How Walmart and the 'water bed effect' raise food prices at smaller groceries
- Walmart uses its size to negotiate low prices with its food company suppliers.
- But that habit creates a "water bed effect," putting pressure on small grocers, an NYT opinion says.
- Grocery stores have been consolidating for decades, creating major players like Walmart and Kroger.
Walmart is known for getting the absolute best prices and terms from its suppliers. But that approach might indirectly affect the smaller grocers it competes with, an opinion piece in the New York Times highlights.
Companies like General Mills and Kraft Heinz make a huge chunk of their sales through Walmart alone, giving the Arkansas-based retailer leverage when it comes to negotiating prices or setting the terms of supply deals, Stacy Mitchell, an executive director at the Institute for Local Self-Reliance, wrote in a piece for the New York Times published on Monday.
But the suppliers have to make up that money elsewhere, and they often turn to small, local grocers, Mitchell said.
"So when Walmart demands special deals, suppliers can't say no," Mitchell wrote. "And as suppliers cut special deals for Walmart and other large chains, they make up for the lost revenue by charging smaller retailers even more, something economists call the water bed effect."
Walmart did not immediately respond to a request for comment from Insider.
The water bed effect or phenomenon has been used to explain a wide range of systems, from carbon dioxide emissions to computer code. The basic principle is by pushing down one part of a system, another part of the system will pop up, much like a water bed.
For the food industry, the consequences of the water bed effect have included consolidation and less competition, Mitchell wrote. "It has driven independent grocers out of business and created food deserts," she wrote in the Times.
The grocery industry has become more consolidated over the last few decades. Walmart commanded about one-quarter of US grocery sales in 2021, according to Euromonitor. Kroger represented about 8%, followed by Albertsons at just under 5%. That consolidation is set to continue, with Kroger and Albertsons seeking federal approval for a merger worth $24.6 billion.
The subject of grocery consolidation was a concern to small grocers before the most recent merger proposal. In January 2022, the US House of Representatives held a committee hearing on competition in the US food supply chain in 2022. Michael Needler, CEO of Fresh Encounter, a grocery chain with about 100 stores in the Eastern US, described Walmart as "legendary" for its ability to set terms for suppliers during the hearing.
Walmart uses its size to set prices with suppliers and demand that they meet other criteria, such as on-time delivery rates, Needler said.
"When a customer can threaten that much of your sales in one stroke, you have to listen," Needler said in the testimony, which he made on behalf of the National Grocers Association, a trade group for small supermarkets.
Smaller grocers, by contrast, can't flex the same muscle, leading to worse terms with the same suppliers. "The view from where the independent grocer sits is this: America's food supply chain problems are a result of increasing concentration and unchecked buyer power by dominant retail chains who force suppliers to discriminate against independent grocery," Needler said.
Independent grocers represent up to one-third of US grocery sales, according to a 2021 estimate from the National Grocers Association. But that share has declined for years. After the great financial crisis of 2008 and 2009, for instance, the number of independent grocery stores leveled off, and the group lost market share to larger rivals, according to a 2017 report from the US Department of Agriculture.
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