How Can Regulators Give Small Business Owners the Legal Backing They Need to Survive?
Kathryn Bedell was a veterinarian in Boulder, Colorado, so she knew first-hand the disturbing practices of big agricultural companies: feedlots with pens that held thousands of cattle and feed additives designed to artificially pack pounds on the animals.
She wanted to be part of something different. In 2004, with her family, she joined the small but growing number of ranchers producing healthier beef with grass-fed cattle. But then she hit a wall common for small business owners across America: an economy that favors big corporations. Because of consolidation, the meatpacking industry is dominated by four large companies that control an estimated 74% of the market.
That means there are no more small- to medium-sized processing plants interested in working with her. Ditto with grocery chains: Because she cannot produce a sufficient volume of meat to supply all the Kroger stores in her region of Colorado, she can only sell at farmers’ markets and tiny independent shops.
The result is that her business cannot grow, and consumers in the rich ranch country of Colorado eat meat shipped from hundreds or thousands of miles away.
A few months ago, Bedell joined dozens of other small business owners to tell her story to regulators in Washington, D.C., who are examining consolidation in the U.S. economy. Access to Markets has heard from hundreds of entrepreneurs facing barriers to growing their businesses because of dominant gatekeepers in their industry. And now regulators are taking notice, too.
“Consolidation and centralization have removed our ability to feed ourselves,” she told regulators. “It's crazy that we send our food off for processing and then buy it back and have to truck it at great distances.”
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And read on for more stories of business owners across the country.
Earlier this year, the Federal Trade Commission (FTC) and the Department of Justice (DOJ), the agencies responsible for ensuring that markets are fair and competitive, held a series of public listening forums to hear directly from entrepreneurs what challenges they face in markets. The hearings are a departure for the agencies, in that they directly focused on the voices of small business owners and entrepreneurs.
The two agencies are in the process of rewriting the “merger guidelines” for U.S. companies. The guidelines lay out the antitrust agencies’ approach and policy towards mergers — how mergers should be assessed, investigated, and potentially blocked. The guidelines are important because they reflect the agencies’ interpretation of the law and help businesses know what kinds of mergers the government considers illegal. Courts often cite the guidelines as persuasive authorities on what the antitrust laws say.
A new set of proposed rules is expected to be issued this year, followed by another comment period, and then final rules sometime later.
In preparation for rewriting the guidelines, the agencies requested information from the public earlier this year. They received more than 5,800 comments, compared to just 32 the last time the merger guidelines were rewritten in 2010 – an indication that the American people are increasingly aware that their economy has been transformed. We’re proud that nearly 4,000 of the comments came through AELP’s web site.
The listening forums were in addition to these public comments. The forums covered four broad sectors of the economy -- food and agriculture, health care, media and entertainment and technology businesses – and showed a consistent message that small businesses owners were being thrown unwittingly into fights with giants of almost unimaginable size.
“The grocery is a very tough business, long hours, many sacrifices, but it's a rewarding one,” said Anthony Pena, owner of about a dozen Super Fresh Markets and Sav-A-Lots in New England. “It's unique. It's special. This is the business that I'm proud to be in, and I hope that my children can carry that same love for the business as I did for my father.”
Pena is up against Walmart, which has 10,500 stories and 1.6 million employees in the United States. During the supply chain crisis, Pena was unable to buy orange juice – even as he watched delivery trucks pass by his stores on the way to the big box stores. Their size and buying power in the market means they have first claim on the available supply.
“It happens because the current rules don't consider how retail concentration results in gatekeeper's power,” Pena said. “Mega retailers set the rules for suppliers and the competitors, enabling them to capture higher profits rather than pass the savings to the consumer.”
The Biden Administration has taken an aggressive stand against corporate power. In July 2021, Administration issued a sweeping executive order to promote competition in the U.S. economy, citing evidence that in more than 75% of industries, a smaller number of large companies now control more of the business than they did 20 years ago. Even international organizations are worried about the increasing consolidation in America in digital platforms, financial companies and the health care sector.
During the listening forums, there were poignant moments, as small business owners who thought they were fighting alone realized their story was echoed across the country. "Thirty years ago in my market, it was all independent … Now there's one, me,” said Tom Charley, a fourth-generation retailer from Greensburg, Pennsylvania, who noted how much he connected with the testimony of another grocer. “The only independent retailer really left in my community of size. I’m the only one.”
Adam Conover, the creator of Adam Ruins Everything, spoke about how even the debate over market consolidation has been silenced by dominant companies. In 2015, Adam Ruins Everything’s team pitched their show concept to Tru TV, TNT, TBS, Discovery, and HBO. Today, all those buyers have consolidated into a single entity, HBO Max. That means they have the market power to hold down wages and set onerous contract terms, he said. “Despite unprecedented growth and record profits, my union has found that median pay for TV writer producers is nearly the same as it was in the '90s, 30 years ago,” he said.
The only time Adam Ruins Everything was censored was when an episode took on consolidation in the cable industry, he said.
You can see videos of them and view transcripts here.
In addition to this overall image, some more specific themes emerged from the forums about the state of the American economy for independent business.
Angela Huffman, the co-founder of Farm Action, drew the regulators’ attention to an increase of two-three times in fertilizer prices. “In December, we sent a letter to the Justice Department, requesting an investigation into the suspicious spike in fertilizer prices that began early last fall. Farmers are reporting fertilizer costs up to two to three times what they were in 2020. These numbers proceed Russia's invasion of Ukraine, which will only put further pressure on our farmers.”
In North America, she noted, the market for fertilizer is concentrated. “Two companies control all the potash, and four companies control 75% of nitrogen.”
Drug prices are another case in point. Pharmacy benefit managers (PBMs) serve as middle-ground players between pharmacies and drug manufacturers. Drug manufacturers have famously increased prices for American consumers, but part of the increase is being driven by middle players who control access to the market through formularies, which determine which medications can be offered by pharmacists. Just three pharmacy benefit managers control 80% of the market.
“In rheumatology, for example,” said Dr. Madelaine Feldman, a rheumatologist in New Orleans. “There are three drugs that have the same mechanism of action that treat rheumatoid arthritis. They are priced at $30,000 a year, $65,000 a year and $70,000 a year. Guess which one can’t get on the formulary?
Feldman went on to describe the role of pharmacy benefit managers: “Now, while manufacturers are not innocent in the ever rising drug pricing crisis, the power of the PBM oligopoly has created a situation where the greatest fear for a manufacturer is being dropped from the formulary, and it drives behavior because of the fierce competition to stay on formulary year after year, manufacturers pay ever increasing kickbacks to the PBMs, and the easiest way to maximize your kickback is raise the list price of the drugs, and this is not helpful to my patients one bit.”
Larger companies often give quality a short shrift, since customers have nowhere to go. It’s a different story with independent businesses. “Our stores … have expert butchers who know every single cut of meat in the entire store, and they have extremely high-quality standards,” said Charley. “We don’t sell ground meat that is more than a day outside of grinding. … Walmart on the other hand has no skilled butchers in the entire organization and their ground meat, they get 20-day shelf life off it. If we continue to let companies like Walmart, set the rules and avoid competition, that’s literally what the market's going to be. It's going to be three-week-old meat.”
Regulators heard testimony from a parent activist on the invisible role of giant education technology (ed tech) companies in schools. Many schools require students to submit work via software platforms and use software systems to record and track student performance and behavior.
"One recent ed tech acquisition has impacted millions of students, including my own kids,” said Cheri Kiesecker, a parent and member of many advocacy organizations concerned about student privacy. She went on to describe how a company called Naviance, which is owned by the private equity firm Vista Equity Partners, has acquired many ed tech companies, and it now serves 10 million middle and high-school kids who are required to use Naviance.
The program includes information such as personality profiles, grades, and disciplinary actions, and in some cases provides this information to colleges. But she questioned the accuracy of the data and reported having to file a request to the company through an attorney for her child’s full record.
“So, after the Naviance acquisition by PowerSchool, many parents contacted their schools requesting to see their children's data held by these companies,” Kiesecker said. “And to my knowledge, these parents never received their children's records. … In our case, for my kids, it took 90 days and a demand letter from my school attorney to get Naviance and PowerSchool to send any data.”
Kelley Tyler, a trauma care registered nurse at Mission Hospital in Asheville, North Carolina, testified about the impact on her community when HCA, the largest hospital company in the world, purchased it. Staffing was cut, she said, so that nurses are now allowed only eight minutes per patient each hour. “We're not able to give the best quality care in the situation. Nursing under these circumstances is more like factory work. … While HCA has reduced our well-loved and regarded system to a shell of its former self, the company has increased the cost of care. In the year following the merger, healthcare prices shot up 10%. We see patients approached by bill collectors while they're still in recovery.”
Randy McDonough, an independent community pharmacy owner in Iowa city, and a board of trustee with the American Pharmacists Association, spoke about the effect of the declining role of community pharmacists. There are countless studies that show when the patient has a relationship with their pharmacist, patient health outcomes are improved and overall healthcare costs are reduced, he noted. “Back in the 1990s, it was estimated that for every dollar spent on drug therapy, we spent another dollar to correct the problems associated with that drug therapy,” he said. “In 2016, this number increased to a $1.51. I have estimated the cost today to be over $2.”
Emily Jenkins, outside council for the National Community Pharmacist Association, echoed this sentiment, stating that the organization’s member pharmacies are “particularly susceptible to [the] exclusionary conduct” of pharmacy benefit managers. Because of the unfair practices of a handful of consolidated PBMs and the resultant decline in independent pharmacies, “patients suffer both in terms of dollars paid for prescriptions, increased copays, and by reduced choice.”
Market concentration, particularly in the healthcare and pharmaceutical sectors, keeps patients from receiving the medicine they need, and keeps local pharmacists from providing high-quality care to their communities. The top pharmacy benefit managers (PBMs) are consolidated among three major players and vertically integrated into the largest health insurers. In addition to increasing the price of prescription drugs – as described earlier – PBMs steer patients towards unreliable mail order pharmacies and use exploitative contracting to crush smaller pharmacies that have deep relationships to their communities.
Lynne Fruth, a pharmacy owner in one such community, passionately spoke to how local pharmacies are reducing hours or shutting down while the small handful of PBMs see record profits. “This oligopoly leaves pharmacies in the position to be held captive by bad contracts,” Fruth said. “That includes provisions that allow PBMs to reimburse pharmacies below their cost, [and] that force pharmacies to accept contract terms which can be changed at any. This allows PBMs to reduce the amount they pay a pharmacy at their whim, and the only recourse for pharmacies is to drop out of their plan.” She went on to say that these exploitative contracts, “are presented in a take it or leave it manner.”
Dr. Clay Marsh, a doctor from West Virginia, described the invaluable care that local healthcare providers in rural communities administer. “It's not just an issue about antitrust or an issue about fair practices in the general sense of an argument. This is about people's lives.” For these communities, specialized care simply cannot be replaced by larger, profit-seeking mail order pharmacies without a serious decline in quality of life.
Jim Rossi, a patient in West Virginia, said there are times when he’s gone without medication, because Express Scripts, a pharmacy benefit manager, cannot deliver it. “There have been times when I'm stuck without any medication, because Express Scripts just can't get the job done,” said Rossi. “So I have to wait a week or two weeks to get medications that I have to have to take several times a day just to stay alive and to have any quality of life.” He described his experience with Express Scripts as not just difficult, but “also dangerous.”
The past decade has seen the rise of large delivery service platforms, such as Uber Eats and Door Dash, which have a track record of acquiring smaller platforms. But restaurant owners – which make up one of the largest remaining groups of independently owned businesses – spoke at the forums about the devastating effects and unfair practices of the delivery services.
“Delivery platforms are draining restaurants of profits, which used to filter back to local workers and communities,” said Erin Wade, a farmer and restaurateur who has opened six restaurants and two farms in Santa Fe and Albuquerque, N.M., and Austin. “They're using the scale of their merge networks to force us, independently-owned businesses, to face an untenable choice, sign on, and die slowly, or shun the platform and get buried now.”
Wade described the transactions: When a restaurant signs up, they’re charged 30% per order, a price they must pass partially or fully on to the customer. The delivery platforms argue that the sales generated make it to the bottom line at a lower marginal cost. But many restaurants were operating on thin profit margins to start with, so adding what’s essentially an entire separate business, takeout, ends up stretching the model too thin.
Christin Evans, another small business and restaurant owner, said that they were “contractually prohibited from setting in app menu prices that were higher than dining prices, meaning [they] couldn't make up for any of the commission with a higher price to consumers who ordered through the apps.” While app companies engage in a race to the bottom to charge customers the lowest possible prices, restaurant owners are the ones forced to make up those commission costs on their own.
“How have these platforms managed to sell such a hoax?” said Wade. “Well, they underprice delivery to the consumer, which has inflated a bubble of unsustainable demand for takeout and delivery, and they use network effects and unchecked consolidation of those networks to bully restaurants into cooperating.”
She reported on the tactics used by large companies to ensure that takeout sales run through their digital platforms. “If a restaurant like mine tries not to sign up or chooses not to sign up, they pirate our menus and logos and sell our food without asking, almost like ticket scalping. They buy AdWords and keywords and present themselves as the internet version of us.”
Even speakers who disagreed with the FTC’s decision to redefine merger guidelines still admitted how consolidation in their industry is severely hampering their ability to compete in the market, especially in online retail.
Mark Gross, a businessman involved in several large regional grocery chains, discussed how the online dominance and disproportionate technology investment of companies like Walmart, Amazon and Target, creates an unequal playing field for his own companies. While Walmart last year spent $7.2 billion on technology, “a regional grocer will spend at most $200 million on CapEx, of which $20 million is on technology. And that battle of that $20 million spend versus $7 billion is disproportionate,” Gross said. “The battle for scale used to focus on price discrimination, but today traditional regional grocers face unequal competition on product availability, retail media networks, which are supposed to be payment for access to a retailer's website, the loyalty program, but it's not a revenue stream open to all.”
Regional businessowners like Gross are suffering so much at the hands of a few giants that they feel the only way forward is to increase their own consolidation – ultimately, an unsustainable solution for business owners who want to remain independent.
Other speakers focused on the role of large media companies such as Google in steering consumers toward viewing productions on platforms they own, such as YouTube. As mentioned above, comedian Adam Conover highlighted the role of media mergers in eliminating diverse and new entertainment content. Gayle Shanks, the founder of Changing Hands Bookstore, two independent bookstores in Arizona, spoke about Amazon’s effect on publishing.
“Amazon's size gives it terrifying leverage over the publishing industry. It has bullied publishers in the past for better discounts, early releases of titles before brick-and-mortar stores get them, lower prices on eBooks and audiobooks. And if the publisher stood up to them or pushed back, they removed the buy buttons, telling the consumer the books were out of stock or unavailable,” she said. “When the bottom line is the main concern for a giant corporation that owns a publishing house, the pressure to produce best sellers only by authors with established track records will increase making it harder for new voices to be heard.”
Despite a loyal clientele, she said, Changing Hands is barely surviving.
In giving a wide range of small business owners across the country and across industries a platform to speak, the FTC and the DOJ broke from the typical practices of regulators. They’ve highlighted the powerful forces that are making it harder for small businesses to survive and serve their customers. Now, the question is how to give small businesses and entrepreneurs the legal backing they need to survive.
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