How Shareholder Profits Are Killing The Food Industry
I think Capitalism is great.
I mean, it’s fine.
It’s okay.
Well alright…capitalism and the love of money and the fervent desire and ability of humans to significantly improve their lot in life has been and is and will be an incredible driving force across all domains. Sometimes it drives amazing progress. Sometimes it drives, well, other stuff.
I want to talk a little bit about how radically the food system, specifically in America, has changed just in the last century or so as a result of opportunistic capitalism and some of the major pros and cons thereof.
Spoiler alert: I think the biggest problem with the whole industry can be boiled down to the simple fact that there are more incentives to “increase shareholder value” than to do almost anything else.
The Early 1900's
In the early part of the 20th century, our food system was much more localized. The core production unit was still the family farm if you can believe that. This was just over 100 years ago which is the blink of an eye in the span of human civilization. Distribution and retail were equally as unrecognizable from today’s systems. We’re talking local markets and cooperatives. Unrefrigerated local milk deliveries. Horse-drawn carriages bringing loads of fresh vegetables to market.
The automobile industry began in America right around the turn of the century with Henry Ford’s Model T hitting roads in 1908 and the semi-trailer industry in its infancy through the 20s and 30s. The 40s and 50s saw the advent of the modern 18-wheeler and the significant growth of the US Interstate Highway System so this became an actually viable method of moving goods around the country.
The first chain grocery stores were just getting going in the early 20th century with A&P being the dominant force at 200 stores in 1900 over Kroger (founded as the Great Western Tea Company). Safeway would be founded in 1915, Albertsons in 1939, and Sam Walton wouldn’t open his first store in Rogers, Arkansas until 1962.
This isn’t a full historical account of the Industrial Revolution but, to be completely reductive about it, that was a whole thing too. We were in the process of inventing the modern versions of most of the things we know and take completely for granted in our industry today. Refrigeration and canning processes were huge milestones for the food industry. The advent and standardization of things like combustion engines and freaking ELECTRICITY were dramatically changing how food was produced, stored, distributed, and sold.
Consolidation and Expansion
The grocery industry as we know it today is a relatively recent thing. All of the things I’ve just talked about contributed to a grocery and grocery distribution industry existing at all. We can skip ahead a bit to the 1980s and 1990s where today’s grocery industry was really given shape. There was a huge amount of grocery consolidation that happened within a couple of decades. Kroger, Safeway, Albertson’s, and Ahold all had some major M&A activity in the US. Walmart also launched its Supercenters in the 80s, officially entering the ring as a grocery contender.
The early 1980s also saw the emergence of the club channel, with Sam’s Club and Costco both opening their doors in 1983. The club channel alone is nearly a $400bn industry in the US now.
The Insidious Burden of Incentives
Now that we’ve had a super thrilling history lesson, let’s talk a bit about money and what the companies you trust to fill your fridge and feed your family are incentivized to do best.
The grocery industry in the US is currently about a $1.2 trillion industry annually. There are 340 million people in this country and we buy a lot of food. Roughly half of that is sold through Walmart, Costco, Kroger, Albertsons, and Amazon/Whole Foods which are all publicly-traded companies. And nearly 1/3 of that $1.2 trillion comes from 5 major brands: General Mills, Kraft Heinz, PepsiCo, Coca-Cola, and Nestlé which are all (you guessed it) publicly-traded companies. There are also a large amount of privately-held companies in the mix with a lot of those today being significantly held by private equity and venture capital firms.
What all of these groups have in common (publicly-traded companies, PE held companies, VC held companies) is that their prime directive is “to maximize shareholder value”.
This is such a common phrase that it might not even make you flinch to read it but I sincerely hope it becomes anachronism.
Let’s just pause and roll that idea around in our heads for a moment. The prime directive for almost all of the companies making, distributing, and selling us the food we eat every day, for every meal, have as their primary goal to maximize shareholder value. Let’s be really clear too on the distinction between stakeholders and shareholders. A shareholder is someone who owns the stock of the company or owns the company. Shareholders are very often already wealthier individuals or groups. Stakeholders, on the other hand, are all the people involved in or affected by the system. Stakeholders are the people working in the fields and on the production lines and driving the trucks and stocking the shelves and, yes, buying and cooking and eating the food. We are all stakeholders in the food economy but few of us are shareholders or at least shareholders in a significant way. The main goal of food companies is to squeeze more value (for shareholders) out of every jar of peanut butter or loaf of bread or bottle of kombucha that you buy. Big brands are watching their stock price on a daily basis and small brands are burning their savings or investor cash to try to get to a payout where they get bought by someone higher up the chain, ie. one of the publicly-traded companies or PE or VC firms I mentioned.
Now of course there is some part of this system where companies and brands have to create value for their customers in order to be viable. But the whole industry is run by just a few companies and when smaller brands gain some success and traction in the market they will get bought up and consolidated by these major brands. They will often have no choice! The market is not designed for small- or medium-sized brands. This is a whole other story but please believe me when I tell you that the only options for small brands are out or up. So we will still have options as consumers but those options will be largely controlled by a dozen or so companies whose main goal is to make their shareholders richer.
I don’t hate shareholders, okay? My company has them as well and they are lovely people. We wouldn’t have lasted 18 months in the market without their support (see: the market is not meant for small brands) so please don’t misunderstand me here. But don’t you think that the big companies feeding us all should have something more generally beneficial above “value for shareholders”? Imagine yourself at the grocery store (one of the 5 above, of course) picking out food that you’d like to bring into your home and ultimately into your body. It is a hugely personal endeavour. What are you thinking about when you are walking down the aisles? You’ve probably got a grocery list, you’ve got a budget in mind, you’re thinking about ingredients or dietary concerns, you’re thinking about health and taste and etc. You’re probably not thinking “How can I use this shopping trip to maximize profits for the shareholders of these 12 companies?” But they are.
Now, it is not my intention to be all doom and gloom about this. I’m not claiming that these companies are evil or that shareholders are evil or that money is evil or any of that. I’m not that guy. I don’t think General Mills is trying to lie to you or hurt your family. What I’m saying is that, when it comes down to making decisions with products or with marketing or whatever, they are going to consider their share price. Their leadership is in fact directed and incentivized to consider that first.
The Implications
Let’s start with some positive. One effect, in general, of all of this industrialization and scale in the food industry is that we can get an amazing assortment of foods very quickly and relatively cheaply. We have way more people than we did in 1900 and we are all generally eating way better. Unless you live in a food desert, the variety of foods available at reasonable prices in the US is incredible. I don’t think we see the full costs of all this convenience and variety but it does, in fact, exist.
There are plenty of implications to this that aren’t great as well. The first is that consumers (ie. the general public, ie. all of us) get treated as process inputs for the few behemoths that have the keys to the kingdom. I don’t have to show yet another graph about growing income inequality, but that too. A system that prioritizes shareholder value can’t also prioritize stakeholder equity. I’m not saying it has to be one or the other but, in a situation where maximizing shareholder value must rule, any conflicting opportunities will get crushed. That’s how priorities and opportunity costs work.
Additionally, contrary to the statement above about variety, our options around smaller brands will be really limited to those that had the charisma and know-how to get some funding.
The Solution
I do believe there are some ways off of this path that fully utilize the capabilities of all the existing players on the field in some reimagined ways. You can’t (and probably shouldn’t) destroy the current systems and start from scratch but you can fix some of the key issues around incentive.
My belief is that any solution, at its core, has to realign incentive from “maximize shareholder value” to “maximize stakeholder value”, with a broader definition of “value”.
Much more on this later.
Happy eating, comrades.