Last month, the Atlanta Fed came out with a report showing a clear relationship between consolidation in grocery stores and the rate of food inflation. Unsurprisingly, where monopolies prevail, food inflation is 0.46 percentage points higher than where there is more competition. The study showed that from 2006-2020, the cumulative difference amounted to a 9% hike in food prices, and presumably since 2020, that number has gone much higher.
Affordability, in other words, is a market power problem.
And yesterday, we got specifics on just how market power in grocery stores works. The reason is because a nonprofit just forced the government to unseal a complaint lodged by Lina Khan’s FTC against Pepsi for colluding with Walmart to raise food prices across the economy. A Trump official tasked with dealing with affordability tried to hide this complaint, and failed. And now there’s a political and legal storm as a result.
Let’s dive in.
Everyone knows the players involved. Pepsi is a monster in terms of size, a $90 billion soft drink and consumer packaged goods company with multiple iconic beverage and food brands each worth over $1 billion, including Pepsi-Cola, Frito Lay, Mountain Dew, Starbucks (under license), Gatorade, and Aquafina. Walmart is a key partner, with between 20-25% of the grocery market.
Pepsi was also a key player in the post-Covid ‘greedflation’ episode. “I actually think we’re capable of taking whatever pricing we need,” said CFO Hugh Johnston in 2022. And the company did just that, raising prices by double digit percentages for seven straight quarters in 2022-2023.
The allegation is price discrimination, which is a violation of the Robinson-Patman Act, a law passed in 1936 to prevent big manufacturers and chain stores from acquiring too much market power. The specifics in the complaint are that Pepsi keeps wholesale prices on its products high for every outlet but Walmart, and Walmart in return offers prominent placement in stores for Pepsi products. This approach internally is called a “price gap” strategy. It’s a partnership between two giants to exclude rivals by ensuring that Walmart has an advantage over smaller rivals in terms of what it charges consumers, and so that Pepsi maintains its dominance on store shelves.
This partnership comes in a number of forms. Pepsi offers allowances for Walmart, such as “Rollback” pricing, where specially priced soft drinks go into bins in highly visible parts of the store. The soft drink company gives Walmart “Save Even More” deals, online coupons and advertisements, and other merchandizing opportunities. Other outlets don’t get these same allowances, meaning they are charged higher prices.
While Pepsi is a “must-have” product for grocery stores, Walmart is also massively powerful. In its investment documents, Pepsi notes that Walmart is its largest customer, the the loss of which “would have a material adverse effect” on its business. Walmart is so dominant that the internal communication of the two companies would show a comparison of prices at Walmart versus “ROM,” or “rest of market,” meaning grocery, mass, club, drug, and dollar channels. It’s everyone in the world versus Walmart.
And Pepsi does a lot of alleged price discrimination to maintain the approval of Walmart. It goes far beyond special allowances and concessions to Walmart; Pepsi even polices prices at rival stores and prepares reports for Walmart showing them their pricing advantages on Pepsi products.
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