The Journal. - The Mysterious Fees Inflating Your Grocery Bill

Episode Date: November 18, 2024

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

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 and 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 farmers markets. And after sales went well, Kyle thought about going bigger. So he headed to the biggest health food store

he could think of. 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 was like to me, I was a little crazy and was like, okay, and we'll give it to me

and I'll give it to the buyer. A few days later, got an email from the serial buyer and said, hey, I got your product and I think this is great. Let's talk about if you guys wanna 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. 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 Leimbach. It's Monday, November 18th. Coming up on the show, the hidden costs inflating your grocery bill. This episode is brought to you by TELUS Business. This Black Friday, TELUS Business is helping small businesses get more done and save. Get the latest technology for your business at exclusive Black Friday prices. Shop these limited time offers today at telus.com slash business Black Friday.

Conditions apply. TELUS, proud supporter of Canadian business. There's something that people have been feeling a lot recently. Have you seen the price of things in grocery stores, bro? $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 Jessie 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're 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. Exactly, and if you are smaller or more niche,

you are not gonna have your own trucks. So you rely on a third party to do that work for you. These distributors are national companies. Their names are like alphabet soup. There's UNFI, CNS, and KEHE, or K-H-E. 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 is that sometime in the future, you're gonna 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, Wild Way 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. Yeah, I mean, I'm... 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 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. And so most distributors have a guaranteed sell clause where I am guaranteed to distributor that the product that they buy from me will get sold. Oh. And if it doesn't, the cost comes back to me.

They 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 could charge 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. You know, 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.

It seems like an imperfect system. It's very much a flawed seems like an imperfect system. It's very much a flawed system and an imperfect system. Jesse reached out to the major distribution companies to hear from them. Only Cahey 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. This episode is brought to you by TELUS Business. This Black Friday, TELUS Business is helping small businesses get more done and save. Get the latest technology for your business at exclusive Black Friday prices. Shop these limited time offers today at telus.com slash business Black Friday. Conditions apply.

TELUS, proud supporter of Canadian business. Many grocery stores are in long-term contracts with a primary distributor. Like UNFI is the main go-to for Whole Foods, and Keighi is the go-to for Albertsons. 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, 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. And distributors will say, you know, look, these brands would not have access to stores nationally if it weren't for us. And I think it's true that, you know, a lot of these smaller brands, they can be naive about just what it costs to really start distributing your product nationwide. Who says that they're naive?

So distributors will say that the smaller brands, you know, they can be, they're run by these great entrepreneurs, great creators with a great idea for a food product, but that, you know, they don't fully understand what they're taking on. What it is to be in the big leagues. Exactly. You know, Kehi told me that something like 87% of small brands fail. You know, there's just huge churn. Wow. And I think small brands would say a

big part of their struggle is with distributors and the distributors will say, hey, a lot of the problem is grocery. So there's, you know, there's a lot of finger pointing within the industry. It sounds like the distributors are pointing the finger that don't look at me, look at them. So what do the grocers say? It's well known, you know, within the industry that grocers charge a lot of their own fees. It's pretty well known even to brands that if you deliver your pallet of goods late, or if you deliver it and it's not everything the grocer asked for, you will get dinged by your grocer.

But what manufacturers say is that the fees, the charges, have gotten way more extreme over time, to the point of being an existential threat for a lot of smaller brands. Who wins? Well, the way I really see this is as a result of this struggle in the American grocery business for profit. You have packaged food manufacturers, you've got distributors, you've got grocers, and they're all fighting for pretty limited profit margins, but it's just really a sort of a tug of war between these factions to make it work. For Kyle at Wild Way Foods, he's not sure the distribution system is working. Are the charges that you face ever so onerous that it's not economic for you?

I would say that selling a product through distribution to retail will never be profitable for the manufacturer, ever, as a small and emerging brand. Ever. Ever. Ever. Why do you continue? That's a great question. With the hope that with some sort of like additional scale

and additional volume, we will be able to kind of break out of that mold at some point. And so, you know, the hope is that those relationships do start to become somewhat profitable or at least break even to some extent. If you could change something in the system, what would it be? That entire system certainly needs an overhaul.

Generally speaking, I think there needs to be a lot less consolidation within our food industry. Most food categories in the grocery store are majority controlled by like three or four companies. We have a big consolidation problem where the majority of food that's produced, you know, shipped and sold in this country is controlled by very few people or very few companies. And so I think if we took steps to increase competition across the board, I think that we would see big changes in the price of food and what consumers are paying for it.

How does this make you feel about your choice to be a national granola brand? Yeah, let's just say I don't talk people into getting into the food and beverage business at all. In order to like fund your business, you know, you need to understand the economics of it and what it takes to truly grow and scale. Because the reality is that to truly grow and scale a food company in grocery retail, it costs a lot of money. And if you don't come from money, or have money, or have easy access to money, it's not going to be a good proposition for you.

That's all for today. Monday, November 18th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.