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AmberWaves February 2003 > Findings > Article

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Market Dynamics Keep Food Prices Steady

Ephraim Leibtag

Increased consolidation among food retailers has left a smaller number of companies with a greater share of the market. As of 2000, the top 4 food retailers accounted for 27.4 percent of grocery sales, up from 16.2 percent in 1995. Many industry analysts feared consolidation would create noncompetitive markets and higher food prices, with less pressure on retailers to improve quality and expand services available. However, the opposite trend is taking hold. Conventional food retailers now vie with Wal-Mart Supercenters, Costco Warehouse Stores, and other alternative retail formats offering (and selling) a larger array of food products. In fact, the share of at-home food sales for warehouse clubs and supercenters rose dramatically, from 1.8 percent in 1991 to 7.4 percent in 2001.

Conventional supermarkets have been forced to compete with warehouse clubs and supercenters in one of two ways—by lowering prices or by differentiating their product from those available at their competitors. Maintaining lower prices to compete with alternative retail outlets has been difficult for many retailers. Even the larger conventional food stores do not have the same buying power as large general merchandisers. Also, less favorable labor costs do not allow conventional food retailers to maintain profit levels with lowered prices.

These difficulties have led many food retailers to instead focus on accentuating the unique characteristics of their stores as contrasted with their competition. By focusing on food products, conventional food retailers are able to provide a more pleasant shopping experience, higher quality food items, a larger selection of specialty foods (gourmet, ethnic, organic, etc.), and additional services, such as prepared foods, Internet shopping, and home delivery, that larger alternative retail outlets are not able to match.

Recent retail food prices reflect these market dynamics. The expanding services offered by retailers may increase their operating costs, but the competitive pressure from warehouse clubs and supercenters continues to keep prices for standard food items (those that are tracked in the Consumer Price Index) at low inflation levels. Retail food prices remained steady throughout 2002, rising only 1.3 percent for the year. This is the smallest increase in food-at-home prices since 1992 and is just over half the 10-year annual average of 2.5 percent.

While other factors, such as the overall health of the U.S. economy, affect food prices as well, the dynamics of competition have kept food prices even lower than one would normally expect during slow economic growth periods. Looking over a longer time horizon, food-at-home prices rose an average of 2.1 percent per year over the past 5 years (including the boom years of the late 1990s) as opposed to 3.5 percent average annual growth in the prior 10 years (1988-1997). In fact, if one were to factor in the increased market share for alternative retail outlets with their lower average food prices, one would see no change, or even deflation, in overall prices for food at home.

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This article is drawn from...

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The U.S. Food Marketing System, AER-811, by J. Michael Harris, Phil Kaufman, Steve Martinez, and Charlene Price, August 2002.

The full table of sales of food at home by type of outlet, 1929-2001.

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