Retail Food Pricing: Horizontal and Vertical Determinants

by

D, I. PadbergDepartment of Agricultural Economics

Texas A & M UniversityCollege Station, TX

Ron KnutsonDepartment of Agricultural Economics

Texas A & M UniversityCollege Station, TX

S. H. A. JafriDepartment of Social Sciences

College of Arts & SciencesTarleton State University

Stephenville, TX

Background

Food retailing is a dynamic mixture ofsupermarkets, hypermarkets, membership marts,and convenience stores. Of these, the mostimportant is the supermarket. Introduced in the1930s, supermarkets have grown to very largesized stores that offer the consumer much morethan food, In 1965, the “typical” supermarketwould offer 4,000 to 6,000 items for sale (NCFM1966). In the early 1990s, most new store open-ings offer 15,000 to 18,000 items for sale. New,larger stores are frequently entering the marketrequiring the displacement of several of the exist-ing competitors. Challenging the once-dominantposition of supermarkets are the even largerhypermarkets and membership marts that deal ina wide variety of food and nonfood items, often ina “warehouse store” format.

A great part of the stream of food productsflowing to supermarkets is manufactured by largeindustrial firms. These firms are highly sophisti-

cated marketers in their own right. In 1990, foodmanufacturing firms accounted for nine of thelargest advertisers in the whole economy. Yetsmaller firms have important roles. The interac-tion among smaller firms and massive organiza-tions at both the manufacturer and distributorlevels has had an important influence on retailpricing and competitive strategy (Handy andPadberg, 1971),

Competitive forces between and amongalternative food outlets are intense. An importantaspect of this competition involves discoveringand maintaining the mix of prices and productsthat allow a firm to compete. The pricing patternsare chosen to convey to the consuming public acompetitive image. Supermarkets are driven to beprice competitive, although they do so in differentways and to different degrees. Complicating thepricing pattern is the array of promotional strate-gies and discount coupons offered by food manu-facturers that are designed to “pull” the flow ofproducts through supermarkets.

February 931page48 Journal of Food Distribution Research

The growth of the supermarket, to a signifi-cant extent, results from vast expansion in the saleof non-foods. This “crossover” connecting foodsand non-foods is continuing in the activities of thesuperstores being opened today by traditionallyfood-oriented companies. It is also a result of theincreasing food sales of the large general mer-chandise discount stores, membership marts, etc.As we will see, this connection adds considerablecomplexity to retail food pricing.

There has generally been a tendency tostudy the food industry apart from the economy,Both manufacturers and distributors were highlyspecialized to food. A stereotypical structureemerged and was associated with an equallysteratypical behavior pattern. The supermarketsbuilt between 1940 and 1960 were just about allalike. Sensitivity to market segments came laterwhen markets became “saturated” with supermar-kets (industry development stages are explainedmore fully in Padberg and Rogers, 1987). Thismonolithic structure focused on price competi-tion--mainly competing with traditional familyretailers having higher costs. During this period,the retail gross margin (margin above cost ofgoods as percent of sales) dropped below 15percent (NCFM, 1966, p. 539). This stands as arather remarkable efficiency achievement, espe-cially since it includes some handling and packag-ing of perishable produce and meat products.

From this point, food retailers began to addnon-food iterns and present a greater variety ofstore sizes and types. There was a “creaming”process where food retailers could take over somehigh volume products usually sold by drugstoresor other retailers having a much higher grossmargin (Brand, 1963, ch. 38). This had the effectof giving consumers a lower price while increas-ing margins and profits for supermarkets. Super-market gross margins have steadily increased withchanges in the product mix and with the additionof more services associated with merchandising tomarket segments. As a result, we now find thatthe larger general merchandise mart is able toskim off some of the higher volume food productstraditionally offered by the supermarket. Thispattern has a bit of the “wheel of retailing” char-acter to it (Hollander, 1960).

Today, management in the food/non-foodretail level is very concerned with strategic issuesinfluencing competitiveness. How does manage-ment deal with the crossover to non-food? Willthe traditional patterns of price and other competi-tive behavior which developed in food be effectiveas we mingle more with non-food realities? Howshould supermarket firms relate to even larger andmore powerful manufacturers? What is the opti-mum response to competitive acts of rival largedistributors? Under these high-stress conditions,what sort of food pricing behavior can the foodproducing industry and consumer expect at theretail level? As for agricultural interests, how arefarmers and their organizations affected?

Price has several roles. In its classic role,it is a mechanism which values products in avertical channel such that each handler is given anincentive for performing the various fhnctionswhich give the product form, time, place andposition utility (Bressler and King, 1970).Increasingly, these vertical signals may be pro-vided by various forms of vertical integration inthe production agricultural sector. In addition, thehighly manufactured food products coming fromthe national brand conglomerates have stickyoligopoly price patterns that are generally insensi-tive to signals from the retail level.

Price patterns at the food retail level havebeen studied at length, It is less clear how thecrossover with non-food may alter these patterns.Supermarket pricing patterns have arisen fromseveral basic realities of the organizational settingof supermarkets and from food shoppers’ attitudesand behavior influenced, in part, by food manu-facturers:

. Retail food prices have special meaning ingroups--’’the product mix. ”

● Price can be used as a promotion device--the“price special”--which only works if it is anoutrageous disequilibrium.

. Retailers have incentive to price their ownbrands to make them attractive in relation tothe advertised brands of food manufacturers.

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. Branded product food manufacturers havemeans, including coupons and other promo-tions, that get the attention of both consumersand retailers.

. Changing lifestyles and consumer prioritiesmake opportunities for new competitors tofind ways to break into the market.

In this environment, retailers likewise havereduced incentives to pay attention to the integrityof the vertical price patterns or signals and havemore freedom and incentive to respond to theincreasingly powerful “horizontal” influences.There is little financial reward or incentive tomaintain the vertical integrity or discipline impliedby the classic role of price (further, such behaviorwould interfere with choosing the most competi-tive price reactions and patterns). The modernfood retailer spends more energy relating pricepatterns to the actions of other retailers than toactions of suppliers. These horizontal influencesmay lead to pricing that is not as effective atperforming the equilibrating and market signalfunctions within the market channel.

After reviewing the evolution of retail foodpricing theory, this paper will consider effects wemay see fkom the crossover to nonfood. We willthen consider how this modified pricing patternmay affect the price signals sent to farmers andranchers in the 1990s. Implications for econo-mists and policy makers will also be assessed.

Evolution of Retail Food Prking Theory

As early as 1930, Cullen noted the potentialfor a severed relationship between the farm priceand the retail price: “I want to sell 300 items atcost . . . 200 items at 5 percent above cost . . .300 items at 15 percent above cost . . . [and] 300items at 20 percent above cost” (Zimmerman,1955). This pattern was a powerful way to relateto retail competitors, but made no sense in thevertical channel, The early supermarket merchan-disers explored the interactions and dynamics ofretail food prices informally and intuitively.

By the late 1950s and early 1960s therewere many formal studies which probed retailprice behavior. The consultants and professors

learned from these studies what the merchandisershad learned from experience (Brand, 1963;McKinsey, Produce, 1964; McKhsey, LeverBrothers, 1964; McKinsey, Birds Eye, 1964;McKhsey, General Foods, 1963; Nelson andPreston, 1966; Cassady, 1962; Progressive Gro-cer, Foodtown Study, 1954; Progressive Grocer,Super Valu Study, 1957; Progressive Grocer,Dillon Study, 1960; Nelson and Preston, 1966;NCFM, 1966; Holdren, 1960). Brand summa-rized the findings with the following conclusion:“Supermarket operators were the first retailers todeviate from the concept that all merchandise in astore, or at least within a department, had to bepriced so as to maintain the same markup percent-age” (Brand, 1963).

Despite the widely recognized incongruityof the vertical structure of prices, policy makers,farm organizations, farmers and even consumersexpect farm prices and retail prices to movetogether. Accordingly, there was a recent con-gressional hearing investigating the apparent lackof correspondence of fluid milk and cheese priceswith farm prices (U.S. Congress). In these hear-ings, there was little or no explanation or discus-sion of the complexity of supermarket pricing andthe reality that it may well be unreasonable, or atleast unlikely, to expect the retail price of milkand cheese to move in “lock step” with the farmprice of milk.

A vocabulary of retail competition hasemerged from efforts to create theories thatexplain retail behavior (Nystrom, 1970; Aldersonand Shapiro, 1964; Nelson and Preston, 1966;Cassady, 1962; Holdren, 1960; NCFM, 1966).Pricing, although important, shared the stage withother elements of the marketing mix. While thereis no uniform theory across these works, thefollowing dimensions were generally recognizedas important aspects of retail competition.

Rice Variation Across the “Product MIX”

All large retailers (including K-mart,Walmart, etc.) realize that some of their productsare more important than others. A special priceon one product will have a greater impact oncustomers than a similar special on another prod-uct. If the retail price of some particular product

February 93/page 50 Journal of Food Distribution Research

is out of line with competitors’ prices, store tral%cwill suffer. Other products have less effect onstore trat%c. Merchandising plans for aggrega-tions of products--the product mix--typically rec-ognize and exploit the characteristics of theseleader products.

The product mix concept recognizes thatconsumers buy a bundle of goods with variouslevels of price sensitivity. This is sometimescalled the assortment dimension of competition(Nystrom 1970; Alderson and Shapiro, 1964). Inall “mix” scenarios, there is recognition that theusual (equilibrating) function of price as applied intheory for single product cases is inadequate.How can we deal with products’ prices in groups?How stable are these groups? Does each con-sumer see products in the same groupings? Theseare special characteristics which challenge a super-market (or other large retailer) where pricingbehavior deviates from the normal “equilibrating”functions.

Product Group Cohesiveness

There is another reason that retail foodprice behavior is different for some products thanfor others. We expect shoppers to buy groceriesin groups. When a consumer purchases eggs, orsome other grocery product, s/he is likely to pur-chase several of items that go with preparation ofmeals in the kitchen, such as lettuce, bacon,canned or frozen vegetables, etc. We have tradi-tionally purchased our food in the form of manyrelated, unprepared items. These many itemsmean that our purchases are groups of items,dependent upon each other. Since the beginningof the supermarket, the convenience of one stopshopping has been an important motivation in foodshopping. This pattern of buying food in groupsmay be on the threshold of change.

Household shopping in the past hasinvolved many products that do not stand alone.Individually, they are incomplete. They are ingre-dients used in preparing meals in the kitchen.Their value potential is achieved through combin-ing them with other ingredients as well as withhomemaker time, energy, and skill. Scarcity ofhomemaker time and energy makes one stopshopping important. Putting all these factors

toge~er, the weekly food purchase has been madeup of a group of products with considerable cohe-siveness. If the merchant motivated the home-maker to buy some of the products, there wasstrong reason to expect that s/he would buy thewhole group of items at the same time and place.Whether the %ait” was location, friendliness,product variety or especially low prices on a fewvisible items, if the bait worked (if the shoppercame to the store), it was likely that shopping forthe entire group would result.

This pattern we may call the “Family FedEra (FFE). ” The nature of the household (fami-ly), the economy, and the culture made this adominant pattern over most of this century. Asmassive changes occur in the family and especiallyinvolvement of women in work outside the home,the family- and kitchen-centered pattern is becom-ing less dominant. Institutions are fabricatingmeals much more frequently. We buy these mealsat restaurants, fast food places, the work placeand as processed entrees purchased in the super-market or at some other food retailer establish-ment. We may call this pattern the “Institution-ally Fed Era (IFE). ” This newer pattern will haveits greatest effect on food shopping by making thegroup of food products we purchase less cohesive.More of the products we buy in the fhture will be“stand alone” products. They will not need to bepurchased with a group of other products. Thecombining of components is already done.

Most of the theory in place relates to FFEand the supermarket. It is important to under-stand this topic. In addition, we must look for-ward to the likely impact of IFE upon the super-markets we already have and on other retail pat-terns emerging.

Developing a Price Image

The literature contains substantial discussionof the consumers’ process of developing an imageof food prices. This discussion typically includesconsideration of a “psychological” (Nystrom) or,more appropriately, a “secondary” (Alderson andShapiro) level of competition. This secondarylevel of competition refers to a residual structurein the consumers’ mind which puts the shoppingexperience and transaction prices into a compara-

Joumal of Food Distribution Research February 931page51

tive context. Since it is impossible to know pricesfor thousands of “convenience goods” like onewould for “shopping goods” (Porter, 1974), theconsumer tries to generalize. This process isnatural and largely unconscious (Oxenfeldt, 1968;Brown, 1969). Certain items which are con-sciously observed and discussed receive greaterweight in this generalization than the numeroussmaller and much less considered transactions.

Most of the retailers’ merchandising strate-gies are designed to affect this process. Pricespecials suggest visible elements of the aggregateprice or price image. Of course, these pricespecials are usually temporary, but their effect onthe price image may be more lasting. Ads show-ing the same shopping cart full of groceries pricedout at their own pries as well as several competi-tors’ prices have the same purpose.

negative correlation between movement and mar-gin. Indeed, one way to look for items on yourstore’s “price sensitive” list which you may havemissed is to check rates of product movement.Alternatively, some items, like meat items, maybe on this list even with moderate movement ratesbecause their price levels are well known.

Prke Variation Through Time

Retail food prices show a pattern of varia-tion over time which is again typically inconsistentwith the conventional equilibrating role of price,Convenience stores seem to always have a majorbrand of beer on “sale.” Supermarkets typicallyhave a newspaper ad of items on sale ‘thisweek. ” There are several types of these tempo-rary or periodic special prices.

i%e “FireSale”Dinner Plate lheorem

One explanation for retail price variationacross the product mix is the dinner plate theorem(Figure 1). This theory suggests that the mostprice sensitive items would be in the center (bot-tom) of the plate. They have this position becausethey are central to our eating habits. Volume andpurchase frequency are high compared to otherproducts in our food consumption patterns. Theprice of these items would be depressed belownormal levels (they are being used as bait). Thismay not mean that retail prices are below whole-sale cost of goods, but certainly the prices of theseproducts do not cover their share of retailingcosts, These prices are depressed in two ways.Everyday prices are low because these items arethe focus of price reviews of competitors andconsequent adjustments. In addition, these itemsare natural choices for periodic price specials. Inorder to offset the low prices on center plateitems, other items less central to the awarenessand the eating habits of consumers must bearmore than their share of the marketing costs.They will be priced so their margins will rise in agradation from the bottom (center) of the plate.Some are more peripheral than others and theywill carry higher margins and prices.

If one studies the rate of movement ofproducts, there will be an imperfect but strong

Most price specials are designed to attractattention to the store, Yet, in some cases, specialsreflect an over-supply condition. These equilibrat-ing price specials are, in essence, a fire sale--thebananas are getting overripe, too many strawber-ries were ordered, or the bacon is going out ofdate. Such fire sales are now relatively few andfar between. More often than not, out of date orcondition products go to the poor and homeless.Retailers are hesitant to emphasize food productsin a serious over-supply. Their value goes downprecipitously. It is often difficult to maintain animage of high product quality while being a scav-enger. Products in conditions of a market glutmake the worst price special one can think of(consumers don’t want more of the productswhich have already saturated the market--theywant a special on something they are looking for).

l’heAdvertised Price Special

Most supermarket advertising is focused onprice. Ads give most emphasis to price sensitiveitems. In this way, advertising relates not only tothe immediate transactions explicitly, but also tothe psychological image or secondary level ofcompetition. There is some feeling that televisionis easily adapted to image advertising (had andGerman, 1985). Price-oriented ads in print

February 931page52 Journal of Food Distribution Research

media, however, are by far the most importantpart of supermarket advertising.

With supermarket newspaper advertisingcovering a large number of stores, price specialsmust be anticipated and planned considerably inadvance. Sometimes this is developed to coincidewith produce coming into the market seasonally,but this is not the usual case. Retail price spe-cials, therefore, are different ftom the equilibrat-ing process economists teach. In fact, the mostsuccessful specials are spectacular disequilibria.They get more attention if they are out of linewith expectations. They are typically not justifi-able by costs nor by basic supply-side economics.

The selection of specials seems to havemore to do with the store’s perception of con-sumer preference and behavior than with supplyand demand. Therefore, supermarket price spe-cials are better understood as promotions (NCFM,1966). They give a signal to consumers that isdesigned to promote individual products, the mixof products, and the store. That signal may beinconsistent with the economic conditions of thesupply of the particular product. It is effective inselling the product mix and in affecting the priceimage consumers have of stores even though itcannot be comfortably classified in the econo-mists’ vocabulary of rational price behavior.

VariablePrice Merchandising

Retailer price changes through time havebeen called “variable price merchandising”(Collins and Preston, 1966). The pattern theydescribe resembles the price special but seems notto be tied to a week or to an advertising cycle.This more continuous pattern is more like what iscurrently observed in convenience stores. Thegeneral merchandise discounter may also use thispattern. Both of these retailers are less affectedby the weekly advertising pattern than is the moreconventional supermarket. Therefore, the “satu-ration” which resulted from shopping last week isnot important. Some major brand is always onspecial. One comes off and another goes on. AsCollins and Preston indicate,”. . . multiple pricesmay be varied so that both the average price ofany single item and the average price level of all

items are the same over time as if no pricechanges took place. . .“ (1966, pp. 4-5).

Branded Product Specials

Many of the products that are priced asspecials by supermarkets are branded product pro-motions. These specials generally stem fromefforts by food manufacturers. Such specials maybe in the form of a coupon designed to create onlya temporary incentive for purchase rather than areduced price image which could develop in theabsence of the coupon. Branded item promotionsare rarely of a fire sale variety. Such promotionsare designed as part of a marketing strategy by thefood processor. Manufacturers like the visibilitytheir brand,,gets in the retail ad. Food retailersuse these to fill out the ad and provide the adver-tising allowance. They have little impact on theretailer’s margin, the immediate product flow, orthe consumer’s long-range image of price levels.

High-MarginItems

Some items that are regularly featured asspecials by supermarkets can better be classifiedas high-margin items. They fail to fall in any ofthe other categories, although they may frequentlybe the subject of branded product promotions.Soft drinks, snacks and frozen desserts are classicexamples. Manufacturers often price them tostores with high margins allowing for manufac-turer-supported deep specials. ‘Ike items varywidely in price because there is tremendous priceflexibility in the higher-than-normal margin itself,whether Iiom the perspective of the manufacturer/distributor or the supermarket. Thus, a six-packof name brand soft drinks may range in pricefrom a 99 cent special to $2.39 over a period ofone or two weeks. Such wide margins exist onlyon highly processed and/or highly differentiatedproducts.

Interestingly, high-margin items have amajor impact on demand for other products soldwith a considerabley narrower margin. For exam-ple, milk increasingly competes with soft drinks asa mealtime beverage. One possible reason for thisincreawxl competition is the frequent specials runon soft drinks. Because milk has a narrowermargin, soft drinka frequently sell at prices sub-

Journal of Food Distribution Research February 93/page 53

. .

stantially lower than milk. Over time, supermar-kets have become less inclined to special milkbecause large price cuts comparable to those forsoft drinks would mean a loss. The potential fora loss on soft drinks is less, particularly with amanufacturer/distributor who is willing to parti-cipate in the promotion.

Discount/Warehouse Stores

We indicated above that supermarket grossmargins got down to less than 15 percent of salesduring the early 1950s. This was achieved withspartan stores which handled a short list of prod-ucts at high volume. Although industry-wideaverages have not been so low since, food mer-chants have tried to develop several store formatsinto that market niche. The most current formatis the “warehouse store. ” Merchandise is sold bythe case. Most products are displayed in theirpacking cases. The store ambiance resembles awarehouse. Modern general merchandise dis-counters or membership marts often use a similarformat and are aggressive competitors in somefood lines.

Modern membership marts constitute aformidable challenge to supermarket pricing strat-egies because they do not just involve the sale ofa few items at a low price. Rather, almost anyitem can be purchased at a price that may becompetitive with supermarket specials. What theconsumer sacrifices is selection or variety. Abroadening of the number of items offered aspecial level prices and in larger lots by member-ship marts makes it much more diftlcult for mod-ern supermarkets to compete. The supermarkets’base for recovering losses or near losses on highermargin items is considerabley narrowed. Consum-ers, therefore, tend to perceive conventionalsupermarkets as being high priced or as taking awider margin.

Those supermarkets most likely to beaffected by the advent of membership marts arethe ones that have attempted to have a lower priceimage. The supermarket’s higher margin itemsare skimmed off by the lower margin membershipmarts in much the same way supermarkets raidedhigher margin drugstore items in the 1950s-60s.

Psychological Prking

Most discussions of retail price behaviorinclude the notion of pricing in odd numbers,multiple units, and numbers ending in nine.These and other tricks have some influence onboth immediate transactions and price images.

Location

A dimension of competition and pricingrelates to location. It originates from the variabil-ity of exposure, status, and convenience associatedwith different sites. Much of the discussion ofprice behavior relates to different locations. It isexpected that there would be some interactionbetween location and the choice of the mostadvantageous market niche in terms of the sur-rounding customer and competitor combinations.Most retailers pursue this dimension of competi-tion aggressively. The typical chain distributioncenter/division headquarters would have a realestate special ist actively pursuing this dimensionof competition.

Price Leadership

In a food retailing context, it is important todistinguish between oligopoly price leadership andleader pricing, which refers to price specials.Early analysts of food retailing instinctivelyadopted the general pattern of single product pricebehavior which was developed for manufacturingoligopolies (Nystrom, 1970). While economictheory suggests that price leadership is common inoligopoly structures, only a few studies havetested for observable patterns of food retail priceleadership (Nelson and Preston, 1%6). Patternsof price leadership have typically not been signifi-cant in these studies. In the most usual pattern,competitors’ price levels, as measured by a “mar-ket basket” of 100 or so products, change placesfrequently--usually from week to week (NCFM,1966; and Kaufman and Handy, 1989).

Zone Pricing

In the early days of supermarkets, botichains and voluntary group independents couldhave a common price pattern at all their stores.This was possible because supermarket were

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mainly competing with the inferior “mom andpop” independenta and were seldom stressed bymuch competitive intensity. As these small storeswere eliminated, supermarkets found themselvesconfronting each other, often in conditions ofexcess capacity or “over storing.” As competi-tive forces became more intense, the commonpricing pattern was inadequate. The optimalpattern of pricing would be one in which eachstore identified the “special list” of items mostimportant in its community and for its particularmarket niche, Even stores across the street fromeach other would have different market niches andwould optimally have different price patterns.

Both chains and group independents foundit feasible to develop several (perhaps five or six)price “zones.” Each zone relates to a genericniche (upscale, middle class, blue collar, etc.).The pricing patterns would be fine-tuned continu-ally with new ones added and others deleted asnecessary. in this way, these larger organizationscould have some sensitivity and flexibility con-cerning the needs of the particular community andstill retain the necessary level of managerial andaccounting control. As conditions in communitieschanged or as competitive initiatives evolved,store managers would negotiate with their divi-sional merchandisers for pricing modifications fortheir zone or to be transferred to another zone.

Predatory or Unfair PAcing

Retail food pricing motivated by the desireto eliminate a competitor is defined as “preda-tory.” In a complex pattern of anti-trust laws,predatory pricing is illegal. Several unresolvedquwtions make application of these laws difllcult.If a single store independent enters the marketarea in which a chain has stores, what inferenceshould be drawn if the chain competes with onlythe nearest store or two? Is the legality of a pricewar different if the chain lowered its prices ini-tially to meet competition? If the entrant is awarehouse store (giving little service), is the chainundercutting prices by offering an equal pricelevel (while offering more services)? If so, howshould one relate service levels to product prices?

Competition between single store firms andchains bring up difficult interpretations of these

laws. At the same time, competition betweenthese different structures makes the matter ofpredatorypricing very important.

Changing Consumer Needs and Behavior

A serious effort by large chains to have theimage of the lowest prices together with a lot ofprice checking and reactive behavior resulted inaggregate price differences horn store to store thatwere small--only 2 to 4 percent. Supporting thisstrategy was the massive difference between theprices of retailer brands (private label) productsand the advertised brands of frequently as much as30 to 40 percent. Balancing this niche was apattern of smaller retail firms without access tolow cost private label products. It was natural forthem to choose a niche featuring a greater empha-sis on national brands and variety. These storestypically catered to upscale consumers with large,attractive facilities and a well developed pattern ofservices. This balance came into place in the1960s and was the fundamental pattern of foodretail competition through the 1980s.

Changes in consumer and household behav-ior have resulted in a crossover between food andnon-foods. Small households and householdswhere all of the adults work outside the homebecome much more dependent on prepared foodproducts and food away from home (IFE). Theymay experience extended periods where no mealsare prepared “from scratch. ” For this reason,they buy little of the perishable food products forkitchen preparation of meals. What they do buy,they can buy in large quantities and put in thefreezer or on the shelf. This supply channelbecomes the primary food supply. Where theyare available, merchandise marts or membershipmarts become an attractive source for this foodsupply. The supermarket becomes the place to get“fill in” purchases. Hence, ironically, supermar-kets may compete with convenience stores--especi-ally for beverages, snacks, etc. in this new (IFE)pattern.

Membership marts or other low margingeneral merchandiser retailers position themselvesto supply this primary and large quantity purchasepattern. In the old balance, consumers wouldhave made a major shopping trip to the supermar-

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ket perhaps once a week with fill in purchases atother supermarkets or convenience stores two orthree times per week. In this newer pattern,consumers may get almost one-half of their “foodat home” purchases at a merchandise mart byshopping (with their cooler to bring home a largesupply of frozen foods) once a month. It isunclear how supermarkets and convenience storeswill share the other half.

Food products, especially many of thestand-alone type, become an important part of themerchandiser mart’s competitive strategy. Foodmay be used for bait to draw shoppers who willalso buy from the much broader offerings in themerchandise mart. This pattern has beenattempted many times over in recent decades. Inthe older patterns it didn’t work very well. Thereseems to be some indication that it works betternow, If this pattern becomes important, it will bemost diftlcult for supermarkets to compete.

While this new market segment is growingand will become an important component in thetotal, the more traditional patterns are still inplace. The newer superstores will be affected bythese changes because they compete with themerchandise mart in both food and non-food.Merchandising both food and non-food is chal-lenging, and adjusting to significant changes in thestructure of competitors will add to the complex-ity.

Supermarket Ricing in the 1990s

The patterns of supermarket price behaviorare a logical consequence of the structure of thesupermarket industry combined with consumers’perceptions, behavior and needs. It is likely thatmerchants will adapt the historic pricing patterns(perhaps adding some new ones) to emergingneeds of consumers. We see the following sce-nario developing.

Superstores will find themselves less con-nected to “the weekly shopping trip” concept ofmerchandising. More of the food market willrelate to packaged, prepared foods for smallhouseholds where every adult works (IFE).Supermarkets will be vigorously involved in that

market channel, but will share it with “once amonth” trips to the merchandise mart.

The price special, dimer plate theorem andthe weekly ads will continue to be effective assupermarkets compete with each other for patron-age of the weekly shopper (FFE). They will beless effective in competition for the “once amonth shopping for prepared foods” business. Apattern of variable price merchandising maydevelop for products in this market segment. Itmay be useful for superstores to always havesome major brand prepared dimers on special justlike the convenience store does with beer and softdrinks. This pattern is not related to the weeklycycle of specials and price ads, but is intended tomake (especially the superstore) more competitivewith the merchandise mart.

It is possible that the upscale supermarketor superstore will have some advantages in com-peting with the merchandise mart. These storesare more differentiated from the merchandise martby the higher service format and more attractivedecor. Supermarkets and superstores more special-ized to cost reduction and low prices will find itdifllcult to compete with merchandise marts,which draw large, regional trafllc flows. Time inthe checkout line will be given increasing atten-tion.

The “fill in” market segment is an interest-ing challenge. For the small households (IFE)who maintain an inventory of prepared food (TVdinners, prepared entrees, etc., probably restockedat the merchandise mart) there will be food shop-ping for milk, soft drinks, beer, some hits andvegetables, snacks, bakery, etc. This doesn’treally fit the present convenience stores. They arepositioned to do fill in for the “weekly supermar-ket shopper.” They don’t have produce or bak-ery. It is possible that we will see conveniencestores growing in scope to relate to this marketsegment. Conventional supermarkets will alsomake adjustments to position themselves for thismarket segment. Pricing behavior in this segmentwill resemble convenient store pricing more thansupermarket pricing patterns. They will havemore stand-alone products and have less depen-dence on the cohesive product group.

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There are constantly changing market fac-tors affecting the consumer’s choice of a shoppingplace. Their purpose for shopping, their sense ofalternatives available and their image of thestore’s relevant aggregate price level is unsettledand incomplete. These are the developments mostimportant in the retailers’ competitive behavior.Considerable energy, expertise and agonizing areexpended in developing competitive decisions inthe traditional competitive balance, while at thesame time contemplating the new patterns. Incomparison to price dynamics in the verticalchannel, these competitive considerations aredominant in retailers’ behavior.

Consequences

For Producers

A great part of the goods the food retailersells is made up of highl y manufactured products.These products are produced in quantities whichthe manufacturer is able to move through themarket. Unless sold on special, their prices arequite stable. As the agricultural production sectorbecomes more vertically integrated, coordinationcomes more from planning and management thanfrom price signals. There is less for the retailerto respond to in terms of the classic or equilibrat-ing role of price. In addition, the householddoesn’t want to participate in the equilibratingprocess by buying attractively priced surplusesand canning or preserving (or even storing) in thehome. In this situation, the behavior of theretailer (responding more to horizontal signalsthan vertical signals) is compatible with the behav-ior of both their suppliers and their customers.

It is when unprocessed and especially per-ishable products come to the retailer that problemsarise. Fruits and vegetables, meats and dairytypically have some processed products and somefresh products. Often the fresh market productsare produced in variable quantities and qualities.They need a pattern of price flexibility that ismuch greater than is usual in the large supermar-ket.

When over-production occurs, prices ofthese perishable products become depressed. Ifthe retail level fails to pass this price cut along to

consumers, the market will not clear and priceswill be tiulher depressed in a continuing cycle.While these fresh products make up less than 18percent of the value of food at retail, they repre-sent a special area where the retail price behavioris a problem for producers. In the case of themost visible and high volume products, such asbeef, the problem may be minimized, becauseretailers may be more likely to respond due tophenomena such as the dinner plate theorem, orsimply because the product has high politicalvisibility. Less visible products, having neitherhigh consumer price sensitivity nor politicalstrength, may experience rather severe retail priceinsensitivity. The fundamental process for clear-ing the market may be significant y impaired.

To a degree, it is possible that the advent ofthe merchandise mart could make food marketsperform better from the produce perspectivebecause of the existence of a more consistentlylow margin on a wider variety of products. How-ever, some of the major items on which pricecorrespondence tends to be a problem from aproducer perspective, such as fruits and vegeta-bles, are not as extensively handled by the mem-bership marts.

For Economists

The economic principles vigorously taughtour college sophomores relate to pricing patternsone would expect of a purel y competitive, oligop-olist, or monopolist manufacturer. Rarely doesthis educational process discriminate concerningother parts of the frequently complex distributionchannel, Few economists have much of a sense ofthe specialized patterns of economic behaviortypical of distribution firms. This subject is seenas an “institutional” matter. It does not play inthe more popular economics specialties such asmacro-economics or econometrics. For this rea-son, both among laymen and professionals, thereis little awareness of supermarket pricing patterns.Business college marketing professors know moreabout supermarket pricing than do either econo-mists or agricultural economists.

Retail prices are difllcult to observe. Thisis especially true of food retailing. Managers aresensitive to margins and profits for the store, but

Journal of Food Distribution Research February 931page57

find little motivation for keeping every price intune with costs or other economic factors. Also,inter-relatedness between products (the capacityfor the prices of some products to encourage thesalea of others) invites distortion across the prod-uct mix. In addition, variations through timecause observations at any particular time to be lessthan completely representative of the “actualprice.” Carefd attention should be paid to theserealities when retail price data are collected orwhen interpreting analyses of prices gatheredwithout sensitivity to these characteristics.Because of these problems, retail price data are aweak spot in food sector data sets.

For Public Policy

Real world discussions and investigationsinto retail price behavior and margins have to betlustrating for producers, economists and thepolicy makers that represent them. Producers,economists and policy makers have a tendency tolook for villains. More often than not, thesevillains are thought to be food processors andretailers who profit by anticipating producer priceincreases as well as from price reductions. Thereal world is not that simple. Pricing decisions byprocessors and food retailers involve highly com-plex issues of pricing a product mix consisting, inthe case of retailers, of over 15,000 items.

Our framework of distribution firms is themost developed in the world (Padberg andThorpe, 1974; Padberg, 1973). It has produceda distinguished record of performance for manyyears. It serves as an effective compliment to ourprogressive food manufacturers and to consumerswho prefer a high rate of change within the prod-ucts they buy and eat. In addition to offeringchoice, they offer economy as well. The uniquepatterns of competition which have evolved in thisindustry are basically functional and effective.Despite all of these positive achievements, thesupermarket may notbe very effective in transmit-ting price signals within the vertical channel toproducers.

For the farmer, the major result of thispatternof supermarketand food processor pricingis to increase the penalty for over production. Itleads to a more carefbl look at alternativeways to

control the flow of products to market-marketorders, cooperatives, integration, etc. It seemshighly doubtful that there is any choice the retailikmd industry could make to improve their perfor-mance relative to producers while at the sametime satisfying the market niches and desirescreated by consumers.

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