The Mysterious Fees Inflating Your Grocery Bill

The Wall Street Journal to which I subscribe to. Author is Jesse Newman. A good read in presenting the problem.

The price of a bag of coconut-cashew granola at Whole Foods jumped last year from $5.99 to $6.69. Why that happened defies simple explanation. This is not unusual for a part of a Grocery Bill.

The granola maker, Wildway Foods, said the cost of making the cereal hasn’t gone up that much, and that it isn’t pocketing more profit. It jacked up the price, it said, in large part to offset fees that piled up from a little-known link in the supply chain: grocery distributors. 

There were charges for processing grocery promotions, others for potential spoilage and still more related to alleged shipping glitches.

Rising prices, especially in the supermarket, have vexed consumers, drawn scrutiny from regulators and emerged as a central issue in the presidential race. Donald Trump has blamed Kamala Harris and the Biden administration, and Harris points a finger at grocery chains and food companies. 

George Milton, who runs a hot sauce business in Austin, Texas, said consumers are frustrated because it is not clear to them why many food prices are so high. He adds . . .

“Is that price gouging or costs going up for distributors or retailers or farmers? I have no idea. Nobody does.”  

Big food companies have increased prices in recent years for everything from cereal to ketchup to potato chips, citing higher costs for ingredients and labor, among other things. Many small manufacturers that have raised their prices have another explanation. They say they also are being squeezed by the distributors who act as gatekeepers to many supermarkets. 

Distributors are the middlemen of the grocery business. They buy products from food makers—many of them too small to run their own distribution networks—then store, sell and ship them to supermarkets. A small number of them, including KeHE Distributors, C&S and United Natural Foods, or UNFI, sell to grocery stores nationwide.

When Milton started his hot sauce business 12 years ago, he delivered the condiment himself by truck, dropping boxes at the back door of local food co-ops in exchange for a check. 

These days, the chief executive of Yellowbird Foods relies on national distributors to ship his product to stores, a process he said is riddled with obscure costs that make it hard to know what, if anything, he’ll be paid. 

“That’s a really tough way to run a business,” Milton said. “But what is the alternative, that I UPS it from one place to another?”

Fees and other charges levied on food makers, such as for late or partial shipments, have long been a part of the grocery business. Grocers impose many of their own fees for things like promotion and shelf space, which distributors pass on to food companies. Distributors charge extra for processing those fees, and levy others themselves. 

Launching a new flavor for an existing product? There’s a fee for that. Running a promotion at retail? Distributors charge for that, too. If distributors buy too much and products expire before hitting store shelves, they can deduct spoilage fees. But if food makers short an order, aiming to avoid spoilage charges, distributors can ding them for that.

Many smaller food makers complain they are being gouged, and that fees and other charges that stream in from distributors have forced them to raise their prices to stay in business. 

Distributors operate on razor-thin profit margins, with limited ability to offset rising operating costs. Food executives said grocers have enormous power to dictate terms with distributors, and that small food companies can be naive about the costs involved in building a brand and getting it to store shelves.

The situation reflects a struggle for profit throughout the grocery sector. Big food manufacturers that account for the bulk of sales have pushed through hefty price increases and notched some of their biggest profits in years. That is adding pressure on grocery chains to find other ways to keep consumers’ grocery bills from rising too much.

The national distributors handle tens of billions of dollars’ worth of packaged food each year. They are a key route to the grocery shelf for thousands of small food makers and provide much of the merchandise found in the aisles of independent grocers. Bigger chains buy most of their goods directly, though many also rely on distributors to keep them stocked, especially with the latest organic, natural or specialty brands.

“It’s almost impossible to make money as a distributor,” said James Curley, a food industry veteran who has worked for both manufacturers and distributors. “It’s just the nature of the business.”

~~~~~~~

I am going to stop here. I was an integral to the introduction and production of OM Lunchables. I handled all of the artwork, packaging, and labeling for the product.

Lets talk about the packaging a bit. That carton had all of the nutrition listed on it. If you changed one ingredient or lowered the ingredients used in the cheese, meat, crackers, etc. It would first be submitted to USDA and or the FDA for approval. Weeks could go by and I was always the one to deliver the message to the people doing the artwork and also submitting to the FDA or USDA or both. A person who worked with the graphics people would tell me and I would pass on the info to the supplier making the packaging or labels in other items. In a sense I was a god and a slave to the whims of the supplier who was approved after weeks of submission, the artwork people, marketing, quality control and the USDA/FDA. A love-hate relationship which I was extremely good at doing.

The pricing for the SBS cartons was high till I found a substitute which was using recycled material which was very similar to SBS in whiteness and creasing. Whacked off 15 percent of the cost of packaging equal to $1 million in 1991. Got me nothing except keeping my job and knowing more than my boss or his boss. It did not take much to cause a resubmittal to Quality, the USDA, and maybe the FDA. A lot of tension.

I guess what I am saying here, there is a lot or parts to manage to the manufacture of a product to which one thing can throw it off.

In the more recent issue of prices being increased by companies, I believe this is rent taking by companies who were in the pandemic and coming out of the pandemic. They can do it because they can, Change the package size, reduce lot size and withhold production, change to formulary, etc. What are you going to do about it if you are locked into a particular Bill of Material or supplier? Grin and bear it and pass on the increase.

The Wall Street Journal article is a nice one. It presents an issue. And me? I am presenting the issues with changes which typically increases costs due to expenditures.