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