A couple of weeks ago, Kamala Harris addressed a crowd during a rally where she talked about high food inflation and price gouging. Here is what she said about the high grocery prices US consumers are facing today:

“We all know that prices went up during the pandemic when the supply chains shut down and failed. But our supply chains have now improved and prices are still too high. A lot. A loaf of bread cost 50% more today than it did before the pandemic. Ground beef is up almost 50%. Many of the big food companies are seeing their highest profits in two decades. And while many grocery chains pass along these savings, others still aren’t.”

Kamala Harris during North Carolina rally on August 16, 2024

Later Harris-Walz campaign issued a press release, where they outlined three specific steps they will take to address high food prices:

1. Advance the first-ever federal ban on price gouging on food and groceries;
2. Set clear rules of the road to make clear that big corporations can’t unfairly exploit consumers to run up excessive profits on food and groceries.
3. Secure new authority for the FTC and state attorneys general to investigate and impose strict new penalties on companies that break the rules.

Harris-Walz Press Release on August 16, 2024

Do Grocery Chains Earn Too Much?

First, let’s examine what data tells us about excessive profits. There are a number of publicly traded grocery chains like Walmart, Kroger, Costco and Albertsons. Of course, some of them sell other things besides food. But, let’s look at their gross profits.

Gross profit is sales minus costs of goods sold. Gross profit margin is gross profit divided by sales. If we look at many of these major companies, we see roughly the same gross profit margins.

Even operating profit margins were more or less the same for these firms.

About the same profit margins mean that these grocery sellers earn the same 20 or 25 cents on every dollar of sales. Even if their dollar sales numbers are higher, their costs have gone up too. This could be higher wages or higher input or cost of goods they buy from suppliers like farms.

Grocery Business is Very Competitive

So, it is not clear which grocery chains vice-president Kamala Harris was referring to. Maybe, there are companies that fattened up their profits and refuse to lower prices. But, does it make sense? Selling food is very competitive. Most grocery players are working to keep their prices as low and competitive as possible.

What’s more, it is very difficult to even stay competitive in the grocery business. Most profits come from either economic scale or extreme differentiation. Think of Kroger or Walmart as examples of scale. These companies buy thousands of items and bargain with suppliers for lower prices.

Or think of your local small health store. Often, it carries local, higher quality foods that other big chains steer clear off. This form of differentiation allows smaller players to thrive.

And, what I don’t understand is this. How can you force a private company to lower its prices at the expense of its profits if it can legally do so? Of course, there are cases of price gouging during extreme situations. But, we are not in one at the moment.

Clearly, Kamala Harris is trying to address high prices that happened during her vice-presidency. We can argue why that is. Maybe it was snarled supply chains or huge amounts of money printed and given to consumers. Oil prices are higher too compared to four or five years ago for one or another reason. But, blaming grocery chains for that does not sound reasonable to me.

True, some parts of the food industry are more concentrated than others. For instance, the meat industry in the US is highly concentrated. Four companies account for roughly 85% of all meat processing in the US. They are Cargill, JBS, Tyson Foods and National Beef Packing Company. These firms often face lawsuits alleging price-fixing and other monopolistic behavior. Some lawsuits get dismissed while others are settled out of court. Maybe Kamala Harris should look into that as opposed to grocery chains.

What is Price Gouging?

Among the proposed actions in the Harris-Walz campaign press-release is advancing the first-ever federal ban on price gouging on food and groceries. Price gouging is often a thrown-around term. But, what does it mean? Here is what to know.

Price gouging happens when firms increase prices to an unreasonable and unfair level. This is especially common after natural disasters. Many states have laws that forbid price gouging.

For instance, take Florida. Florida forbids renting or selling products at “unconscionable” prices during emergencies. But, the key is the meaning of “unconscionable”. It means a gross disparity between the current price and the average 30-day price before emergencies. Florida also specifically excludes certain situations. If a seller can show that he faces higher costs or there are certain market trends, then it is okay.

Mike Pyle, economic advisor to Kamala Harris’s campaign, was on Bloomberg for an interview recently. There, he said that they plan on having price gouging federal law similar to what other states have. Okay, fair enough. But, I don’t understand how this helps in this situation. We are not in a state of emergency, which you will also have to define on a national level, by the way.

Bloomberg pressed Pyle on whether he or Harris sees any signs of price gouging in food markets now. Pyle avoided answering this question altogether.

Excessive Profits in the Grocery Business

There was a second point that Harris’s campaign made. They want laws to prevent food companies from exploiting consumers and running up “excessive profits”. I would say that this is the most controversial thing they said.

First, how do you define excessive profits? Or what is the exploitation of consumers? There must be objective measures that will establish what these things mean. As it stands now, it is very difficult to imagine what that would be. Is 2% too excessive in the case of Walmart? Or should it be 5% for Target? What if a company does something more productively and generates higher profits. How do you distinguish between these factors? Should we punish a more productive company and force it to lower its prices?

Short History of Fights Against Food Companies’ “Excessive Profits”

I don’t know the answers to these questions. But, we know what it can lead to, especially in centralized state economies. There, governments tried to impose penalties on companies generating “excessive” profits. These initiatives quickly devolved into either criminal persecutions or price controls.

One recent example involved a crackdown by the Venezuelan government on high food prices. They established price controls forbidding companies to charge above a certain level. The result? Food shortages. It is natural for sellers not to produce when governments try to control prices. It is especially true if there are justifiable reasons why prices are high.

A similar debacle happened with President Nixon in the 1970s. He established a 90-day freeze on wage and price increases. The result? Shortages ensued. Farmers stopped selling their cattle or producing anything altogether. Empty store shelves became the new reality.

For instance, recently chocolate and cocoa prices have been going through the roof. We can quickly blame food companies for that. Or, we can look at the industry dynamics and realize that there are objective reasons why chocolate is getting so expensive. 

Overall, I don’t think that the Harris campaign is talking about outright price controls. They know that these things are unlikely to work, especially on a federal level.

Harris-Walz Are Downplaying Their Initiatives

Finally, Harris’s campaign made a third point. They want to empower the federal government and state attorneys to persecute companies who break rules. They probably mean price-gouging. As for other things, such as excessive profits, they will have to define that first.

Also, my feeling based on public info is that Harris’s campaign is trying to downplay their fight against high food prices. Generally, these initiatives will face an uphill battle in the Congress. Even if they make their way through executive orders, there will be court battles. The food industry will be there to vigorously defend its profits.