The Signal August 27, 2024

Price Gouging, Politics, and Proof 

Last week, US presidential nominee Kamala Harris promised to ban “price gouging” on food and groceries. Ignore the headline hyperbole. There is little reason to believe the Democrats have any need – let alone ability – to enact wide-spread government price controls.

Kevin O'Marah Avatar
Kevin O'Marah
Strategy

Last week, the press was buzzing over Democratic presidential nominee Kamala Harris’s promise to ban “price gouging” on food and groceries. Some economists and politicians were quick to blow this simple and largely toothless proposal into a communist move toward government price controls.  

What a tempest in a teacup! 

Price Gouging Is NOT a 10% Increase 

Food industry and retail business leaders have correctly said that prices at the shelf, especially for notoriously competitive grocery food items, reflect cost increases. Inputs from cocoa to polyethylene, as well as transportation, energy, and financing, all saw intense upward cost pressure during Covid. This is clear in the Producer Price Index, which mirrors the Consumer Price Index but is slightly more volatile. 

Price gouging as defined at the state level is meant to limit extortionate increases in times of crisis, like the proverbial $100 snow shovel right after a blizzard. Plus, price gouging laws have been administered rarely, and usually via consumer complaint-driven investigations that can trigger lawsuits by attorneys general or other state-level bodies.  

The reality for big food and retail brands is that drastic price increases are so trust-destroying that grocery items have historically absorbed spiky cost increases rather than passing them along to consumers. 

Politics Is Making a Mountain out of a Molehill 

The Harris proposal seems to be more rooted in her experience as a prosecutor using the legal system to painstakingly target individual offenders than in any kind of sweeping government price mandates. Price controls, whether enacted by Nixon during the 1970s US oil crisis or Hugo Chavez in early-2000s Venezuela, never work. The notion that the Federal Trade Commission (FTC) might pursue “price gougers” like Martin Shkreli is nothing like the Kremlin setting prices in the USSR.  

Political hyperbole notwithstanding (“a sweeping set of government-enforced price controls across every industry” – really?), there is little reason to believe the Democrats have any intent, let alone ability, to set prices on groceries. A legitimate concern, though, is an activist FTC chair freezing potentially beneficial deals like the Kroger-Albertsons merger, with the price gouging ban as another angle of attack. 

However this plays out, it is not the same thing as genuine government price control. It is an oversight process that will likely generate no more than a handful of cases. Plus, the burden of proof falls on the regulator, whether the FTC or any state-level authority. 

Proof Is Nearly Impossible 

Leaving aside those brazen enough to quadruple prices overnight, like New York egg distributor Hillandale Farms was accused of doing 2020, big companies aren’t so stupid as to “gouge” their customers. Brands are hypersensitive to customer loyalty, so their approach to pricing is usually cautious, cost-based, and savagely competitive. 

And as supply chain leaders know all too well, calculating fully loaded cost-to-serve at an item, date, and location level is incredibly complex and difficult. Any regulator who decides to go after a big food producer or grocery retailer for price increases of, let’s say, 30% in a year, will end up tangled in the same cost and inventory accounting maze that supply chain planners have been toiling over for decades. 

Add the rising complexity of omnichannel fulfillment, promotional specials, and loyalty deals and it would seem a long shot to come across many cases where a brand-owning company like Mars or Publix was worth taking to court. Lawyers don’t like taking cases they can’t win, and these would certainly fall in that category. 

Know Your Costs 

The Harris ban on price gouging has been an effective signal to voters that Democrats care about the high cost of living. And yet, with the battle against inflation essentially won, it’s unlikely she’d ever need to invoke it. The macro forces working against inflation,which include rising automation, increasing customer choice, improved supply chain resilience, and a Chinese economy that continues to export deflation, should overwhelm consumers’ inflationary expectations.  

Supply chain leaders should stay alert for populist rumblings about high prices, whether justified or not. Being ready with quick, accurate answers to questions about gross margins versus net margins is essential. 

No matter who wins in November, customers expect fair pricing and supply chain management is uniquely positioned to provide the facts to show it.