Grocery bills are going up for a lot of reasons. One has to do with how food gets on grocery store shelves. WSJ’s Jesse Newman explains a hidden layer of fees that are getting passed down to the consumer. Further Reading: - The Mysterious Fees Inflating Your Grocery Bill - After Years of Raising Prices, Food Companies Hit Consumers’ Limits Further Listening: - The Twinkie: From Bankruptcy to Billions - Food Fight: PepsiCo vs. Carrefour Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: What are the hidden fees inflating grocery bills?
More than a decade ago, Kyle Kaler was working in finance in New York City and trying to live healthier.
I took a lot of things out of my diet, you know, grains, wheat, corn, soy, like all of these things. I took a lot of processed foods out of my diet and couldn't find a whole lot on store shelves that tasted really good as well.
So Kyle tried to solve this problem in his own kitchen.
And so, yeah, threw all these dried fruits and nuts and seeds in like a food processor and like blended it together and just ate it like that for a snack.
This snack became life-changing for Kyle. He moved to San Antonio, Texas and started a food company. He named it Wild Way Foods and began selling his granola at farmer's markets. And after sales went well, Kyle thought about going bigger. So he headed to the biggest health food store he could think of.
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Chapter 2: How did Kyle Kaler start his food company?
I just walked into Whole Foods Markets headquarters in Austin with this product in a bag and was like, hey, I have a product that I think would sell well on your shelves. And, you know, there was a woman at like the front desk that was like, well, do you have an appointment or like anything? And I was like, no, I just I think this would sell well in your stores.
And she looked at me like I was a little crazy and was like, OK, we'll give it to me and I'll give it to the buyer. A few days later, got an email from the cereal buyer and said, hey, I got your product and I think this is great. Let's talk about if you guys want to be on shelves.
Kyle's granola was going to be on Whole Foods shelves. But to make that happen, Kyle had to start working with a distributor. Distributors are companies that buy, store, and transport millions of products to grocery stores.
At that point, now the work begins for us to set up the relationship with the distributor. So we sell to the distributor. The distributor then sells to the retailer.
But the relationship with distributors is complicated and full of all kinds of obscure costs. Kyle says these charges erode his profits. And to stay afloat, he says he has to pass those costs onto consumers in the form of higher prices.
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Chapter 3: What role do distributors play in grocery pricing?
And, you know, we recently raised prices last year for the first time in, gosh, six or seven years. And we're not making any more money off of that price increase at all. So, yeah, we have to raise prices or else we'll just never survive.
Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Monday, November 18th. Coming up on the show, the hidden costs inflating your grocery bill. There's something that people have been feeling a lot recently.
$70?
And I didn't even get that much. I don't even understand. I literally, I literally don't understand. $41 on three items at a small town grocery store. So you're supposed to spend $300 to $400 to $500 a week just to feed your family now?
I think if you go to any grocery store right now, the inflation and just the price of everything is just exorbitant.
I have a family of four, and it's just been wild to watch the bill rack up, you know, in the past couple of years. It feels like a major investment every time we go to the grocery store these days.
That's our colleague, Jessie Newman, who covers food. Jessie's been looking into why her bills have been racking up. One big reason is higher costs for things like raw materials, transportation, and labor. But Jesse says there's another factor that's behind the scenes and is tied to distributors, those companies that bring food products from manufacturers to grocery stores.
They are bringing in thousands and thousands and thousands of products from thousands of different manufacturers, big and small. And they are then curating a truckload of all of these different products to bring to a grocery store.
This makes sense to me. Like you can't have like a conga line of, you know, bread makers and yogurt makers and crazen makers outside a grocery store delivering their bags. Those go to distributors.
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Chapter 4: Why are small brands struggling with distributor fees?
These distributors are national companies. Their names are like alphabet soup. There's UNFI, CNS, and KEHE, or KEHE. Small brands say these companies are like gatekeepers to the grocery store, and they hold a lot of power.
And it's this part of the supply chain that happens to be characterized by these really sort of Byzantine rules and conventions that involve fees and charges, and they can really rack up. And so this is this other piece of the inflation story that is particularly the case for a lot of the smaller brands that you might be putting in your grocery cart.
And where the rub is, is that sometime in the future, you're going to receive a payment from your distributor. And there will be dozens and often dozens and dozens of deductions that are taken off. And these are just sort of like a long string of numbers, you know, that are attached to your check stub. And they will be minus numbers. And this is where a lot of the tension and conflict comes in.
Kyle Kaler, who owns the granola company, has felt that tension and conflict. His company, Wildway Foods, now sells its products to over a thousand grocery stores around the country. And that means Kyle is working with distributors a lot. What is that relationship like?
That's a great question, and I'm trying to be really careful about what I say and how I say it. Yeah, it is fun. Complex? It can be complex, yes.
Where is the complexity?
You know, you would think it would be as simple as, you know, distributor buys my product, and then once they buy it, you know, it's their responsibility, and then it's their responsibility to sell it, right? But the reality is that it's not as black and white at all as it would seem.
Kyle says that sometimes when he's supposed to get his payment from a distributor, there have been so many deductions that he's the one who owes the distributor money.
So most distributors have a guaranteed sale clause where I am guaranteed to the distributor that the product that they buy from me will get sold.
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Chapter 5: What challenges do grocery store suppliers face?
And if it doesn't, the cost comes back to me. Either I have to buy it back or I have to discount it to get rid of it. Or maybe it expires and I have to pay for it to, you know, get thrown away.
That seems risky and potentially costly.
Very risky and very costly, yes.
Kyle says when there are other problems, he can get charged fees upon fees.
So, you know, this was a few weeks ago. We had an invoice that had a $2 charge from a retailer. And the distributor tacked on a $40 administration fee on top of that $2 fee. And so individually, $40, not so much, but repetitively done over and over again, adds up to a lot.
So you just have to have a big accounting department?
Yeah. So we have somebody that works with us and their sole job that they do for us is to look at all of the chargebacks and fees that we get charged on the distribution side and try to determine which ones are legitimate and which ones are not.
And is there any way around this system?
Yeah, no, there's not really much of a way around it. If we want to grow and become a larger company, a national company, we're going to have to continue to deal with distributors and continue to have to take on potential partnerships and relationships that are not profitable.
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Chapter 6: How do fees impact the cost of groceries for consumers?
It's very much a flawed system and an imperfect system.
Jesse reached out to the major distribution companies to hear from them. Only Kayhee spoke with her. An executive there said food distribution is costly and complex, especially when it involves smaller brands, and that three-quarters of the fees originate from grocery stores, not from distributors. Coming up, how the food distribution system got to this point.
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Many grocery stores are in long-term contracts with a primary distributor. Like, UNFI is the main go-to for Whole Foods, and Kahey is the go-to for Albertson's. But over the years, the landscape of this industry has changed significantly.
You know, consolidation in the distribution industry is part of this story. You know, the distributors, they themselves operate on incredibly thin profit margins. These are not companies that are just racking it up. And so they have had to, you know, they have consolidated over time in order to stay afloat. themselves.
And that just means that there aren't very many national distributors for brands to choose from.
So for many small food brands, working with these distributors is pretty much the only way to get into grocery aisles.
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