RISCARIO INSIDER: CHOCOLATE, PRICE-FIXING AND SALMONELLA POISONING

I like chocolate.
I don't like price-fixing.
I hate salmonella poisoning.

The quest for money leads to bad behaviour.

After a five year investigation, three major chocolate makers got charged with price-fixing this month (Toronto Star, Jun 6, 2013):

Hershey (Kisses, Oh Henry, Reese. Skor)
Mars (Bounty, Mars, M&M, Snickers)
Nestle (Aero, After Eight, Kit Kat, Smarties)

A national distributor, ITWAL is charged too.

What About Cadbury?

Cadbury (Caramilk, Crunchie, Dairy Milk, Wunderbar) is noticeably absent from the price-fixing charges. They got immunity by reporting the problem to Competition Bureau in 2007.

Confession

Yesterday, Hershey pleaded guilty and has been fined $4 million (CBC News, Toronto Star, Jun 21, 2013). This is lenient because Hershey informed the Competition Bureau in 2007, cooperated with the investigation, didn’t implement the price increases and fired the people involved.

Class Actions

The companies already paid $23.2 million to settle class action lawsuits:

Cadbury: $5.7 million (seems odd since they weren’t charged with price-fixing)
Hershey: $5.3 million
Mars: $3.2 million
Nestle: $9 million

They didn’t admit any wrongdoing, but since when do companies spend millions without a reason?

Making More Money

There are various ways to make more money such as increasing efficiency (e.g., Walmart), using cheaper ingredients and making more desirable products (e.g., Apple).

How do you charge higher-than-market prices when what you sell is much like a commodity? If you try, your competitors might grab market share and force you to drop your price unless buyers must have your brand. For many products, price affects demand. You may be willing to pay more for Coke than Pepsi. As the gap grows, you'll likely decide that Pepsi is a suitable substitute.

There are other games that companies can play. Different chocolate bars have different weight and ingredients. You can boost profits by using cheaper ingredients with names that people can't pronounce. You can reduce the package size. Rather, you can keep the package the same size but reduce the weight and volume of the contents. You'll likely be caught by a blogger somewhere but may not get enough publicity to affect sales.

Another way to boost profits is to get competitors to raise their prices too. If there's no cheaper option, buyers can't save by switching. This is price-fixing and illegal. There are numerous examples. Here is a small sampling from around the world:

British Airways: $547 million fine for fuel surcharges (CNN, Aug 2007), cut in half last year (The Telegraph, Apr 2012)
Cathay Pacific Airways: fined $1.5 million (The Standard, Jun 21, 2013)
De Beers: $295 million (Star Tribune, May 2013)
Electronics makers (LG, Panasonic, Phillips, Technicolor, Toshiba): fined $1.92 billion (New York Times, Dec 2012)
LCD makers: fined $585 million (New York Times, Nov 2008)
Mastercard and Visa: $7.25 billion for interchange fees (Bloomberg, May 25, 2013)
North Face: $4.62 million (Korea Times, Apr 2012)
Penguin: fined $75 million for ebooks (Apple Insider, May 2013)
Samsung ($22.6M) and Hynix ($15.6M) for DRAM prices (newswire.ca, May 31, 2013)

Since competitors tend to match price points, it's difficult to tell whether collusion is taking place. Sometimes we find out thanks to insiders.

Tainted Chocolate

While price-fixing is bad enough, you wouldn't want to get salmonella poisoning too.

November 2006

Back in November 2006, Hershey recalled 25 products for possible contamination before anyone got sick (CBC News). The ingredient and cause were known but the public was never informed (Food Production Daily). At least the company acted appropriately. They now leave our story and the real culprits enter.

June 2007 (7 months later)

The recalled chocolate was to be destroyed but pallets were stolen from a recycling depot. The chocolate was sold in convenience stores in southern Ontario (CBC News).

Thieves are in the business of stealing but don’t vendors care about their customers? The stores probably bought the tainted chocolate at a discount and figured that no one would know since you can't tell by looking at the label or the chocolate. Why would you even check when you trust the store to sell fresh product? If you did get sick, how would you know the cause? You might even forget you bought the chocolate.

Oct 2008 (2 years later)

The Canadian Food Inspection Agency found that tainted chocolate was still on sale in Toronto two years later (CBC News). They found 640 bad chocolate bars in five stores. Who knows what they missed.

Chocolate doesn't stay fresh that long. Maybe the bars don't have Best Before dates. Imagine how much chocolate was stolen for some to remain available two years later.
Who’s on the side of your sweet tooth?

Podcast 225

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PS Let's see what happens when Mars and Nestle go on trial in October

RISCARIO INSIDER

June 22, 2013

CHOCOLATE, PRICE-FIXING AND SALMONELLA POISONING