- Gary Hawkins
Maybe Bigger is Not Always Better
As the COVID-19 crisis continues to hammer the supermarket industry, we must ask ourselves if bigger is necessarily better. Panic buying early in the pandemic has given way to rising prices and empty shelves have moved to the meat department. The crisis has brought to light our dependency on a relative handful of massive companies controlling vital parts of the country’s food supply chain.
The chokehold of a few major meat processors showcased just how fragile our meat supply chain really is as growing numbers of sick workers shut processing plants, triggering a cascading series of events up and down the supply chain. Initially, less processing has led to scarcity and higher prices of meat products at retail. And less processing has forced farmers into putting down millions of animals, which will reduce supply for months, even years, to come.
The farming and dairy industries have also undergone vast consolidation over the years that has caused problems during the crisis. These large operations could not switch packaging and distribution fast enough away from restaurants and food service to retail, leading to millions of gallons of milk being - literally - flushed down the drain, and countless crops plowed under.
And consolidation has not only occurred in producers. According to the USDA, the market share of the top four grocery retailers has increased from an estimated 16% in 1992 to nearly 45% in 2016. That consolidation has only continued in the ensuing years as Albertson’s acquired Safeway, Kroger rolled up Harris Teeter and Roundy’s, and Delhaize was purchased by Ahold. Adding even more potency to the consolidation trend are store closings. David Schoeder, principal with The Food Partners, called out that grocery store count declined by 2.5% in 2018, a trend he believes will continue or even grow in the years ahead.
And then we have legislative disfunction on prime display early on in the COVID-19 crisis as 250,000 retail stores were deemed nonessential and closed, the government ordered shutdown clearing a massive path to windfall revenue gains for ‘essential’ retailers Amazon (sales up 35 percent from prior year) and Walmart (online sales up 74 percent), helping each retailer add to their already considerable resources as they continue their push into grocery retail.
While grocery stores were also deemed essential and remained open, few have been able to enjoy the gains of the two giants. Certainly supermarkets, from the single store independent to Kroger, have seen sales surge, especially online sales. But whereas Amazon and Walmart have been able to leverage vast automation and fulfillment efficiency, most traditional retailers have struggled with manual order picking, the significant costs largely offsetting any gains.
So we have massive and growing consolidation everywhere across the food industry. But as we have seen in this pandemic, there is a risk that accompanies consolidation, especially in something as vital as our food industry where decentralization of food production, processing, and retail can help insure against supply issues and price surges.
The call of consolidation has not always rung true. The military recognized the value of diversifying risk during the Cold War when it deployed ICBM missile silos in disparate regions across the U.S., reducing the risk of a single enemy strike obliterating our retaliatory capability.
The U.S. realized the risk of consolidation when it broke up AT&T years ago, deleveraging the nation’s dependency on one communications company. Similarly, threatened antitrust action against IBM and Microsoft at different times helped provide a fertile ground for the explosion of small tech startups that have gone on to transform our world.
Imagine a scenario where an Amazon or Walmart is shut down - even temporarily - by some catastrophe. Not hard to imagine America’s enemies gaming this in electronic warfare, especially when these mammoth retailers have been deemed ‘essential’.
Never going to happen. Too far-fetched. Maybe. But who would have ever imagined that most of the developed world would be shut down literally overnight. The world’s largest economies simply stopped. When thinking about the nation’s food supply and distribution networks, I think we would be wise to consider all scenarios when evaluating the risk.
The time-honored argument for consolidation is greater efficiency that translates into lower prices to the consumer. That has certainly been the argument used in the meat processing industry and farming as large corporate behemoths have consolidated production into fewer, larger operations.
The U.S. food supply chain has been a model of plentiful efficiency as Americans have long assumed low-priced food was a given. But the COVID-19 crisis has shown us the dangers of an over-reliance on too much consolidation and provided warning that disaster is possible, if not now, then maybe in the next inevitable catastrophe.
In the opening weeks of the pandemic, our government leaders spent over $3 trillion intended to provide relief to those who had lost their jobs or had their businesses shuttered. That $3 trillion added to the country’s already significant debt, a debt that must be serviced, inevitably through higher taxes for everyone.
Maybe now, as our political leaders look to spend trillions more dollars to help bring the country out of the COVID-19 induced economic coma, it is time to look beyond legislation written by the K Street lobbyists that favors the mega-corporations of America and spend the money in a way that strengthens and better ensures our future through a diversified food industry ecosystem. And if maintaining that diversity costs a little more we can think of it as funding an insurance policy to help protect our food supply chain when the next pandemic or other catastrophe comes along.