United States of America
© Springer-Verlag Berlin Heidelberg 2015
Pierre Kobel, Pranvera Këllezi and Bruce Kilpatrick (eds.)Antitrust in the Groceries Sector & Liability Issues in Relation to Corporate Social ResponsibilityLIDC Contributions on Antitrust Law, Intellectual Property and Unfair Competition10.1007/978-3-662-45753-5_2020. United States of America
(1)
District of Columbia Department of Consumer and Regulatory Affairs, Washington, DC, USA
(2)
Qian & Nemecek, Alexandria, VA, USA
(3)
Baker and Miller LLC, Washington, DC, USA
20.1 Introduction
The US food distribution market, and particularly the grocery retail sector, is dynamically competitive and innovative today. As a result, apart from hyperlocalized issues, food distribution and marketing do not seem likely to be a priority area for public antitrust enforcement or even private antitrust litigation in the next decade or so.
This situation represents a marked difference from many markets in Europe, where quite a few national competition authorities (the “NCAs”) are devoting considerable attention and resources to the grocery sector. Ideologically, the difference seems to be that today the US tends to be less concerned about the outcome of “fair” competition, even if it means the elimination of competitors; Europeans tend to be more concerned about “fairness” of the outcome among businesses, even if it means restricting competition. The US has traveled some of the roads that Europe is traveling and faced many of the same questions in an earlier area.
This difference of enforcement emphasis in the US appears to be due to divergent regulatory approaches and market fundamentals. Less overall sector regulation, a more liberal business climate, more technological and supply chain R&D and innovation, effective cartel enforcement, relatively light restrictions on vertical arrangements, limited intervention in mergers, and a few other factors combine to make grocery retail, and retail overall, a vibrant and competitive segment of the American economy that offers a rich variety of products with a diverse range of quality and prices.
Nonetheless, the US antitrust agencies (the Department of Justice Antitrust Division, the “US DOJ,” and the Federal Trade Commission, the “FTC”) continue to monitor sections of the industry to put industry players on notice and ensure that unexpected problems do not crop up. We detail these factors below.
20.1.1 Modern American Regulatory Environment
Less regulation is obviously a relative measurement. The US has both less competition-specific regulation and less overall regulation when compared with many of our European counterparts. While the less regulation exhortation may sound like a broken American record, things like the myriad Sunday shopping laws, or blue laws,1 and town center zoning regulations that occur in many other countries can depress overall prices and sales and create barriers to entry for large and small market players.
These examples are underscored by the long-term work of the OECD in assessing indicators of product market regulation. The most recent indicators from 2008 reflect how the common law countries in general, and the US in specific, have a significantly more liberal approach to both labor (employment protection laws) and product market regulation. The net effect is that even after extensive liberalization in Europe, primarily between 1998 and 2003, the US still has far more incentive-based regulation than prohibitions and has lower barriers to entrepreneurship.2
To some extent, the US approach is due to an established pillar of our national, constitutional law, a doctrine known as the Dormant (or negative) Commerce Clause that with a few exceptions prevents states and municipalities from responding to local merchants’ political pressure to erect discriminatory and protectionist regulatory barriers against interstate (or foreign) enterprises. In most industries, only Congress may create regulations that restrict trade and investment, and we can see the impact of the doctrine because traditionally liquor is exempt from the doctrine under the 21st Amendment of the Constitution of the United States repealing Prohibition.
Alcohol sales are the exception that may prove the rule. For many years, shipping wine or other alcohol between States without the State boards’ involvement and control was prohibited by local laws that only permitted producers to sell their products to wholesalers (the three-tiered distribution system). Only recently is that regime starting to liberalize due to efforts like a 2005 Supreme Court decision that permitted direct-to-consumer sales.3 While some would hold that the protection created a cushion for local alcohol industries, it appears that the recent flourishing of craft beer, non-California wineries, and even craft distilleries—throughout the country—owes its genesis to a loosening of protectionist regulation in many states that was led by the demand of Internet retailers to ship wine and beer directly to consumers.
20.1.2 Prior Examinations of the US Grocery Sector
The US Federal Trade Commission has conducted studies of the retail grocery sector at different times. Sometimes a study is through a staff or agency-sponsored report, but more recently in 2007 the FTC held a conference in which it invited scholars to discuss their individual research and findings.4 The papers included the following:
Earlier efforts included 2003 and 2001 staff reports on slotting fees, also known as “pay-to-stay” fees paid by manufacturers,8 and a 1990 literature review.9
The reports on slotting fees resulted in theories for how such arrangements, where manufacturers pay retailers for premium shelf space, would be anticompetitive. However, the 2003 report was not able to find data and economic models that conclusively determined antitrust harm or injury that resulted from slotting fees.
20.1.3 Recent Cases of Competition Enforcement Against the US Grocery Sector
Grocery retailer conduct cases have been sparse in the US in the last 5 years. However, a recent set of consolidated grocery wholesaler cases did wend through the US Courts.
In In re Wholesale Grocery Products Antitrust Litigation,10 two of the largest wholesale grocers allegedly agreed to not compete in the other’s primary region. The five direct purchaser plaintiffs claim that this agreement artificially raised prices. The wholesalers attempted and failed to escape the litigation through arbitration agreements, but more recently several claims were dismissed on a finding that the retailers could not prove antitrust injury under a Rule of Reason analysis.
The US DOJ and FTC rarely are involved in hyperlocal antitrust enforcement outside of market remedies for larger mergers that affect small markets. Policing anticompetitive practices can happen through the State Attorneys General, through state or applied Federal law, or through private cases, though those are rare. Enforcement by the State Attorneys General varies greatly across the states.
Revenue Sharing
One of the more recent cases of local anticompetitive practices was a 2004 revenue-sharing agreement by three grocery stores in California that were together facing labor renegotiations. The California Attorney General led this case with assistance from the US DOJ. Through appeals and litigation, the court case regarding this dispute is ongoing.11
Monopolization
Similarly, the California Attorney General also brought a case, with assistance from the US DOJ, in the same year requiring divestiture of a supermarket store where 6 years earlier Vons purchased both supermarkets in a small island community.12 In this case, California was able to demonstrate a direct rise in local grocery prices.
Abusively high consumer prices by a single firm are generally clear evidence of monopoly power and thus can support a charge of monopolization of a market under US antitrust law if coupled with other exclusionary conduct by a defendant. Similarly, abusively high prices by several competitors could be important evidence supporting a finding that a price-fixing conspiracy among competitors has occurred. Such conspiratorial price fixing, however, is generally illegal per se, regardless of whether the prices were reasonable or abusive.
Research did not reveal any major cases beyond California ex. rel. Lockyer v. The Vons Companies, Inc.,13 which involved retail grocery monopolization of a small California town. The plaintiff state, California, was able to demonstrate across-the-board price increases following monopoly control.
20.1.3.1 Resale Price Maintenance
Slightly further back one finds the leading case on resale price maintenance (the “RPM”) in the US, the 2007 Supreme Court decision in Leegin,14 which overturned the per se presumption leaving RPM under the Rule of Reason. The result has been a flowering of contradictory RPM decisions in the lower courts.15
Reselling below cost, delisting suppliers, or RPM are not per se violations of American antitrust law. Research did not reveal major US antitrust cases on these topics.
20.2 Economic Landscape of the US Grocery Sector
20.2.1 National Market Structure of the Vertical Levels of Grocery Competition
There are four main levels of the US food/grocery market: (1) agricultural production, (2) secondary production (processing), (3) wholesaling, and (4) grocery retail.
20.2.1.1 Agricultural Producers
Agricultural production in the United States is vast and varied, but it remains strongly marked by the cooperative structure.16 Farming cooperatives have limited immunity from antitrust scrutiny by the 1922 Caper–Volstead Act.17 Note, however, that the antitrust immunity has not necessarily resulted in economic stability or prosperity for many small farmers. Median farm income in 2012 was in the red.18
It is debatable today whether Capper–Volstead antitrust immunity ultimately benefits most farmers or simply benefits the corporate heads of large cooperatives, though the issue largely has been dropped.19 Several recent consolidated antitrust cases discussed herein have challenged what downstream purchasers believed were cooperatives restricting supply to maintain higher prices for producers.20
At the production level, the price and quantity of corn, which are heavily impacted by the price of oil,21 in turn impact the price of animal products such as beef, poultry, and dairy. There is a phenomenon by which small family farms, while banded together through coops, nonetheless are unable to exercise sufficient pricing control for inputs or outputs; thus, many small producers operate at a loss and rely on outside income, tax benefits, and government support.22 Thus, despite 2012 being the highest income year for American farmers on record, the benefit of higher prices did not uniformly support producers.23
20.2.1.2 Food Processing
The processing industry is not covered by Capper–Volstead and historically was frequently regional due to the perishability of products and high cost of overland shipping. Concentration has been increasing for decades, however, as processers focus on new technology, economies of scale, and low energy costs as key drivers of economic viability.24 The United States Department of Justice and the Department of Agriculture have been investigating processing industries for signs of monopsony in recent years through public workshops because concentration levels in the major segments are high.25 , 26 Many larger processors have successfully insulated themselves from the recent global pricing shocks through commodity hedging.27
The 2007 Economic Census found almost 30,000 food and beverage processing plants in the US owned by about 24,500 companies in 2007. However, 77 % of all processed foods were made by the largest 12 % of processors.28
20.2.1.3 Food Wholesaling
Food wholesaling in the United States is in decline. The US Census identifies three main types of wholesalers: (1) merchant or third-party wholesalers, which accounted for 57 % of grocery wholesaling in 2007; (2) manufacturers’ sales branches and offices (the “MSBOs”) that help manufacturers market their own products accounted for 23 % of wholesaling; and (3) brokers and agents who do not handle products accounted for the final 20 %.29 Both manufacturers and supermarkets are looking to cut wholesalers out of the supply chain. The market contraction for failed wholesalers is driving concentration,30 and recent litigation marks retailers’ concern about wholesaler monopsony pricing.31 There has also been vertical integration of the wholesaling function into retailing and manufacturers and wholesalers moving to direct-to-consumer marketing.32
20.2.1.4 Food Retailing
Food retailers exist in a changing and nationally competitive market that may nonetheless be subject to regional or submarket dominance and control. In particular, lower income communities throughout rural and urban areas and those found increasingly in suburban locations frequently lack the level of competition and variety available to middle and higher income communities in the United States.33 Antitrust authorities, however, rarely consider market segmentation based upon income levels of the consumers, and therefore little has been written about this lack of competition in antitrust literature.
In 2011, the US had 212,000 traditional food stores, which sold USD 571 billion of retail food and nonfood products.34 Grocery stores, including supermarkets, accounted for 91 % of food store sales.35 USDA Economic Research Service data show that the top 4 retailers account for 37.3 % of the retail market, the top 8 retailers account for 50.5 %, and the top 20 account for 63.7 %.36
As the latest ERS data show, “The longer term trend shows an increasing concentration of sales among the Nation’s largest grocery retailers.”37 “One contributing factor to such increases over the past decade has been the rapid growth of Wal-Mart Supercenters. Their food and non-food grocery sales amounted to an estimated $109.4 billion in 2011, making it the largest U.S. retailer of grocery products. In comparison, second-place Kroger, the largest traditional grocery retailer, had sales of USD 71.1 billion in 2011.”38
20.2.2 Geographic and Consumer-Led Markets
The grocery market in the US, as in Europe, is complicated because many of the consumer markets are geographically small with sales competition occurring at a local level. Nationally, concentration in the US grocery market seems low, with the top 20 retailers accounting for 63.7 % of the market. However, many of the retail chains are regional or local and do not participate in all geographical markets. As a result, concentration in specific markets may be higher.39
Nonetheless, in the main, the shape of the US grocery consumer markets allow for an easy mix of national and regional chains that benefit from considerable foreign direct investment and ownership. Consolidation in US grocery chains is rising as it does in most mature industries, but it remains low with the top four retailers holding 37 % of the market.40 The market has been shaped by consumer demand (for store hours, location, product variety, prices, quality, etc.) and will likely become ever more segmented based upon the type of consumer (i.e., deep discount, convenience, specialty, high end).
Even as the market continues to mature, barrier entry into the market at various levels remains relaxed. For small and medium enterprises, nonrestrictive local zoning and relatively little land use restrictions have allowed niche providers like green grocers, gourmet food stores, and organic markets to enter urban and high-income areas in proliferation. At the same time, Wal-Mart has grown quickly in rural areas to openly compete with local and regional chains that previously faced little competition.
While the growth of Wal-Mart and other hypermarkets and warehouse stores has led to various other public policy concerns (mainly labor issues), regarding competition among retail grocery providers, anticipated changes to the market may displace most concerns about Wal-Mart gaining regional monopoly or national and international monopsony powers in grocery retail or retail overall.
For antitrust purposes, retail grocery markets have been defined in terms of the local geographic areas where a consumer could reasonably turn for alternatives. But this may be changing. The FTC in the 2007 Whole Foods case, a specialty grocery store merger, argued that “organic” markets were a distinct product market from main retail grocery stores, displaying a more nuanced view of shoppers’ behavior.41
Beyond redefinition by the agencies, the retail market in the US is undergoing organic, innovative change. Leading online retailer Amazon is poised to enter the grocery market with refrigerated delivery, and much like Wal-Mart, Carrefour, or other “grocery” retailers will offer a product mix that covers much of the basic retail landscape. With an already formidable brand, logistical operation, and customer base, Amazon’s entry into grocery retail is another example of how competition can keep the market moving quickly. Other major grocery chains are expected to follow suit in providing delivery options creating a new dynamic in terms of customer engagement and allowing for new players to vie for customer attention and loyalty.
20.2.3 Technology and Innovation
Some aspects of grocery retailing in the US are similar to many other countries, given that it is a low margin business. The low margins coupled with low regulatory barriers incent retailers towards ever more efficiency and innovation to shave costs.
Innovation takes many forms, but many of the more recent innovations have been in business process and inventory control that reduce unnecessary overhead and speed up decision making. Through this grocery retailing again is morphing from being about the product (groceries) to being more about the distribution systems and customer engagement (and simply merging with broader retail). Importantly, however, much of the technological innovation appears to rely on sufficient scale to invest in technology like RFID inventory control, better computer modeling and consumer studies, etc. Interestingly, US-based companies spending on R&D in this sector outstrips EU spending by a third or more.42
While there is recognition that Internet grocery retail presents an interesting area of growth, market entry, and specialization, there are no substantially different competition laws applied to online grocery retailers. In many cases in the US, online retailers are subsidiaries of well-established brick-and-mortar stores.
Online grocery retail occurs mostly for dry groceries and nongrocery (home and beauty) items.43 As of 2012, 46 % of shoppers said that they never or rarely shop for grocery items online.
In most cases, however, online sales are small enough, with the slow adoption of the service by consumers, that these institutions have not drawn the attention of the agencies. In particular, in the dry groceries and nongrocery space, Amazon, Inc. continues to be a major market player, but currently little public attention has been paid to Amazon’s potential impact in the grocery sector.
20.3 Impact of Legal Factors on the US Grocery
20.3.1 Effective Antitrust Cartel Enforcement
One reason that US-facing firms may spend more on innovation is the need to gain a competitive edge in a tough market, a consideration that is less critical to companies engaging in traditional cartels. The American approach to anticartel enforcement (with its heavy emphasis on directly punishing individuals with incarceration and fines) appears to have done a reasonable job of deterring domestic cartels. As result, we haven’t seen recent investigations or cases, public or private, in the grocery retail or larger good sector based on cartel theories.
In contrast, the 2012 European Competition Network ECN Food Sector Report lists that half of all European NCA antitrust inquiries in the food sector between 2004 and 2007 concerned cartel activities.44 There are no specific negotiating practices that are banned by unfair trade or competition laws. US antitrust law has swung away from per se presumptions. Negotiating practices in vertical relationships would not violate any per se rules.45
The US has had cartel and other competitive concerns in the food sector in the past, and these have been dealt with through strong enforcement in an earlier era. For example, under the 1922 Capper Volstead Act, farming cooperatives were granted limited antitrust exemptions to allow small farmers to band together to purchase supplies and sell their products. However, an agricultural cooperative loses its exemption if it includes nonfarmers in horizontal agreements concerning prices or output.46 Historically, there was a considerable amount of US DOJ criminal antitrust enforcement against milk producers and cooperatives for engaging in nonexempt activity.47
However, for at least 30 years, cartel enforcement in the domestic food sector has no longer been necessary. There do not seem to have been any prosecutions against groceries for cartel activity, since 1972, when the US DOJ prosecuted a group of small, independent grocers that organized to compete against larger chains. However, the Justice Department has brought cases against food processors for price fixing. In one recent case, the president of a large food company was sentenced to 6 years in prison for bribing customers to purchase tomatoes at an inflated price. More recently, concerns of producer collusion and price fixing have been addressed through private cases like chocolate and potato growers.
20.3.2 Abuse of Monopsony Status
Technically, abuse of buying power is prohibited in the US under the major antitrust laws, although very few cases alleging monopsony are seen in the US Courts.48 The leading case law on monopsony or oligopsony power is the 2007 Supreme Court case Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312 (2007).