Smaller food makers and independent grocers bear brunt of distributors' fees. Bigger grocery stores have the advantage.

As Americans continue to face stubbornly high grocery prices, many are searching for root causes. Turns out, mysterious add-on fees might be part of the problem. "The price of a bag of coconut-cashew granola jumped last year from $5.99 to $6.69," reports Jesse Newman of The Wall Street Journal. "The granola maker said the cost of making the cereal hasn’t gone up that much. . . It jacked up the price, it said, in large part to offset fees that piled up from a little-known link in the supply chain: grocery distributors."

Since the pandemic, bigger grocery chains have raised prices citing supply chain woes, high labor costs and ingredient price hikes. Newman explains, "Many small manufacturers that have raised their prices have another explanation. They say they also are being squeezed by the distributors who act as gatekeepers to many supermarkets."

Avoiding grocery store middlemen isn't easy for smaller food makers. George Milton, who runs a hot sauce business in Austin, Texas, used to deliver his product himself, but that model is no longer realistic. Newman reports. "These days, the chief executive of Yellowbird Foods relies on national distributors to ship his product to stores, a process he said is riddled with obscure costs that make it hard to know what, if anything, he’ll be paid." Milton told Newman, "That’s a really tough way to run a business. But what is the alternative, that I UPS it from one place to another?”

While distributors may look like the problem, it's not easy for them to make a profit either. "Distributors operate on razor-thin profit margins, with limited ability to offset rising operating costs," Newman writes. "The situation reflects a struggle for profit throughout the grocery sector. Big food manufacturers that account for the bulk of sales have pushed through hefty price increases and notched some of their biggest profits in years."

Distributor fees can harm independent grocery stores because larger chains can buy inventory directly and negotiate lower distribution fees. "Distributors’ rules and charges are a symptom of pressures rippling through the supply chain," Newman explains. "Grocers are competing with one another to win shoppers with lower prices. Big food sellers have gained market share, giving them more leverage in negotiations with distributors."