum! (which owns KFC, Pizza Hut and Taco Bell), Subway and Wendy’s control 43%. For convenience stores, power remains more fragmented, except for the 24% market share of 7-Eleven. The concentration ratio may actually understate the concentration of power, since it overlooks vertical integration, as when a retail firm acquires one or more of its suppliers.

One reason for the rapid increase in concentration is the relaxation of anti-trust enforcement under Ronald Reagan. [I also know from reading transcripts of the Watergate tapes that Richard Nixon was already declining to enforce anti-trust laws in the 1970s.] The Robinson-Patman Act of 1936 was specifically aimed at the first supermarket chain, A & P, which Howard calls “the Walmart of its day.” The law prohibited the practice of discriminatory pricing, where A & P obtained discounts from its suppliers that were not available to other retailers. [I also remember my grandfather complaining that the chain store would come into town, undercut the prices of smaller stores to drive them out of business, and then raise prices.] Since the 1980s, the anti-regulatory climate promoted by corporations and free-market conservatives has reduced government checks on corporate power, not only by regulatory agencies but by courts:

Beginning in the late 1970s, large corporations funded public and private think tanks, which in turn arranged for judges to go on all-expenses-paid junkets. These were typically held at resorts in warm weather states, such as Florida and Arizona, where the judges could play golf. While there, they would also attend seminars presented by Chicago School economists suggesting that mergers and acquisitions would increase efficiency, and should not be opposed unless there was clear evidence of harm to consumers.

With Walmart leading the way, the biggest retailers pressured their suppliers for the kind of volume discounts that Robinson-Patman was supposed to curb. In addition, consolidation was accompanied by lower wages in the grocery industry, but higher prices and profits. By 2010, the six heirs of the founder of Walmart had accumulated a fortune greater than the net worth of the lowest two quintiles (40%) of families in the United States. They were also spending millions of dollars lobbying to get Congress to repeal estate taxes, now supported, by the way, by the current Republican presidential nominee and most Republicans in Congress.

The prize for the industry with the greatest wage inequality goes to the fast food industry, where the ratio of CEO pay to average worker pay surpassed 1,200 by 2012.

Recently, the Federal Trade Commission has become more active again in questioning mergers and acquisitions, as well as some other anticompetitive practices.

Distribution

Food distributors stand between producers and retailers. Theirs is also a story of increasing concentration, especially for the “broadline” distributors that carry the widest variety of products. The top four firms (Sysco, US Foods, Performance Food Group and Gordon Food Service) have a combined market share of 48%. That share increased by 10% just between 2003 and 2013. Sysco tried to acquire US Foods in 2013, but withdrew from the deal after a U.S. district court issued an injunction to stop the acquisition.

The power of distributors is somewhat limited by the countervailing power of large retailers to produce products themselves or obtain them directly from producers. This is called “disintermediation,” a fancy term for cutting out the middleman. Not all retailers can accomplish this, however, since many find it more convenient and less costly to rely on a large distributor. Distributors can also promote retailer dependency by becoming the sole provider of a desirable product.

A similar power struggle goes on in beer distribution, although the number of distributors is much larger. Distributors have benefitted from old laws in many states that prohibit breweries from selling directly to retailers. Although distribution is fragmented among some 3,000 firms, they have organized into a powerful trade association to lobby for the continuation of those laws. They also limit competition by obtaining from brewers the right to market in particular territories. However, the brewers themselves are also very powerful. The top four (Anheuser Busch InBev, MillerCoors, Crown Imports and Heineken USA) have close to an 84% market share. They have pressured states to let brewers to distribute their own product, and twenty states allow this.

The recent resurgence of small brewers threatens the dominance of both large producers and their distributors. After falling from over 2,000 to only 48 from the late 1800s to 1979, the number of breweries has recovered to over 2,700. Some states exempt microbreweries from their laws prohibiting direct sales to retailers. Big brewers have tried to turn the craft beer trend to their advantage by buying up existing craft brewers or introducing fake craft beers.

Although broadline distribution is increasingly concentrated, there are many small distributors that can succeed by offering particular products that consumers want, such as farmers markets offering local produce.

Engineered consumption

In theory, consumers remain free to reject the offerings of any particular company, unless that company has an absolute monopoly on a product that every consumer must have. There is no worldwide water monopoly…yet. However, dominant firms can exert a great deal of power over consumption itself. Howard discusses two particular ways they do so: deskilling and spatial colonization.

The term “deskilling” usually refers to dumbing down jobs, but in the consumption context, it means encouraging consumers to rely on businesses to do things that they used to know how to do for themselves.

Deskilling increases control for capitalists but makes us more dependent upon them by eroding our knowledge and abilities. Food preparation and cooking practices that were once common have become less prevalent, often through the active efforts of food manufacturers to make buying higher profit-margin processed foods a regular habit.

An early example of deskilling was the marketing of infant formula, which discouraged breastfeeding, especially for low-income and minority women who obtained free formula from the government. A more recent example is bagged salad, which encourages consumers to purchase convenience at the cost of higher prices, lower nutrition and greater risk of foodborne illnesses. The top four marketers of bagged salad (Chiquita/Fresh Express, Dole, Earthbound Farm, and ReadyPac control 64% of the market).

“Spatial colonization” refers in part to the normal process of business expansion into new markets. In the food business, it also means controlling supermarket shelf space. The larger companies can better afford the slotting fees charged by retailers for desirable space. “By offering very slight variations on existing products, they are able to take up even larger amounts of shelf space, crowd out smaller competitors, and prevent new competitors from breaking into key retail outlets.”

Spatial colonization also includes invading “mind space” with advertising. Perhaps the most disturbing example is the incessant marketing of foods high in salt, sugar and fat in programming directed at children. “Most of us would call these products addictive, as they are deliberately engineered to have tastes, textures, and synthetic flavors that make them difficult to consume in moderation.” Many of the junkiest foods have profit margins more than double those of other foods, so the incentives are there to colonize consumers in that manner.

Howard ends his chapter on engineered consumption on a hopeful note. Some consumers are turning away from processed foods and “reskilling” themselves in healthier cooking. New media of communication allow consumers to talk back and talk to one another, as opposed to being just a passive mass audience for corporate advertising. And public advocacy groups have had some success in getting harmful ingredients such as trans fats out of some foods.

Continued

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