Should Americans be worried about “Big Grocery”? According to some people, including Sen. Elizabeth Warren (D-Mass.), the answer is yes. A quick glance at Warren’s Twitter feed reveals a recent theme: calls for using antitrust laws to break up large companies, particularly in the supermarket sector. In December, Warren sent a letter to several food suppliers, chastising them for appearing “to be passing costs on to consumers.” And last month, the senator took advantage of a Senate Banking Committee hearing to grill Federal Reserve Chairman Jerome Powell about grocery store profit margins, claiming “Econ 101? dictates that a lack of competitors inherently leads to higher prices.
According to this logic, the limited number of supermarket competitors grants large players like Kroger or Albertsons monopoly power, resulting in friendly neighborhood grocers being replaced by predatory leviathans that extort normal Americans by overcharging for a most basic necessity. However, ignoring the grocery industry’s many competitive characteristics is hardly Econ 101.
Warren’s not wrong that Americans are paying high prices for food. On average, shoppers paid 6.4% more for groceries in November 2021 than a year prior, with meat prices skyrocketing even higher. But higher revenues shouldn’t be equated with excessively higher profits. Quarantines have led to increased demand for groceries, and grocers have also experienced rising costs. COVID-19 and extreme weather have affected crop yields and disrupted supply lines and the labor market. It’s no wonder we’ve seen bizarre absences on grocery shelves (cream cheese, anyone?) and higher prices.
A closer look at the grocery industry actually reveals a highly competitive market. It’s true that the industry is dominated by large chains, with the top four firms — Walmart, Kroger, Albertson’s and Target — constituting about 35% of U.S. food sales in 2019, but it is equally true that the industry has thin profit margins (in the range of 1-3%). Indeed, one 2020 report noted that “despite rising incomes, the heightened competitive landscape has forced many operators to compete based on price.” So while grocery profits have risen slightly during the pandemic thanks to increased consumer demand, the industry still maintains some of the lowest margins of any economic sector. One can hardly call that anti-competitive.
Warren’s mistake is that she confuses having a greater number of small firms in an industry with competitiveness (and therefore lower prices). This ignores how easy it is for companies to enter or exit the market. In a market with relatively low barriers to entry, such as the grocery industry, a company’s actions are constrained by the threat of new competitors. The possibility of taking market share from incumbents incentivizes new companies to dip a toe in the water, limiting the ability of even large companies to take advantage of consumers.
Despite the industry’s relatively low profit margins, over the past few years there have been no shortage of newcomers, so much so that traditional brick-and-mortar chains increasingly seek to compete over the quality of the grocery shopping experience itself. Companies like Walmart, for example, now offer online ordering and same-day pick up to compete with non-traditional newcomers like Instacart and Blue Apron. The adoption of these new services exploded during the pandemic and is likely here to stay, meaning the industry will likely grow even more competitive in the future.
Warren’s regulatory crusade against Big Grocery is not economically sound, but with antitrust crusades against Big Tech and other industries a hot topic in the halls of Congress, it may gain some traction. Her colleagues would be wise to remember the words of Nobel Laureate economist F.A. Hayek: “[W]e should worry much less about whether competition in any given case is perfect and worry much more about whether there is competition at all.” Fortunately, that is very much the case with our grocers.
Competition isn’t just defined by the number of existing firms nor by their size. It’s defined by the ability of entrepreneurs to innovate and compete for the customers’ patronage. If Warren got her way and split up Big Grocery, it would harm consumers. Bigger grocers offer lower prices by negotiating quantity discounts with their suppliers while taking advantage of cost savings due to their large-scale operations. That’s Econ 101, and ignoring it points us toward bad decisions that make us worse off.
Coyne is a professor of economics at George Mason University and the F.A. Harper Professor of Economics at the Mercatus Center. Waldron is a Mercatus Ph.D .student and former resident fellow with the R Street Institute.
