In this entry, I intend to prod away at a key pillar of the argument put forward in my paper ‘Food Price Inflation as Redistribution’ (FPIAR): that rising agricultural commodity prices of the 2000s contributed to the relative stagnation in the profits of major supermarkets. My renewed interest in this contention is prompted by the insightful comments of the contributors to the dialogue. The entry points our attention to the fact that when we analyse the distributional dynamics of relative price changes, we should examine not only differential profits, but also what Nitzan and Bichler call differential ‘depth’ and differential ‘breadth’.
Breadth is registered in firms’ employee numbers and depth is defined as profits per employee. As Figure 1 shows, breadth and depth are the two major axes of corporate earnings. Firms can increase their earnings by expanding their employee base through mergers and acquisitions and green-field investment; and they can increase their profits through cutting costs of inputs/inventories or through increasing costs of outputs/finished products (which in turn affect sales and expenses per employee). Partly due to space constraints in my original article, I did not consider the profit trajectory of major food retailers with reference to these two key axes of accumulation. The issues of breadth and depth are perceptively alluded to by both Cochrane and Gorsky.
By examining the breadth and depth dimensions of food retailers’ relative profits, we can establish whether the relative stagnation of supermarkets and wholesalers that I identify in my original article was brought about principally by the slowdown in their breadth expansion, or principally by a diminution in their depth, i.e. their capacity to cut costs or to pass on price rises to consumers in the inflationary conditions of the 2000s. If it is the former, then my original argument is weakened; if it is the latter, then my original argument is strengthened; and if both play an important role, then more work needs to be done in analysing the relationship between breadth and depth dimensions of supermarket profitability, and therefore the original argument needs to be refined. Supermarket Breadth and Depth Relative to the Agro-Food Sector
Figure 2 represents an initial attempt to measure the relative depth of major supermarkets. Following Figures 2 and 3 of FPIAR, I draw on data from Datastream. This source has multiple strengths. It provides much more historical data than Mergent or Bloomberg, much more wide-ranging data than CRSP, and much more complete data series than Compustat. Datastream has its own equity index for ‘food wholesalers and retailers’. As of the beginning of 2015, this index comprised 80 firms. Interestingly Wal-Mart is not one of them. The absence of Wal-Mart in the index is important because, as Cochrane and Howard astutely point out, the ‘Retail-Core’ proxy that I constructed for Figure 4 in FPIAR is dominated by Wal-Mart, and as a result its accumulation trajectory closely follows the accumulation trajectory of this one mammoth firm. In the ‘food wholesalers and retailers’ index, we have a proxy for major supermarkets (and wholesalers) that is not skewed by Wal-Mart’s idiosyncratic pecuniary gyrations.
As you can see from the chart, I adopt Nitzan and Bichler’s measure for differential depth: relative profits per employee - calculated by dividing major food retailers’ and wholesalers’ weighted average profit/employee ratio by the weighted average profit/employee ratio of all firms in the agri-food sector listed in Datrastream. I also plot the supermarkets’ relative profit margins (relative profit/sales ratios), calculated mutatis mutandis.
Two major observations can be made from the figure. First, supermarkets’ differential profit margins are closely correlated with their differential depth. The strong correlation (r=0.89) is attributable to the fact that differential profit margins represent a key component of differential depth (see Nitzan and Bichler 2002, 171-2). Second, the trajectory of the food retailers’ and wholesalers’ differential profit margins and differential depth broadly follow the narrative arc of the first and second sections of FPIAR, in which retailer power is said to reach a zenith in the agri-food system at the turn of the twenty-first century and decline thereafter.
But what about the breadth dimension of supermarkets’ profits? Figure 3 traces food retailers’ and wholesalers’ share of workers employed in the agri-food sector. It also tracks their share of sectoral revenue. The chart reveals explosive growth in relative employee and sales levels in the last five years of the twentieth century. At the beginning of the twenty-first century, food retailers and wholesalers employ almost 65% of people working in listed firms operating in the agri-food sector. The share trends downward thereafter. While there is a steep peak for supermarkets’ employee share in 2001, in supermarkets’ revenue share data we see more of a plateau that inclines slightly upward until the end of 2007, and which then gives way to a precipitous fall in the remainder of the decade.
The findings made so far have mixed implications for our assessment of the argument advanced in FPIAR. On the one hand, they bolster my original critique of the supermarket mastery thesis insofar as the major food retailers’ relative profits was falling into negative territory in terms of both depth and breadth during the early and mid-2000s - precisely when the idea of supermarket mastery began to have widespread currency. On the other hand, in decomposing food retailer and wholesaler profits in their breadth and depth dimensions, I complicate my original analysis of why supermarkets were experiencing relative stagnation. The original argument, at least implicitly, suggested that the millennial downturn of supermarkets stemmed from problems in the depth dimension, as food retailers’ struggled to cut costs and pass on price increases to consumers in the inflationary conditions of the 2000s. While the data put forward in Figure 2 adds weight to this thesis, clearly it does not tell us the whole story. To recapitulate: Figure 3 shows that since the early 2000s, major supermarkets have also been experiencing a crisis of breadth expansion.
The breadth crisis, as Cochrane kindly pointed out, has been addressed in a project I’ve done specifically in relation to Wal-Mart - a project, I hasten to add, that was kick-started by a post he made in this very forum. But it is worth putting this breadth crisis in context. While major supermarkets’ shares of sales and employees in the agri-food sector have fallen in proportional terms by 3 percent and 7 percent respectively from 2000 to 2015; their differential profit/sales and profit/employee ratios have declined by 42 percent and 40 percent. As such, the relative stagnation of supermarkets has principally been brought about by a differential depth crisis rather than a differential breadth crisis. Supermarket Breadth and Depth Relative to Global Capital
I now want to turn to an issue that Hager raises - that struggles within the capitalist political economy are multifaceted and that we need to clarify the multiple and ever-shifting lines of these struggles. Cochrane makes a point that compliments this position, arguing that the fluidity of business conflict behoves us to be reflexive about the analytical categories that we adopt. These points direct our attention to the qualitative aspects of research on business power. However, they also have clear implications for the forms of quantitative analysis we engage in, and for the findings to which these quantitative explorations lead. To illustrate, consider Figures 4 and 5. They use the same depth, breadth, profit margin and employee data for food retailers and wholesalers used in Figures 2 and 3. But instead of creating differential measures through dividing these data against the corresponding data for all corporations listed by Datastream in the agro-food sector, it does so against all corporations in all sectors.
Although the differential breadth and sales trajectories depicted in Figure 5 broadly concur with those presented in Figure 3, the differential depth and profit margin trajectories depicted in Figure 4 are very different to those revealed in Figure 2. Rather than seeing quadratic lines of best fit that reach apexes at the turn of the twenty-first century, we see curves whose maximal points are reached in the early to mid-1990s. Moreover, the cyclical upturns that punctuate these curves are much more prominent than any upturn presented in Figure 2. In short, by simply changing the benchmark of supermarket performance from the global agro-food sector to global capital at large, we get a different impression of the trajectory of supermarket power. Major supermarkets, from the view of Figure 4, reached the acme of their power over prices in the early 1990s and there has been a secular downturn since. This finding fits in quite well with the data presented in Figure 4 of FPIAR, where the ‘Retail-Core’ is shown to be experiencing little more than relative stagnation for the last two and a half decades.
But what of the sharp cyclical upturns presented in Figure 4 of this entry? They appear to broadly coincide with the onset of economic downturns; specifically, the recession of 1990-91, the bursting of the dot-com bubble in 2000-01, and the Great Recession of 2007-09. Why would supermarkets perform relatively well during these periods? This question demands thoughtful analysis, but it seems at least partly attributable to the fact that consumption of the kinds of basic necessities that supermarkets provide is relatively resilient during periods of economic contraction. In other words, consumer demand for supermarket products may be more inelastic than in other sectors. As such, prices may not have to be adjusted downward significantly by supermarkets to maintain satisfactory levels of business traffic in recessionary conditions. The relatively robust share of sales data for supermarkets during the recessions of 1990-91 and 2000-01, as presented in Figure 5, corroborates this claim.
Again, it is worth comparing how shifts in supermarkets’ relative breadth compares with shifts in their relative depth. Whereas major supermarkets’ shares of sales and employees in listed companies have fallen in proportional terms by 5 percent and 7 percent respectively from 2000 to 2015; their differential profit/sales and profit/employee ratios have declined by an astounding 78 percent and 72 percent. Thus, whether we use the agro-food sector or global capital as the comparator, the general picture remains the same: relative stagnation of supermarkets has principally been brought about by a crisis in food retailers’ differential depth rather than a crisis in their differential breadth. In this respect, the argument put forward in FPIAR seems structurally sound.
With that said, there is perhaps an observation that one can make from Figure 5 that is more troubling. The last major upsurge in the profit margins and depth of supermarkets, relative to global capital as a whole, began in 2007 when food price rises accelerated. This finding is at odds with the overall thrust of my contention that food price inflation was a key contributor to the relative stagnation of supermarkets. Moreover, if we inspect the data in Figure 2 of this post a bit more carefully, we can see that although the agricultural commodity price inflation of the 2000s broadly coincided with a drop in the profit margins and depth of supermarkets relative to the agri-food sector as a whole, in 2007 and 2008 there was an uptick in the profit margins and depth of supermarkets relative to the agri-food sector. However, the relative profit margin and depth data depicted in Figure 2 and Figure 4 show that in the next agricultural commodity price spike – in 2010-11 – no upsurge in the differential depth and profit margins of supermarkets occurred.
As such, these data suggest that a more nuanced conception of the distributional dynamics of food price inflation may have to be developed. This need for nuance is further underscored by the following excerpt of a Bloomberg Business TV interview in 2012 with Michael Schlotman, the Chief Financial Officer of Kroger – a company that Howard mentions in his contribution to this forum:Schlotman: “At this point we would expect 2013 to be about where we are right now in the mid-one percent range for inflation”
Interviewer: “So in some ways this is almost a sweet spot of a level for you?”
Schlotman: “It’s not too bad. Actually if it was just a touch higher it would be a little bit more of a sweet spot. A little bit of inflation is okay, but none is bad, and too much is bad. What is really bad is when we have some voluble swings like we had a couple of years ago, where it was very high and then went low to negative very quickly. That’s a more difficult environment to operate in.”
(Bloomberg Business, 2012)In lieu of a Conclusion
This excerpt brings us to the beginning of the end of my initial response to some of the comments made by those involved in the forum. I have only responded to a small portion of the comments so far, and I have raised more questions than answers. These questions include the following: is the relative stagnation of major supermarkets witnessed in recent years a secular phenomenon brought about by some asymptote being reached in the differential breadth of food retailing? Or is the relative stagnation more of a cyclical effect of the upsurge in agricultural commodity prices in the 2000s? Can the neoclassical concept of demand elasticity invoked in this post be recast in the terms of business sabotage and capital as power? What are the transmission mechanisms between price rises in raw agricultural commodities and the prices paid by consumers for products bought at the supermarket checkout? Should price volatility, rather than the level of prices, be the primary consideration when we analyse the distributional effects of price changes? And finally, what is the relationship between the differential breadth of supermarkets and their differential depth?
In considering the relationship between breadth and depth, we’d do well to recall the presentation that Joe Francis gave in a conference organized by the Forum on Capital as Power back in 2011. In this presentation, Francis sketches a theory which links breadth regimes of accumulation with increased downward pressure exerted by oligopsonic firms on suppliers’ prices throughout the commodity chain. Their breadth expansion is emulated by the breadth expansion of firms operating upstream in supply chains as a response to increased oligopsonic power (a point that Howard makes in his contribution, specifically in relation to Wal-Mart). Due to the limitations on mergers placed by anti-trust law, the decline in attractive takeover targets, paroxysms of economic nationalism, and other developments, the breadth regime may reach a point of exhaustion. In this situation, equity markets become less attractive for investors, and commodity markets become subject to a speculative frenzy that helps to drive up commodity prices. These commodity price hikes necessitate the breadth expansion of oligopsonic buyers so that they can regain some control over input prices; and the cycle begins anew.
In the next post, I plan to test some of these claims. Specifically, I’ll ‘zoom in’ on the distributional effects of price changes through revisiting Figure 3 of FPIAR, and through producing a more granular analysis of differential prices and differential profitability. And I’ll ‘zoom out’ by contextualizing the distributional dynamics of food price changes in a broader disaggregate analysis of global breadth and depth regimes. These moves will necessitate adopting a wider historical lens – a move that McMahon convincingly proposes in his contribution. Moreover, in adopting a wider historical lens, I’ll have to use the patchier but nonetheless longer time-series data provided by Compustat. As for comments regarding the Agro-Trader Nexus and the biofuels boom, I’ll get there eventually. For now, it suffices to say that this charted survey shows that one of the key pillars of the argument in FPIAR regarding the linkage between supermarket stagnation and food price inflation may have somewhat thinner evidentiary foundations than previously thought. The pillar still stands, but it requires refinement and support from more research.
Bloomberg Business. 2012. Interview with Michael Schlotman, Chief Financial Officer of Kroger. 7 March 2012. Available from: http://www.bloomberg.com/news/videos/b/ ... c9d6a48d4e
(accessed on 21 December 2015).
Nitzan, J. and Bichler, S. 2002. The Global Political Economy of Israel. London: Pluto Press.