U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing Behavior
by Carolyn Dimitri, Abebayehu Tegene
, and Phillip Kaufman
Agricultural Economic Report No. (AER-825) 23 pp, September 2003
U.S. markets for fresh fruits and vegetables have been
transformed in the past decade. Consumers are purchasing more
produce, more exotic varieties, and more convenient portions and
packaging. The implications of consumer demand filter through the
marketing chain. The foodservice sector has stepped up as buyers of
fresh fruits and vegetables, while merchant wholesalers have
declined in importance. Retail companies have grown larger, with
mass merchandisers (e.g., Wal-Mart) more active in food marketing
and supermarket chains undergoing mergers and pursuing acquisitions
of new stores. Purchasing strategies have also changed, with
retailers and wholesalers now asking grower-shippers to provide
additional services and fees, including marketing fees and
These new trade practices have raised concern among grower
associations about whether the fees and services are the result of
industry evolution or reflect the ability of larger retail
companies to increase profits at the expense of growers. To address
these concerns, the grower associations asked the U.S. Department
of Agriculture to study produce market relationships, leading to a
major study by the Economic Research Service. A new report, U.S.
Fresh Produce Markets: Marketing Channels, Trade Practices, and
Retail Pricing Behavior, synthesizes the publications from this
research project, including two newly released technical reports by
academic experts on market structure issues.
What Is the Issue?
Given the broad changes occurring throughout the produce
industry, analysis of market relationships at any one level
requires consideration of the entire industry. The absence of data
on new trade practices and on prices paid and received throughout
the marketing chain helps explain the wide gap in perceptions among
industry participants about the existence of market power.
Recognizing the links across the industry and the gaps in data and
information, the overall project had three major objectives:
• To develop a comprehensive overview of the produce industry,
including consumption and retail sales trends, markets and market
channels, and the changing structure of produce buyers.
• To identify and characterize the types of trade practices used
in the produce industry, including fees and services, forward
contracting, and marketing strategies.
• To analyze supplier-to-retail price margins for evidence of
How Was the Project Conducted?
To analyze, from farm to table, an industry as complex as
today's produce industry, ERS consulted with experts in the
economics of produce markets and market structure analysis. ERS
worked with researchers at Cornell University to assess changing
produce markets and market channels, per capita consumption and
retail sales trends (including value-added produce), and retail
consolidation trends between 1987 and 1997.
Limited public information challenged the study's second
objective. (Most firms typically do not reveal the details of
transactions between shippers and buyers.) As a result, ERS worked
with collaborators from the University of California-Davis,
University of Florida, and University of Arizona to interview and
collect primary data from selected small-, medium-, and large-scale
shippers of Florida grapefruit, California and Florida tomatoes,
California and Arizona lettuce and bagged salad, California table
grapes, and California oranges. Shippers were asked about the share
of sales accounted for by the largest produce buyers, various
pricing strategies, including fees, services, and contracts, and
the extent of fees charged as a share of sales. Grocery wholesalers
and retailers were interviewed about changes over the past 5 years
in their use of fees and services and the number of employees in
produce buying positions.
ERS contracted studies from the University of California-Davis
and Arizona State University to assess the pricing by retailers for
some fresh produce commodities in selected markets. Working with
ERS, both research teams gained access to detailed data on retailer
pricing and sales that underpin the statistical analysis. However,
neither team had direct access to data on retailers' actual costs
and fees. Instead, they applied economic theory and statistical
methods to estimate costs. The techniques applied by both teams
give a range of costs and, consequently, their estimates of the
extent that retailers are exerting market power has lower and upper
What Did the Project Find?
Per capita consumption of fresh produce increased 12 percent
during 1987-97 and retailers have responded by increasing the size
of their produce departments. Fresh-cut produce and prepackaged
salad sales have grown rapidly and the number of nationally branded
products is expanding. Largely since 1996, the share of grocery
store sales accounted for by the top 4, 8, and 20 food retailers
nationwide has increased through mergers, acquisitions, and
Advance pricing arrangements, contracts, fees, and services are
becoming more common. In 1999, short-term contracts accounted for
11 percent of total commodity sales (grapes, oranges, grapefruit,
and tomatoes), and long-term (annual or multiyear) contracts for 7
percent. Lettuce sales mechanisms in 1999 were similar except that
all contracts were long term. Bagged salad shippers indicated that
annual or multiyear contracts are the standard for retail sales.
Similar consolidations are occurring among wholesalers.
Volume discounts are the most commonly imposed fee. Slotting
fees-paid by suppliers to ensure shelf space-are not used for bulk
items such as tomatoes, lettuce, and oranges, but are used in the
bagged salad industry. Requests for marketing services from produce
shippers have increased, with 77 percent of requests reported as
new between 1994 and 1999. According to shippers, the most common
service requested is third-party food safety certification,
followed by returnable plastic containers. Retailers cite the top
three service requests as private-label produce items, category
management, and electronic data interchange.
Across the products analyzed, a wide variety of pricing
strategies were observed among retailers, indicating that retailers
have some control over produce prices. However, there was no
evidence of coordinated pricing or collusion among retailers.
Analysis of retail and wholesale margins found that retailers do
influence prices paid to fresh produce shippers and prices charged
consumers for some commodities. Retailer ability to hold shipper
prices below competitive prices was found for grapefruit, red
delicious apples, and lettuce, but not for tomatoes, grapes and
oranges. Consumer prices were estimated to be above competitive
prices for red delicious apples, fresh oranges and grapes,
tomatoes, and lettuce.