Fair or foul? Report finds grocery stores might've padded profits under cover of inflation

(TND) — A report from the Federal Trade Commission found that some grocers potentially took advantage of inflationary conditions and supply chain disruptions to pad their profits.

Whether that was right or wrong is in the eye of the beholder.

One expert on Thursday called it capitalism. Another called it shady.

FTC Chair Lina Khan said in a news release that the agency’s report found “that dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve.”

The FTC in 2021 ordered Walmart, Amazon, Kroger and other large wholesalers and suppliers to turn over information so the agency could dive into what was behind empty store shelves and high prices.

The FTC said it was looking into supply chain disruptions.

Overall prices, not just groceries, started rising fast in early 2021. The annual increase in the consumer price index, a popular measure of inflation, peaked at 9.1% in June 2022.

Last month, the CPI was down to 3.2%.

Bankrate Chief Financial Analyst Greg McBride recently told The National Desk that overall household expenses are 20% higher than they were four years ago. Food prices are up 25% during that span.

Anyone who’s bought groceries recently has noticed the difference. A dozen eggs this time four years ago was $1.45. Now, it’ll cost $3, according to the CPI data.

A pound of ground chuck was $4.03. Now, it’s $5.21.

A gallon of milk was $3.20. Now, it’s $3.94.

The new report from the FTC stems from the probe it launched several years ago.

Some in the grocery retail industry appear to have used rising costs as an opportunity to further raise prices to increase their profits, which remain elevated today, the FTC said.

Revenues for food retailers increased to more than 6% over total costs in 2021, higher than their most recent peak of 5.6% that occurred in 2015, the FTC report states. In the first three quarters of last year, retailer profits rose even more – reaching 7% over total costs.

The FTC said the numbers cast doubts that grocery stores were simply raising prices in lockstep with their rising costs.

And the FTC found that smaller stores were hit harder by the supply chain disruptions.

Big companies pressured suppliers to favor them over rivals, according to the FTC. That gave larger companies a competitive advantage.

Was this price gouging at the grocery store?

“This is capitalism,” said Jay Zagorsky, a professor with the Questrom School of Business at Boston University.

Price gouging is often “very vague and nebulous.”

Price gouging is when sellers take unfair advantage of consumers during an emergency or disaster by greatly increasing prices for essential goods and services.

In California, for example, the anti-price gouging statute prohibits raising the price of many consumer goods and services by more than 10% after an emergency has been declared.

But there’s no universal threshold in which higher prices at the grocery store qualify as price gouging, even during a pandemic.

“If we clearly raise the price of milk and diapers, then people get upset,” Zagorsky said. “But if we're raising the price of chocolate chip cookies, does everybody deserve to have the exact same profit margin on chocolate chip cookies before the pandemic as during the pandemic?”

Plus, he said supermarkets operate on relatively low profit margins.

The 7% noted as high by the FTC compares to Apple’s 37% gross margin, for example, on its iPhone and other products.

“I was underwhelmed when I read the FTC report,” Zagorsky said.

But Colorado State University economist Stephan Weiler applauded the FTC report.

Grocery stores, “under the cover of darkness” created by the pandemic and supply chain disruptions “basically used it to crank up prices more than” their costs dictated, Weiler said.

Weiler, however, also wouldn’t necessarily call it price gouging.

“I think the wording would be ‘taking advantage of an unfortunate situation for the consumer,’” he said. “I think that is true. They took advantage of a consumer situation that was difficult and made it worse.”

“I think it's shady,” he added.

While other industries likely did the same – raise prices more than inflationary costs required – Weiler said the essential nature of food makes this a special case.

“The food sector was kind of the perfect storm where you had a lot of industry consolidation,” he said. “So, you had big grocery stores that have these preferential supplier-chain relationships and ... people needed food. There's no elasticity of demand for food.”

Zagorsky, however, applauded grocery stores for staying open during the pandemic.

And he said grocery stores shouldn’t be expected to operate on fixed profit margins.

“I, for one, we're actually very thankful that the supermarkets in my neighborhood stayed open late at night during the pandemic instead of just having limited hours or limited amount of stock. And then if they took an extra $8 out of my pocket and $8 out of my wife’s pocket, it didn't really get me that upset,” he said.