Retailers Sue Chocolate Companies Over Alleged Price Fixing
Retailers including CVS, Delhaize (Food Lion, Hannaford and Sweetbay), Giant Eagle, Hy-Vee, Kroger, Meijer, Publix, Rite Aid, Safeway and Walgreens, have all recently filed lawsuits alleging that the major chocolate companies selling products in the U.S. have engaged in price-fixing.
A lawsuit filed last week by Giant Eagle against Cadbury Schweppes, Hershey, Mars and Nestle alleges that the companies have colluded on prices going back to 2002.
The suit, as reported by The Wall Street Journal, contends, “The chocolate confectionery product market was ripe for collusion. In addition to the collective market power exercised by the defendants…defendants’ profits from these products have suffered in recent years because of increasing health concerns, and changing consumer preferences, with respect to chocolate consumption.”
Suits filed in U.S. courts along with investigations launched by Canadian and European authorities have caught the attention of the Justice Department.
A spokesperson for the department, Gina Talamona, said its “antitrust division is investigating the possibility of anticompetitive practices in the chocolate manufacturing industry.”
According to The Journal report, the German Federal Cartel Office raided the offices of seven different candy makers in that country. Hershey, Mars and Nestle were among the companies investigated.
Kirk Saville, a spokesperson for Hershey, denied the collusion allegations made against the company.
“None of the lawsuit complaints contain any facts or evidence to suggest otherwise,” he told The Journal. “The lawsuits are based on unfounded allegations. We intend to vigorously defend against them and are confident we will prevail.”
Nestle has not commented on any of the pending suits against it in U.S. courts but has maintained that it is cooperating fully with investigators.
If any of the companies were found to have engaged in price-fixing, then it is likely fines would be imposed. It is also possible that executives involved in the activity could face jail sentences.
Discussion Questions: Isn’t it common in commodity-based categories such as cocoa, coffee, paper, oil, wheat, etc. that prices rise or fall across the board at roughly the same rate and pace? Why do you see retailers filing suits against chocolate manufacturers when they have not done the same in other categories where competing companies take price increases on virtually the same schedule?
If it’s simply follow the leader pricing, it’s not price fixing. Reading the posts above, it seems commodity type industries react very fast when word gets around.
In my categories, when we are lucky enough to hear about price increases/decreases or get a price list somehow, we react too, but it might months after some analysis is done. Sometimes we don’t follow the leader, but it makes sense since my products aren’t such commodities.
If following the leader is the equivalent of price fixing, then all gas stations are guilty. Once one station changes its price half a penny, the competitors nearby also do it within 10 minutes.
Right or wrong, “Follow the leader” has been common practice in pricing matters for decades, particularly in commodity based products. This suit rests on what the definition of “Price Fixing” is, or has become, today combined with whatever the mood and manner of courts today. I’m inclined to think this suit will pass away unrewarded.
I don’t know where this law suit will lead but it could be interesting. The fundamental question here might be, is following leader just a good or accepted business practice or collusion?
I don’t think anyone wants prices determined by a government or 3rd party agency any more then they already are.
I do believe that some form of collusion does exist across the board.
It doesn’t take very long in business to understand the dynamics of how price changing works. That of course is as long as everybody plays by “the rules.” Usually the market leader takes a price increase and everyone else follows as soon as they can. Or it might be the company that is most in need of pricing relief that starts it and hopes that everyone will follow suit.
It most likely is not true “price fixing” but it is easy to see why it looks that way. This will likely cause the companies involved to make certain that they do everything to avoid giving any false impressions.
Shareholders of any company that declines to follow price increase leadership or price fixing should consider replacing the management. Collusion helps profits more than any other strategy. Collusion is so rarely punished, and the punishments are so minor. It’s not hard to develop effective collusion methods. Except for retail internet sites, how often do you see genuine all-out price wars?
Collusion violates the Sherman Anti-Trust Act, but the chocolate companies will have to be proven to have conspired to act in restraint of trade to fix market prices or restrict trade. This has to be proven to be different and unique from market response pricing, which is more of what is happening here. The companies are trying to have their prices reflect market prices, which are set by their competitors. This is a large gap between their pricing actions and conspiring to restrict trade through collusionary pricing practices.
The most direct analogy for pricing in the chocolate industry is cigarettes. In the cigarette business, when one of the leaders–either Philip Morris or Reynolds–raises prices, all the others followed suit, usually within hours and sometimes within minutes. They are always poised to raise prices and as soon as the word comes to them that a competitor sent out an increase notice, typically via a distributor, the emails go out announcing their own increases.
This is also how the chocolate industry and many other commodity-based industries work price increases. It’s not the nefarious backroom scenario painted by the retailers. It just seems like collusion because the information flows so fast now.
It is common in commodity-based categories for prices to rise and fall across the board with the prices of raw materials. That having been said, the price of a candy bar does not fluctuate each day with the price of raw cocoa. If retailers believe that prices were being fixed, it’s their right to press a suit. We won’t know which side is “right” until the suit progresses further.
This will be interesting to watch. On the one hand, it seems ludicrous that typical commodity pricing processes based on matching what the leaders are doing would be construed as price-fixing. This process happens daily with local gasoline station prices, milk, etc. This is not price-fixing, it is just typical competitive pricing: charge as much as the market will bear and don’t appear to be pricey compared to the local competition.
On the other hand, it would seem odd that these top retailers would go to the time, expense, and distraction of a lawsuit if there weren’t extremely compelling evidence of actual price-fixing which would involve proof of direct communication between these manufacturers to fix chocolate prices. As I said, this will be interesting to watch.
I think this is simply another example of retailers trying to bring their supply chain under “control”. If they do not get the prices they want then their suppliers must be holding out on them. I can not imagine why these directly competing companies would share pricing information risking their profitability and shareholders’ wrath, simply to get one over their retailers.
The more credible scenario, and the one that I accept is mentioned above and is that they simply are geared to register any change in form price or position by competition and react immediately.
Perhaps it’s simply time for these retailers to stop the trend of mass merchandising and bulking products onto consumers who simply (especially on the EU side of things) do not need so much clutter.
But that’s a debate for another time/place.