The Impact of Changing Retail Services on the Grocery Store Producer Price Index

This article focuses on quality adjustment of the U.S. Producer Price Index (PPI) for retail food stores. Within the retail trade sector, food stores make up 15.4% of the revenue generated in the sector. This article outlines methods of quality adjustment and applies a direct adjustment technique to the PPI for grocery stores. This subset of the PPI is unique in that it is one of the first indices for retail goods to use the retail margin (retail price - wholesale price) as a measure of the price of the products sold in a store. This measure provides an estimate of the prices of the services provided by the retailers. In this study I find that the Producer Price Index for food stores would be biased upward between 0.06 and 1.74 index points if a change in store characteristics was not adjusted for in the index calculation. This bias would be larger if store characteristics were to change over time without any adjustment made for them. Given the ever-expanding services available in grocery stores and the recent increase in nontraditional retailers selling a greater share of consumer food products , this is likely to occur. An up-to-date measure of store and product characteristics will be needed to construct an unbiased (or at least less biased) index. The use of PPI indices in labor contracts and cost estimate adjustments makes accurate measures of producer price inflation crucial. For example, since food service companies use the PPI to adjust their cost estimates, the upward bias in the PPI causes prices to rise artificially in response to a higher than actual inflation estimate. The more information that is available in terms of store and product characteristics, the more accurate an adjustment that can be made. The potential bias that would occur without these adjustments underlies the importance of proper data collection and frequent updates of any changing characteristics in order to construct a more accurate measure of price change in an industry, sector, or market where the price that is observed encompasses more than the physical product that is sold. This adjustment method can and should be applied to retail and service sector indices whenever possible.Demand and Price Analysis,

THE IMPACT OF BIG-BOX STORES ON RETAIL FOOD PRICES AND THE CONSUMER PRICE INDEX

Over the past 10 years, the growth of nontraditional retail food outlets has transformed the food market landscape, increasing the variety of shopping and food options available to consumers, as well as price variation in retail food markets. This report focuses on these dynamics and how they affect food price variation across store format types. The differences in prices across store formats are especially noteworthy when compared with standard measures of food price inflation over time. Over the past 20 years, annual food price changes, as measured by the Consumer Price Index (CPI), have averaged just 3 percent per year, while food prices for similar products can vary by more than 10 percent across store formats at any one point in time. Since the current CPI for food does not fully take into account the lower price option of nontraditional retailers, a gap exists between price change as measured using scanner data versus the CPI estimate, even for the relatively low food inflation period of 1998-2003.food prices, retail markets, CPI, dairy, nontraditional retailers, Agribusiness, Demand and Price Analysis, Industrial Organization,

Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart

Consumers often benefit from increased competition in differentiated product settings. In this paper we consider consumer benefits from increased competition in a differentiated product setting: the spread of non-traditional retail outlets. In this paper we estimate consumer benefits from supercenter entry and expansion into markets for food. We estimate a discrete choice model for household shopping choice of supercenters and traditional outlets for food. We have panel data for households so we can follow their shopping patterns over time and allow for a fixed effect in their shopping behavior. We find the benefits to be substantial, both in terms of food expenditure and in terms of overall consumer expenditure. Low income households benefit the most.

The Magnitude and Timing of Retail Beef and Bread Price Response to Changes in Input Costs

In this study we develop a model for pass-through behavior for two retail food items with different levels of processing, beef and bread, using 36 years of monthly Bureau of Labor Statistics price indices data (1972-2008). Through the use of a two-stage error correction model that allows for the possibilities of asymmetric and threshold type response behavior, we analyze both the farm to wholesale and wholesale to retail price relationship considering underlying cointegrating relationships and allowing for the presence of structural breaks in these long term equations. Our results indicate that broad differences in price behavior exist not only between food categories but also across production level prices. While farm to wholesale relationships generally appear to be symmetric, retail prices are shown to have a somewhat more complicated response behavior, and for both food products the pass-through at this stage is weaker than that of the farm to wholesale response.Marketing,

CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists?

Hausman (2003) discusses four sources of bias in the present calculation of the CPI. A pure price' index based approach of surveying prices as done by the BLS cannot succeed in solving the problems of bias. We discuss economic and econometric approaches to measuring the first order bias effects from outlet substitution bias. We demonstrate the use of scanner data that permits implementation of techniques that allow the problem to be solved. In contrast, the current BLS procedure does not treat correctly outlet substitution bias and acts as if Wal-Mart does not exist. Yet, Wal-Mart offers identical food items at an average price about 15%-25% lower than traditional supermarkets. The BLS links out' Wal-Mart's lower prices. We find that a more appropriate approach to the analysis is to let the choice to shop at Wal-Mart be considered as a new good' to consumers when Wal-Mart enters a geographic market. This approach leads to a continuously updated expenditure weighted average price calculation. We find a significant difference between our approach and the BLS approach. Our estimates are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42 percentage points, which leads to an upward bias in the estimated inflation rate of about 15% per year.

Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart

Consumers often benefit from increased competition in differentiated product settings. In previous research Hausman (1997a, 1997b, 1999, 2002) has estimated the increased consumer welfare from the introduction of new brand, e.g. Apple Cinnamon Cheerios, and new products, e.g. mobile telephones. In this paper we consider consumer benefits from increased competition in a differentiated product setting: the spread of nontraditional retail outlets. Non-traditional outlets, including supercenters, warehouse club stores, and mass merchandisers have grown in popularity and nearly doubled their share of consumer food-at-home expenditures from 1998 to 20033. Within this non-traditional retail group, supercenters have experienced the largest increase over this time period, but warehouse club stores and dollar stores have also experienced significant increases in their share of the consumer food dollar as U.S. consumers attempt to find the best combination of prices and services at their retailer of choice.

Not-So-Classical Measurement Errors: A Validation Study of Homescan

We report results from a validation study of Nielsen Homescan data. We use data from a large grocery chain to match thousands of individual transactions that were recorded by both the retailer (at the store) and the Nielsen Homescan panelist (athome). First, we report how often shopping trips are not reported, and how often trip information, product information, price, and quantity are reported with error. We focus on recording errors in prices, which are more prevalent, and show that they can be classified to two categories, one due to standard recording errors, the other due to how Nielsen constructs the price data. We then show how the validation data can be used to correct the impact of recording errors on estimates obtained from Nielsen Homescan data. We use a simple application to illustrate the impact of recording errors as well as the ability to correct for these errors. The application suggests that while recording errors are present, and potentially impact results, corrections, like the one we employ, can be adopted by users of Homescan data to investigate the robustness of their results.Measurement Error, Validation Study, Self-Reported Data

Promoting Fruit and Vegetable Consumption: Are Coupons More Effective Than Pure Price Discounts?

The U.S. Department of Agriculture administers food and nutrition assistance programs that promote fruit and vegetable consumption. But consumption remains relatively low among program recipients as well as among the general U.S. population. The perceived high cost of produce is often cited as a deterrent to more consumption. This study looks at coupons and price discounts, two methods of lowering the cost of fruits and vegetables, and uses household purchase data and a consumer demand model to examine each method. Coupons influence consumer behavior through a price-discount effect and an informational/advertising effect. Because of this dual effect, the use of a coupon to increase fruit and vegetable purchases may be more effective than a pure price-discount policy or other noncoupon promotion. Assuming a coupon usage rate of 10 to 50 percent, lowering prices through a “10 percent off” coupon would increase average weekly fruit and vegetable quantities purchased by 2 to 11 percent, as compared with a 5- to 6-percent effect for a pure price discount.fruit and vegetable consumption, coupons, price discounts, consumer demand, dual effect of coupons, informational advertising effects, Food Consumption/Nutrition/Food Safety,

Produce Sourcing and Transportation Cost Effects on Wholesale Fresh Fruit and Vegetable Prices

Demand and Price Analysis,

Exploring Food Purchase Behavior of Low-Income Households: How Do They Economize?

This report compares food purchases by U.S. households of different income levels and finds that low-income shoppers spend less on food purchases despite some evidence that they face generally higher purchase prices. Households can economize on food spending by purchasing more discounted products, favoring private-label (generic) products over brand, pursuing volume discounts, or settling for a less expensive product (for example, less lean beef within a product class. A 1998 sample of food store purchase data shows that low-income households adhere to these practices when possible, but that the typically smaller size of food stores in urban and rural locations may sometimes preclude them from doing so.Food Consumption/Nutrition/Food Safety,