Walmart’s ‘water bed effect’ is raising grocery prices

According to reports, Walmart’s famously great prices are due to their ability to set their own terms with suppliers, however, indirectly effecting smaller stores.

Walmart is responsible for a large portion of sales in companies like General Mills and Kraft Heinz. This leads Walmart to achieve a huge negotiating perk, allowing them to set a standard when it comes to the terms of their supply deals. The suppliers on the other hand, are unable to say no to their biggest client, and therefore need to make up their losses by increasing rates for smaller, local stores. 

According to economist, the phenomenon is known as the water bed effect, and has been used to describe a variety of methods, including computer code and carbon dioxide emissions. The fundamental idea is that, by pressing down one component of a system, another component would rise up, much like a water bed.

Over the past few decades, the supermarket industry has gotten more centralized. According to Euromonitor, Walmart controlled around 25% of US food sales in 2021. Albertsons came in second at just under 5%, followed by Kroger at approximately 8%. With Kroger and Albertsons seeking regulatory permission for a $24.6 billion merger, that consolidation is expected to continue.

According to the CEO of Fresh Encounter Michael Needler, Walmart utilizes its heft to negotiate costs with suppliers and place requirements on them, such as on-time delivery rates.

According to a 2021 projection from the National Grocers Association, independent grocers account for up to one-third of US grocery sales. However, that share has been falling for years. According to a 2017 analysis from the US Department of Agriculture, the number of independent grocery stores leveled out during the great financial crisis of 2008 and 2009 and the group lost market share to bigger rivals.