The Food Industry's Market Concentration Problem

Feb. 25, 2021
High market concentration in the food industry is getting attention from law enforcement and others. What can or should be done about it?

Everyone wants to build market share. But it can be a problem if you get too good at it.

Market concentration in the food and beverage industry is a chronic situation that is getting renewed attention, especially in the meat and poultry sector. High-ranking executives in major companies have seen criminal indictments and convictions for price-fixing in recent years.

One recent high-profile case saw the indictment last spring of Jayson Penn, then-CEO of Pilgrim’s Pride (which subsequently dismissed him), along with top-ranking executives from other poultry companies, by the U.S. Justice Dept. on price-fixing charges. The former CEO of Bumble Bee Foods was sentenced last year to more than three years in jail for what was characterized as a lead role in a conspiracy to maintain artificially high prices for canned tuna fish.

For market years 2017 and 2018
Source: Open Markets Institute

Excessive concentration has other negative consequences. It can lead to civil suits, either from trade customers or class actions brought on behalf of consumers. Even short of litigation, it can create distrust and suspicion between those two groups and processors, to the point where executives in companies with large market shares end up having to walk on eggshells to avoid the appearance of collusion.

Market concentration in the food industry, with its attendant legal and other problems, is of course nothing new. The state of the beef and sugar markets helped inspire antitrust legislation at the turn of the 20th century. But concentration has been surprisingly persistent.

Some 53% of the total meat processing market is controlled by the top four firms, with four companies processing 85% of America’s beef and 65% of its chicken. Four companies own 80% of the beer market; four others control 83% of the ready-to-eat cereal market. For some specific products, concentration is even tighter. J.M. Smucker has a 45% share of the U.S. jelly market; Frito-Lay, 60% of potato chips.

In the view of some observers, when it comes to market concentration, the food industry is simply following a well-established general pattern for American business. Big fish constantly eat little ones, and there are several major industries that are dominated by handfuls of companies.

“The meat industry, in many ways, is not different from a lot of industries,” says Derrell Peel, a livestock marketing specialist at Oklahoma State University. “Why do we have three or four big car companies, three or four big airline companies, Walmart and large grocery chains? It’s basic economics at the root of it. In the meatpacking industry, the economies of size are very, very strong. There’s just a lot of economic cost efficiencies from these large-scale operations.”

Others say that some companies get bigger just because they can; opportunities for acquisition keep presenting themselves.

“I think it’s a combination of lax enforcement and then constant merger after merger,” says Austin Frerick, deputy director of the Thurman Arnold Project at Yale, an initiative to study antitrust policy and competition enforcement. He notes that Smithfield Foods, among others, reached its current dominant position among pork producers in part by snapping up one regional pork processor after another.

Mary Hendrickson, a professor of rural sociology at the University of Missouri, agrees that antitrust enforcement policy shapes the pace of concentration in the food industry. She points out that vertical integration in the broiler industry – arrangements where processors supply chicks and feed to growers, who are contractually obligated to use them – was common by the 1960s, but it took until the 1980s for claims of unfairness and abuse to be heard.

The difference, Hendrickson says, is that the top four firms had only about 12% of the market in the 1970s; today, it’s more than 50%. With that situation, Hendrickson says, “antitrust interpretations and enforcement changed greatly in the 1980s.”

Enforcement through happenstance

The current spate of antitrust actions, however, is not related to any change in conditions in the food industry, at least in the opinion of lawyers who specialize in the field. It’s basically just happenstance, they say; a case popped up, it led to another, and so on.

“I think what occurred probably is that information about collusion in the food industry came to their attention, and they pursued it,” says Philip Giordano, a partner with Hughes Hubbard and a former antitrust prosecutor with the U.S. Justice Dept. Antitrust cases get prosecuted all the time, and several high-profile ones just happened to be in the food industry, Giordano says.

Scott Wagner, a partner at Bilzin Sumberg, says cases tend to cascade: “I don’t know if it’s so much a change of focus as the cases sort of build on each other.” It starts with a Justice Dept. antitrust division amnesty policy: If a company goes to the department and confesses, its executives will usually get a full walk.

That principle extends down the line as a case unfolds, Wagner says: “When you’re the second or third in, one of the ways to reduce a penalty is to advise the DOJ of conspiratorial activity in another or a related market.” As a result, cases tend to build on each other: “You see all these companies coming in trying to reduce their criminal liability, and one thing leads to another leads to another.”

That’s what happened with the poultry case now being pursued by the Justice Dept. An initial round of indictments came down in early June of last year that included six current and former executives of Tyson Foods, Pilgrim’s Pride, Koch Foods and others. A week later, Tyson Foods approached prosecutors with an offer of cooperation. About four months afterward, Pilgrim’s Pride agreed to plead guilty and limit its liability to a fine of $110.5 million.

Concentration in the poultry industry has been fingered for a decline in the living standards of poultry raisers who are under contract to the big processors.

Digital pitfalls

The criminal case against Tyson, Pilgrim’s and the others was built in large part on a paradox of the Information Age. Digital communication makes collusion between ostensible competitors easy – but it can also make that collusion easy to detect.

The criminal indictment charges that one of the main ways the defendants collaborated was by sharing information about their current prices with a third party: a price-index news service to which the top processing companies all subscribed. Doing so is always a dicey proposition, antitrust experts say. It’s probably all right if 1) the third party is truly independent and not owned, even partly, by any of the participants, and 2) the information is truly anonymous, with no possibility of determining which prices are being charged by which companies. However, the government alleges that anonymity was not preserved with the information that the defendants furnished to the news service.

“The primary concern is that, as it appears the poultry defendants [in the criminal case] did, competitors will use the shared data to make their pricing more uniform and avoid competition,” says Laura Alexander, vice president of policy at the American Antitrust Institute. “If the third party collecting the information is truly independent, that can help mitigate the concern, but often the third party has an interest in the scheme or is a shell created by the competitors to facilitate data sharing and/or price fixing.”

Some of the most vivid evidence in the poultry case came from emails and texts among the defendants. For instance, in one case, an employee of Koch Foods emailed Bill Lovette, then-CEO of Pilgrim’s, in 2016, inquiring about a request that a distributor customer made for an extension of credit-line terms. The Koch employee asked whether Pilgrim’s had received a similar request, and Lovette allegedly acknowledged that he did: “Yes, we told them NO!” – leading Koch Foods to also refuse the request.

Dangerous liaisons

Communicating directly with competitors is generally a bad idea, antitrust experts say. It becomes a terrible idea when the conversation gets into prices and other specifics.

Alexander acknowledges that communication between competitors can serve legitimate purposes, but adds, “It is hard to think of a scenario where direct communications between competitors about specific future prices would be anything but anticompetitive and illegal. There is no legitimate basis for sharing company-specific, current or future pricing information between competitors; rather, such communications are a hallmark of price fixing and bid rigging, both of which are per se illegal and patently anticompetitive.”

The criminal case against the poultry giants originated as a 2016 civil case, filed by their major customers, including restaurant chains, distributors and retailers, including Kroger, Walmart and Sysco. The Justice Dept. stepped into the case in 2019, beginning the investigation that led to the criminal charges.

This pattern is common. Either customers or smaller competitors bring civil suits against larger operators; this gets the attention of the Justice Dept. The process works in reverse, too. After Pilgrim’s and Tyson settled their criminal cases in October, they, along with four other poultry processors, were hit with new civil suits by Target Corp., Chick-fil-A, Aldi and others.

Fixing vs. gouging

Antitrust cases are not the only kind of potential difficulty that excessive concentration can bring. Under certain circumstances, it can also leave producers vulnerable to charges of price-gouging.

That’s what happened to Hillandale Farms, a major egg supplier in the Northeast. It is now facing a lawsuit filed by New York State attorney general Letitia James, charging it with taking advantage of egg shortages during the pandemic by hiking prices by almost 500% between January and March. Hillandale acknowledges that the price of eggs went up drastically but argues that it was due to market forces.

Price gouging is fundamentally different from price fixing in that it takes advantage of an event, usually a calamitous one, that causes a spike in demand. Most of these are natural disasters like hurricanes. James is arguing that the pandemic constitutes such an event.

It may be questionable as to whether the pandemic qualifies as a calamitous event on the order of a hurricane. The primary issue, however, is usually the amount of the increase.

“At bottom, the question to ask when it comes to price-gouging is whether the firm is trying to take advantage of misfortune,” Wagner says. “The amount of the price increase is generally what tips off investigators to look at whether there is price-gouging.”

For market years 2017 and 2018
Source: Open Markets Institute

M&A concerns

Concerns about excessive concentration can crop up in the wake of a large-scale acquisition or merger. This can be a problem when it affects local or regional markets, as well as national.

Big M&As usually require review and approval by the Federal Trade Commission. These can range from a simple OK, to a demand that some assets or even units of the combining businesses be divested, to outright denial of permission for the deal.

An example of the last came early last year, when the FTC put the kibosh on a sale of the ready-to-eat breakfast cereal business of TreeHouse Foods to Post Holdings. That business was mostly for private label, and the FTC determined that it would put a 60% share of private label cereal production in Post’s hands, which the agency deemed too much.

The FTC takes various factors into account when considering a merger. “A merger can enhance market power simply by eliminating competition between the merging parties,” the agency notes in published guidelines. Other considerations include: whether competition will be lowered in particular locations; whether the intention, or effect, will be to squelch an emerging technology or other disruptive innovation; or if it increases the risk of coordinated or interdependent action by ostensible competitors not involved in the deal.

Is concentration ‘natural’?

It’s impossible to evaluate what, if anything, should be done about industry concentration without determining how and why the situation came about. In the view of many observers, it’s a natural evolution toward maximal efficiency, and it endures because it gives consumers what they want: a reliable, relatively inexpensive food supply.

“At the root of it, economic efficiency is the big driver,” says Peel of Oklahoma State. “Everybody in the industry has benefited in a general sense. Cost savings in the industry tend to get redistributed back in the industry.” Cattle producers get higher prices and consumers get cheaper meat – at least in theory.

Others say that the theory doesn’t transfer into practice. Frerick calls it a “chimera.”

“Bacon was cheaper under President Truman than it was under President Obama,” he says. “That is a false notion that industry likes to give, that consumers are saving money.”

Hendrickson argues that concentration allows for cheap product in part because it facilitates exploitation of farmers, plant workers and others. “The question is how does meat become so cheap and will the impacts of that cheapness on farmers, workers or the environment have more serious consequences, especially over time?” she says. “One could argue that food is simultaneously too cheap and too expensive.”

In addition, she says, the experiences early in the pandemic – when meat supplies were threatened by giant plants closing due to COVID ¬– show that concentration has its downside. “A 20,000-head-a-day slaughter plant could have major labor efficiencies, equipment efficiencies and the technological advances that support those efficiencies but can be felled by a virus.” And that can put a very big dent in the food supply.

Nevertheless, it’s hard to imagine the concentrations at the top of the food sector spontaneously breaking up due to any sort of market forces, especially once the pandemic is over. It’s equally hard to imagine the Justice Dept., even under President Biden, pursuing antitrust cases to the point of forcibly breaking up any big players.

Frerick considers modern antitrust enforcement in the food industry to be slaps on the wrist. “All they do is fine the companies and say ‘don’t do it again’ or ‘don’t be sloppy.’ But until there are structural changes in these markets, I think it’s safe to say this behavior will continue to occur.” He would like to see a law prohibiting meat processors from owning any of the animals they process, similarly to how producers of alcoholic beverages are not allowed to sell directly to retailers.

Hendrickson would like to see a wider debate on the issue.

“Much discussion has centered on a need to rethink competition policy itself in ways that benefit business, producers, consumers, workers and their communities, and understand this at multiple scales of governance, from the state level to the global level,” she says. “There are lots of ways to think about power in the marketplace and the impacts that has across society.”

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