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Supermarket Characteristics and Operating Costs in Low-Income
Areas
Robert P. King, Ephraim S. Leibtag, and Ajay S. Behl
Agricultural Economic Report No. (AER-839), December
2004
Whether the poor pay more for food than other income groups
is an important question in food price policy research. Much
of the evidence indicates that shopping opportunities for the
poor are more limited than they are for higher income consumers
and that prices are slightly higher in stores where low-income
consumers shop.
What Is the Issue?
Higher prices are often attributed to higher operating costs
for stores that serve low-income households. Higher costs could
be due to older, less efficient store designs, outdated operating
practices, weak organizational linkages with suppliers, high
rates of labor turnover, and/or greater losses due to theft.
If store operating costs are higher in low-income areas, and
if the reasons for these higher costs can be better understood,
it may be possible to develop public- or private-sector initiatives
that will improve operating efficiency.
What Did the Study Find?
This analysis shows that stores serving low-income shoppers-stores
with high Food Stamp redemption rates-differ in important ways
from other stores. Stores with more revenues from Food Stamps
are generally smaller and older than stores serving moderate-income
consumers, and are less likely to offer conveniences for shoppers
such as bagging and carryout or pharmacy services. They derive
a higher portion of sales from meat and dry groceries. Stores
serving low-income customers generally have a higher rate of
employee turnover, pay lower wages, are less likely to have
a unionized workforce, are open for fewer hours, and are more
likely to face competition from supercenters.
There are similarities, however. Nonmetro stores serving the
poor do not differ significantly from other stores in the adoption
of progressive supply chain and human resource practices. In
metro locations, stores serving the lowest and highest income
customers are more likely than other stores to be wholesaler
supplied and less likely to be part of a large chain. Finally,
stores with the highest Food Stamp redemption rates have a higher
median cost of goods sold (lower sales margin) than stores serving
higher income customers, but also have significantly lower payroll
costs as a percentage of sales. Sales margins and payroll account
for a major share of total store operating costs.
Overall, our results do not support the hypothesis that it
costs more to operate supermarkets that serve low-income consumers.
While stores with different rates of Food Stamp redemption have
significantly different cost structures, their overall operating
costs are essentially the same. If the poor do pay more, factors
other than operating costs are likely to be the reason.
How Was the Study Conducted?
This study uses a unique data set-the Food Industry Center's
Supermarket Panel- to assess how supermarket characteristics
and operating costs differ in relation to the percentage of
sales derived from low-income consumers.
In this study we use the percentage of store sales attributable
to Food Stamp redemption as a measure of the degree to which
a store serves low-income shoppers. Average weekly store sales
data, as reported by participating store managers in early 2002,
are part of the Supermarket Panel database. Store-level data
on Food Stamp redemption were based on a database compiled by
USDA's Food and Nutrition Service. The share of sales from Food
Stamp redemptions ranges from zero to over 30 percent, with
a weighted average of 3.4 percent.
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