The Mysterious Fees Inflating Your Grocery Bill

Summary

The Journal: The Mysterious Fees Inflating Your Grocery Bill Hosted by Kate Linebaugh and Ryan Knutson, with Jessica Mendoza

Release Date: November 18, 2024
Produced by: Spotify and The Wall Street Journal

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1. Introduction

In this episode of The Journal, hosts Kate Linebaugh and Ryan Knutson delve into the hidden costs that are significantly inflating grocery bills for American families. Through the lens of small business owner Kyle Kahlor and industry insights, the episode uncovers the complex web of distributors and the obscure fees that ultimately burden both manufacturers and consumers.

2. Kyle Kahlor's Journey

Kate introduces listeners to Kyle Kahlor, the founder of Wild Way Foods, a granola company that has grown from selling at farmers markets to being featured in over a thousand grocery stores nationwide.

• Kyle Kahlor [00:05-00:36]: Reflecting on his personal health journey, Kyle shares how he transitioned from processing his own snacks to creating a commercially successful granola product. His move to San Antonio, Texas, marked the beginning of Wild Way Foods, leading him to pitch his product to Whole Foods Market with remarkable determination.

3. The Role of Distributors in Grocery Supply

Kyle's expansion into major retailers necessitated collaboration with distributors—entities that act as intermediaries between manufacturers and grocery stores.

• Kyle Kahlor [01:32-02:03]: He explains the fundamental role of distributors: "We sell to the distributor. The distributor then sells to the retailer." This partnership is crucial for manufacturers aiming to scale their presence in the competitive grocery landscape.

4. Hidden Fees and Their Impact

The heart of the episode examines how distributors levy a multitude of hidden fees that erode manufacturers' profits, forcing them to increase retail prices to sustain their businesses.

• Kyle Kahlor [02:24-02:39]: Highlighting the financial strain, Kyle notes, "We recently raised prices last year for the first time in, gosh, six or seven years." This price hike was a direct response to the escalating fees imposed by distributors.

• Unnamed Colleague [06:18-07:44]: The discussion reveals that distributors implement a "long string of numbers" as deductions from payments to manufacturers, complicating financial transactions and adding to operational burdens.

5. Challenges Faced by Small Brands

Small and emerging brands like Wild Way Foods often find it economically unfeasible to navigate the intricate fee structures dictated by distributors.

• Kyle Kahlor [15:09-15:36]: Expressing frustration, Kyle asserts, "selling a product through distribution to retail will never be profitable for the manufacturer, ever, as a small and emerging brand, ever, ever, ever."

6. The Complexities of the Distribution System

The episode delves into the convoluted nature of food distribution, where multiple layers of fees and administrative charges create a challenging environment for manufacturers.

• Kyle Kahlor [08:08-10:44]: He details instances where minor fees escalate, such as a $2 charge from a retailer accompanied by a $40 administration fee, highlighting the cumulative financial strain on businesses.

7. Industry Perspectives and Consolidation

Jesse Newman, a colleague covering food, provides an analysis of how the distribution industry's consolidation has reduced competition, thereby exacerbating fee-related challenges for manufacturers.

• Unnamed Colleague [12:12-13:09]: The consolidation of distributors like UNFI and Kehe has limited the options available to brands, leading to a monopolistic scenario where a few large distributors dominate the market.

8. The Tug of War for Profit Margins

The episode outlines the ongoing struggle between manufacturers, distributors, and grocery retailers, all vying for limited profit margins in a fiercely competitive market.

• Unnamed Colleague [15:09-16:45]: The narrative paints a picture of a "tug of war" where each faction—manufacturers, distributors, and grocers—fights to maximize profits, often at the expense of smaller brands and, ultimately, consumers.

9. Kyle's Perspective and the Future

Kyle shares his cautious optimism and the harsh realities of operating within the current distribution framework.

• Kyle Kahlor [16:06-17:32]: He advocates for an industry overhaul, emphasizing the need for reduced consolidation and increased competition to alleviate the financial burdens on manufacturers. Kyle poignantly remarks, "I don't talk people into getting into the food and beverage business at all," underscoring the systemic challenges faced by entrepreneurs in the sector.

10. Conclusion

The Journal episode sheds light on the often-overlooked intricacies of the grocery supply chain, revealing how hidden distributor fees contribute to rising grocery bills. Through Kyle Kahlor's experience and industry analysis, listeners gain a comprehensive understanding of the financial pressures that small brands face and the broader implications for consumers. The episode calls for a reevaluation of the distribution system to foster a more equitable and sustainable food industry.

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Notable Quotes:

• Kyle Kahlor [02:24]: "We recently raised prices last year for the first time in, gosh, six or seven years."

• Kyle Kahlor [15:09]: "Selling a product through distribution to retail will never be profitable for the manufacturer, ever, as a small and emerging brand, ever, ever, ever."

• Unnamed Colleague [13:09]: "Something like 87% of small brands fail."

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For more insights into the complexities of the food industry and other business stories, subscribe to The Journal on Spotify or your preferred podcast platform.

Transcript

[Kate Limebaugh]

More than a decade ago, Kyle Kahlor was working in finance in New York City and trying to live healthier.

[Kyle Kahlor]

I took a lot of things out of my diet. You know, grains, wheat, corn, soy, like, all 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.

[Kate Limebaugh]

So Kyle tried to solve this problem in his own kitchen.

[Kyle Kahlor]

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.

[Kate Limebaugh]

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.

[Kyle Kahlor]

I just walked into Whole Foods Market's 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, okay, well, 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.

[Kate Limebaugh]

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.

[Kyle Kahlor]

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.

[Kate Limebaugh]

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.

[Kyle Kahlor]

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.

[Kate Limebaugh]

Welcome to the Journal. Our show about money, business, and power. I'm Kate limebaugh. It's Monday, November 18th. Coming up on the show, the hidden costs inflating Your grocery bill.

[Jesse Newman]

This episode is brought to you by Empowering. If you're like most people, you've got your fair share of financial questions. Questions Will we be able to afford having a third kid? Will we be able to do everything we want when we retire? What if we outlive our savings? Empower knows these questions can be stressful, but they'll help answer your what ifs and empower what's Next? So join 18 million Americans and take control of your financial future with Empower. Start [e-mail] this episode is brought to you by Polestar Electric. Performance is at the core of every choice that went into the all electric Polestar 3. Like merging a spacious interior with the torque and handling of a sports car or the ability to go from 0 to 60 in as little as 4.8 seconds and get an EPA estimated range of up to 315 miles per charge. Choices like this all lead to making your decision to choose Polestar 3. Obviously book your test drive today at polestar.com.

[Kate Limebaugh]

There'S something that people have been feeling a lot recently.

[Kyle Kahlor]

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.

[Unnamed Colleague]

I literally.

[Kyle Kahlor]

I literally don't understand $41 on three.

[Unnamed Colleague]

Items at a small town grocery store.

[Kyle Kahlor]

So you're supposed to spend 3 to 4 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.

[Unnamed Colleague]

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.

[Kate Limebaugh]

That's our colleague Jesse Newman, who covers food. Jesse'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.

[Unnamed Colleague]

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.

[Kate Limebaugh]

This makes sense to me. Like, you can't have like a conga line of, you know, bread makers and yogurt makers and craisin makers outside a grocery store delivering their bags. Those go to distributors.

[Unnamed Colleague]

Exactly. And if you Are smaller or more niche, you are not going to have your own trucks. So you rely on a third party to do that work for you.

[Kate Limebaugh]

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.

[Unnamed Colleague]

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.

[Kate Limebaugh]

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?

[Kyle Kahlor]

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. It is fun. Yeah. I mean, complex. It can be complex, yes.

[Kate Limebaugh]

Where is the complexity?

[Kyle Kahlor]

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.

[Kate Limebaugh]

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.

[Kyle Kahlor]

And so most distributors have a guaranteed sale clause where I am guaranteeing to the distributor that the product that they buy from me will get sold. Oh, 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.

[Kate Limebaugh]

That seems risky and potentially costly.

[Kyle Kahlor]

Very risky and very costly, yes.

[Kate Limebaugh]

Kyle says when there are other problems, he can get charged fees upon fees.

[Kyle Kahlor]

So 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. So individually, $40, not so much. But repetitively done over and over again adds up to a lot.

[Kate Limebaugh]

So you just have to have a big accounting department.

[Kyle Kahlor]

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.

[Kate Limebaugh]

And is there any way around this system?

[Kyle Kahlor]

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, you know, that are not profitable.

[Kate Limebaugh]

It seems like an imperfect system.

[Kyle Kahlor]

It's very much a flawed system and an imperfect system.

[Kate Limebaugh]

Jesse reached out to the major distribution companies to hear from them. Only K spoke with her. An executive there said food distribution is costly and complex, especially when it involves smaller brands, and that 3/4 of the fees originate from grocery stores, not from distributors. Coming how the food distribution system got to this point.

[Unnamed Colleague]

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[Kate Limebaugh]

Many grocery stores are in long term contracts with a primary distributor like UNFI is the main go to for Whole Foods and CAHI is the go to for Albertsons. But over the years, the landscape of this industry has changed significantly.

[Unnamed Colleague]

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.

[Kate Limebaugh]

So for many small food brands, working with these distributors is pretty much the only way to get into grocery aisles.

[Unnamed Colleague]

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.

[Kate Limebaugh]

Who says that they're naive?

[Unnamed Colleague]

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.

[Kate Limebaugh]

What it is to be in the big leagues.

[Unnamed Colleague]

Exactly. You know, K told me that something like 87% of small brands fail. You know, there's just huge churn.

[Kate Limebaugh]

Wow.

[Unnamed Colleague]

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.

[Kate Limebaugh]

It sounds like the distributors are pointing the finger that don't look at me, look at them. So what do the grocers say?

[Unnamed Colleague]

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.

[Kate Limebaugh]

Who wins?

[Unnamed Colleague]

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.

[Kate Limebaugh]

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?

[Kyle Kahlor]

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.

[Kate Limebaugh]

Why do you continue?

[Kyle Kahlor]

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 the hope is that those relationships do start to become somewhat profitable, or at least break even to some extent.

[Kate Limebaugh]

If you could change something in the system, what would it be?

[Kyle Kahlor]

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 a 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.

[Kate Limebaugh]

How does this make you feel about your choice to be a national granola brand?

[Kyle Kahlor]

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.

[Kate Limebaugh]

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.