USDA report examines agribusiness concentration and competition

A new 57-page report from the USDA looks at concentration and competition in U.S. agribusiness, including food retailing.

The report addresses seed companies, meat packing and food retailing in its analysis.

“This report details how consolidation proceeded in each sector — with attention to the important driving forces — and the effects on prices and innovation,” the report said. It also examines the federal antitrust policy regarding mergers and its implementation in these sectors.

The USDA said market concentration — measured by the share of industry sales held by the largest firms — has increased sharply over the last four decades in many seed, livestock and food retail markets: 

• The report said two seed companies accounted for 72% of planted corn acres and 66% of planted soybean acres in the U.S. in 2018-20.
• In 2019, the four largest meatpackers accounted for 85% of steer and heifer slaughter and 67% of hog slaughter.
• In most metropolitan areas, five to six store chains account for most supermarket sales.

The report said while concentration can work against competition, the relationship between concentration and market power “is not tight.” High concentration can often result from factors like innovations or the realization of scale economies that improve productivity and reduce costs and prices, the report said.

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Food retail

The report said food retail has undergone a long reorganization, featuring several trends:

• Traditional supermarkets facing entry from new store formats like Walmart and Costco.
• Increasing store sizes, offering a wider variety of products.
• The emergence of national chains, often realized through mergers and acquisitions involving local and regional chains.
• A growing reliance on data-driven distribution and inventory strategies within agrifood market chains.

“The food retail sector underwent a striking transformation over the last 30 years as new store formats emerged to challenge supermarket chains,” the report said. “Some of the new formats offer a range of apparel and other nongrocery items in addition to food (Walmart is an example), while others offer a limited array of food items, often in large package sizes at low prices (Costco, for example).”

At the same time, the report said many traditional supermarket chains expanded by building bigger stores with a wider range of products and by merging with one another. Other formats such as discount stores, drugstores and dollar stores have also started carrying more food products, and online retail for food products is growing as well, the report said.

Specifically, the report focuses on food retail by using the two most widely used concentration measures: the four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI).

The CR4 is the four largest firms’ combined share of a market or industry. In practice, the CR4 is most often based on the dollar value of sales, the report said.

The HHI is more complex, defined as the sum of the squared market shares of the firms in an industry.

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Food retail concentration is growing by any measure, however, with nationwide CR4 rising from 13% in 1990 to 34% by 2019, and HHI rising from 106 in 1990 to 593 by 2019, the report said.

 The number of supercenters has expanded from 705 stores in 1996 to 2,659 in 2006.

Walmart held a small share of food sales in the early 1990s, but the chain has now emerged as the largest food retailer in the U.S., the report said.

Stores also have become much larger, with the report citing FMI (The Food Industry Association) with a statistic that the average supermarket size grew from 35,100 square feet in 1994 to 48,466 square feet in 2020.

“While supercenters and warehouse club chains mostly expanded by building large stores in new locations, traditional supermarket chains have also grown across geographical markets through mergers with other supermarket chains,” the report said. “As of 2021, the largest chains were Albertsons, Kroger, and Ahold-Delhaize. Both factors — mergers and internal growth — accelerated the shift of retail sales to regional and national chains. The share of food stores that were single-store firms, or part of local chains, fell from 55% of all food stores in 1977 to 35% in 2007.

While the largest four food retail chains held 34% of nationwide grocery sales in 2019, the report said concentration within metropolitan areas is considerably higher.

Large retail stores and chains are better positioned to take advantage of economies of scope and scale, the report said.

The average number of products in stores, as measured by counts of UPCs, rose from 14,000 in 1980 to 51,000 by 2008.

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The long suburban population boom fueled the expansion of larger stores with expanded product offerings, the report said.

Food retailers can also affect food supply chains. Larger retail grocery chains often integrate backwards into wholesale distribution by directly entering contracts with manufacturers, the report said.

“While they do not necessarily integrate further backwards into food processing and agricultural production, they do establish supply chains through contracts with processors and packers of fresh products,” the report said. “Retailers can affect agricultural producers through the standards and specifications they set for their supply chains.”

In addition, the growth in private labels can be attributed to the growing size of retailers and allows for larger retailers having more bargaining power against national brands, the report said.

About 23,600 farms sold directly to retail outlets such as restaurants or supermarkets in 2015, and the farms that participated in such sales were heavily oriented toward specialty crop production rather than field crops or livestock products, the report said.

“In the last two decades, large grocery and restaurant chains have become much more proactive in specifying production practices in their supply chains, particularly regarding fresh produce, meat, and dairy products,” the report said.

The report said some specifications aim at procedures for farm production, processing, packaging and transportation practices to assure food safety, while other specifications may target product attributes relating to sustainability or social responsibility.

“Some specifications require new capital investments that may be more onerous for smaller producers and can accelerate consolidation for producers as well,” the report said. “Retailers tend to work through large processors and produce packers to impose their supply chain requirements on farm producers.”

The study said more research on the topic is needed.

“Although food retailing concentration has increased in the last 30 years, more in-depth research could examine the competitive impact of increasing concentration,” the report said.