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Where You Shop Matters: Store Formats Drive Variation in Retail
Food Prices
Ephraim
Leibtag
Americans'
food shopping habits are changing. Just 20 years ago, traditional
grocery stores claimed nearly 90 percent of Americans' at-home food
purchases. Today, their share has dropped to 69 percent. Led by
retail giants Wal-Mart, Costco, and Target, nontraditional food
stores have managed to grab market share by enticing consumers with
a formula of one-stop shopping and lower prices. Supercenters, warehouse
club stores, and other nontraditional foodstores (see What's
in a Name?) increased their share of consumer food expenditures
from 18 percent in 1998 to 31 percent in 2003. Among the nontraditional
retailers, supercenters (primarily Wal-Mart Supercenters) made the
largest leap over this 6-year period, increasing in share from just
over 3 percent of food-at-home sales to nearly 11 percent.
What does the eroding role of the traditional grocery store mean
for consumers and for retail food prices? Over the past 20 years,
the Consumer Price Index for food at home has increased by 3 percent
per year, implying relatively stable food prices over time. However,
this aggregate measure of food price change does not tell the whole
story.
The determinants of retail food prices are many and their interaction
is often complex. Certainly, the cost of procuring food (from wholesalers,
distributors, or other suppliers) is a major factor, but labor and
other costs associated with the operations of a store are also important.
In addition, the competitive environment in which a retailer operates
along with the preferences of consumers in a given market will have
an effect on average prices paid, as well as on the ability of retailers
to adjust prices as market conditions change.
These differences in store costs, store characteristics, and consumer
preferences cause retail prices to vary across regions and markets.
Even within a narrowly defined market, food prices can and do vary
substantially: average prices for an identical basket of food items
can vary by 5 to 15 percent between stores. Measuring variation
in food prices helps improve our understanding of inter-regional
variation in food purchasing power and the economic well-being of
households, especially low-income households whose food purchases
constitute a large share of their household budgets.
Prices Vary by Region . . .
ERS investigated variation in food prices by calculating national
prices for a variety of dairy products, using a unique data set
that facilitated an analysis of average prices paid across all retail
outlets (see Homescan Provides Insight Into
Food Purchases). Prices paid for food during 1998-2003 were
found to vary geographically. Comparing food prices across four
regions of the U.S., ERS found variations of as much as 11 percent.
Within the milk category, for example, prices for both skim milk
and low-fat milk were highest in the South, while whole-milk prices
were highest in the West. Skim-milk prices showed the greatest variation
in prices paid, with a 14- to 16-percent difference between the
highest and lowest priced regions. For example, in 2003, consumers
paid an average price of $2.55 per gallon for skim milk in the South,
but only $2.14 per gallon in the Midwest. Low-fat milk prices varied
8-13 percent, while whole-milk prices varied by 7-11 percent. By
comparison, these differences dwarf annual milk price inflation
rates during this time period. The East averaged the highest price
increase at 3.1 percent per year between 1998 and 2003, while the
Midwest and West averaged annual price increases of 2.6 and 2.5
percent, respectively. The South had the most stable prices, with
average increases of 2.1 percent per year.
Homescan
Provides Insight Into Food Purchases
The ACNielsen Fresh Foods Homescan data set uses a consumer
panel consisting of 15,000 randomly selected households
across the U.S. and includes purchase as well as demographic
information for all households in the sample. ERS used the
Fresh Foods Homescan Panel to obtain purchase information
for random-weight, non-UPC coded food purchases, such as
loose fruit and vegetables, store-packaged cheeses, and
random-weight meats, in addition to the standard fixed-weight,
UPC-coded products. The panel is geographically dispersed
and is demographically balanced in terms of household income,
family composition, education, and other characteristics.
Each household is equipped with an electronic home-scanning
unit, and household members record every UPC-coded food
purchase by scanning in the product's UPC code or the relevant
product look-up code for non-UPC coded food purchases.
One of the unique features of the Fresh Foods Homescan data
is that panelists record food purchases across all retail
outlets that sell food for home consumption, including grocery,
drug, mass merchandiser, club, supercenter, and convenience
stores. Panel members record their purchases, capturing
not only what is purchased, but where the purchase was made,
and whether the purchase was a promotional, sale, or coupon
item. |
Among major U.S. markets, general regional patterns persist for
skim-milk prices, with cities in the Midwest (Chicago) and West
(Los Angeles and San Francisco) having the lowest average prices
paid, and cities in the East (New York and Philadelphia) and South
(San Antonio and Atlanta) having the highest average prices. Consumers
in nonmetro areas pay lower average prices for skim milk than consumers
in major urban areas. Low-fat and whole-milk prices are also low
in Chicago but are high in Los Angeles and San Francisco.
In general, variation in retail food prices across markets is a
function of differences in costs of producing and transporting foods,
consumer preferences, the level of competition in a given market,
and USDA programs that regulate production and/or prices of certain
commodity groups at earlier stages of production. In the case of
milk, while Federal milk marketing orders set minimum prices for
raw milk, actual prices reflecting market forces are generally,
and sometimes substantially, higher than the minimum prices. In
addition, a 2004 USDA Report to Congress concluded that the influence
of State-level intervention on raw milk prices is minimal due to
the regional and national scope of milk marketing. Variation in
raw milk prices within a region would be faced by all processors.
This implies that even if there are differences in the minimum allowable
milk price at earlier stages of production, the effect of milk marketing
regulations will be minimal at the retail level.
Other factors more closely related to the retail-level transaction
must play a larger role in accounting for variations in retail milk
prices. Regional variation in prices for skim milk, as opposed to
whole and low-fat milk, are attributed to differences in demand
for these products and differences in retailer pricing strategies.
The significant differences in milk prices across U.S. markets,
as well as between metro and nonmetro locations, implies that there
are differences in the purchase behavior of consumers in different
markets that may impact the average price paid for milk.
. . . But Less so by Shoppers' Income Levels
Consumers can affect the price they pay for foods through their
purchase behavior: this can include using coupons, checking the
newspaper for sale items and buying accordingly, or traveling to
a store offering lower prices. Because this behavior is often linked
to income, ERS examined how average prices paid for food vary by
household income level to determine if income and prices paid are
related.
Differences in average milk prices paid by households of different
income levels ranged from 1 to 3 percent. Low-income households
paid 2 to 3 cents more per gallon for skim milk than households
in the other income groups; however, the order and magnitude of
the price differences varied from year to year. For whole milk,
low-income households paid, on average, 3 cents more per gallon
than middle-income households and 5 cents more than high-income
households. Lower income households do not always pay higher prices;
they paid 2 to 7 cents less per gallon for low-fat milk than did
high-income households.
Store Formats Matter
Given the relatively small differences in milk prices paid across
income groups, but the larger differences in average milk prices
among regions and markets, a store's format, including physical
characteristics, product offerings, business practices, and marketing
strategies, is a likely determinant of and a key to understanding
retail food price variation. Earlier research by ERS and the University
of Minnesota examined the relationship between variations in store
characteristics, operating costs, and the income levels of consumers
shopping at a given store. Store characteristics included physical
characteristics, such as square feet of selling area and date of
last remodeling, services offered, and operating practices.
Study results showed that stores serving low-income
shoppers are generally smaller and older than stores serving moderate-income
consumers and offer fewer time-saving services for shoppers. In
urban locations, stores serving the poor lag behind other stores
in the use of sophisticated inventory controls and in worker training
and compensation practices. They also have fewer checkout lanes
and parking spaces, and shorter operating hours than other metro
area stores.
Despite these differences, overall operating costs
for stores that serve a greater proportion of low-income consumers
were not significantly different from those of stores serving more
middle- and high-income consumers. However, differences do exist in
terms of the sources of costs. For example, stores serving the poor
incur greater costs for procuring the foods they sell, but have significantly
lower payroll costs and fewer expenses on additional services. These
differences in the sources of costs can impact the prices consumers
pay for food.
Using the Homescan data, ERS extended this earlier
work by examining prices paid at traditional versus nontraditional
food retailers. Even when controlling for similar-sized packages,
dairy prices are 5 to 25 percent lower at nontraditional retailers
than at traditional supermarkets. For example, skim and low-fat milk
prices are consistently 5-12 percent lower at nontraditional stores.
Similar patterns of lower prices at nontraditional store formats exist
across a wide variety of food products including eggs, fruits, vegetables,
beef, poultry, coffee, and cookies.
These price differences are significant,
especially when compared with standard measures of food price variation.
Over the past 20 years, annual food price changes have averaged 3
percent per year, while differences in food prices paid across income
groups ranged from 1 to 3 percent. Differences of more than 5 percent
in food prices are driven by differences in store formats, which largely
account for the regional and market variation in prices observed across
the U.S.
Lower Prices Not the Only Issue
Changes in food retailing affect food prices, as
well as the variety of products and services available to consumers.
With average food prices 5-25 percent lower at nontraditional retailers,
the growing presence of these stores will benefit the average U.S.
consumer. It remains to be seen, however, if the overall economy
will benefit from these new retail formats, particularly when taking
into account the impact on traditional retailers, food retail workers,
food manufacturers, and agricultural producers.
Initially, as the share of consumer food spending dollar shifts
to nontraditional outlets, traditional retailers are forced to lower
costs by reducing the services they provide to consumers, by decreasing
the benefits provided to their workers, or by combining the two
strategies. They may also opt to expand the variety of products
and services available in their stores to include additional prepared
foods, carryout meals, organic and health products, and nonfood
related services (banking, dry cleaning, etc.) to provide the perception
of a unique shopping experience for the consumer.
Traditional food retailers that have lowered prices and/or increased
the quality and variety of the services they provide have remained
competitive, while those that have not adapted have struggled. Retailers
that do not adjust quickly lose market share and are in jeopardy
of being forced out of markets where they once were dominant, and
in some cases, out of food retailing entirely. For food wholesalers,
distributors, and others involved in the food supply chain, expanding
and maintaining relationships with nontraditional retailers will
be crucial to ensuring that their products are available to the
U.S. consumer in the future.
What's
in a Name?
Both traditional and nontraditional retail
formats contain a variety of store types:
Traditional food retailers
-
Conventional supermarket—A
format offering a full line of groceries, meat, and
produce with at least $2 million in annual sales. These
stores typically carry approximately 15,000 items and
frequently offer a service deli and a bakery.
-
Superstore—A larger
version of the conventional supermarket with at least
40,000 square feet in total selling area and 25,000
items. Superstores offer an expanded selection of nonfood
items, including health and beauty products and general
merchandise.
-
Combination food/drug store—A
combination of a superstore and drug store, but with
85 percent of sales still from food products.
-
Warehouse store—A low-margin
grocery store offering reduced variety, lower service
levels, and a streamlined merchandising presentation,
along with lower average prices.
-
Super warehouse—A high-volume,
hybrid format of a superstore and a warehouse store.
Super warehouse stores typically offer a full range
of service departments, quality perishables, and reduced
prices.
-
Limited-assortment foodstore—A
low-priced grocery store that provides very limited
services and carries fewer than 2,000 items with limited
perishable products.
-
Specialty/Gourmet retailers—Stores
that specialize in a specific food category, such as
organic, locally grown or produced, ethnic/international,
or health focused.
Nontraditional food retailers
-
Supercenters—A large
food-drug combination store and mass merchandiser under
a single roof. Supercenters offer a wide variety of
food, as well as nonfood merchandise, average more than
170,000 square feet, and typically devote as much as
40 percent of their space to grocery items.
-
Wholesale club—A membership
retail/wholesale hybrid with a limited variety of products
presented in a warehouse-type environment. These 120,000-square-foot
stores usually have 30 to 40 percent grocery sales and
sell mostly large sizes and bulk sales.
-
Mass merchandiser—A
store that primarily sells household items, electronic
goods, and apparel, but also offers packaged food products.
-
Dollar store—A limited
assortment store that sells a variety of general merchandise
and, increasingly, food products. These stores offer
a wide assortment of basic household goods at very low
prices.
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This article is drawn from...
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Supermarket
Characteristics and Operating Costs in Low-Income Areas,
by Robert P. King, Ephraim S. Leibtag, and Ajay S. Behl, AER-839,
USDA, Economic Research Service, December 2004.
CPI Bias from Supercenters: Does the BLS Know that Wal-Mart
Exists? by
Jerry Hausman and Ephraim S. Leibtag, NBER Working Paper No. 10712, National
Bureau of Economic Research, Inc., August 2004.
ERS
Briefing Room on Food CPI, Prices, and Expenditures.
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