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,

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,

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,

THE OUTLOOK FOR FOOD PRICES IN 2005

Farm Management,

On the Accuracy of Nielsen Homescan Data

Researchers use Nielsen Homescan data, which provide detailed food-purchase information from a panel of U.S. households, to address a variety of important research topics. However, some question the credibility of the data since the data are self-recorded and the recording process is time-consuming. Matching purchase records from 2004 Homescan data with data obtained from a large grocery retailer, it is evident that quantities purchased are reported more accurately in Homescan than are prices. Many of the price differences may be driven by the way Nielsen imputes prices: when available, Nielsen uses store-level prices instead of the actual price paid by the household. There are also differences by household type in the tendency to make mistakes that are correlated with demographic variables. However, the fraction of variance explained by the documented recording errors is in line with other research data sets for which cross-validation studies have been conducted.Nielsen, Homescan, scanner data, validation study, Agricultural and Food Policy, Consumer/Household Economics, Demand and Price Analysis, Institutional and Behavioral Economics,

SUPERMARKET CHARACTERISTICS AND OPERATING COSTS IN LOW-INCOME AREAS

Whether the poor pay more for food than other income groups is an important question in food price policy research. Stores serving low-income shoppers differ in important ways from stores that receive less of their revenues from Food Stamp redemptions. Stores with more revenues from Food Stamps are generally smaller and older, and offer relatively fewer convenience services for shoppers. They also offer a different mix of products, with a relatively high portion of sales coming from meat and private-label products. Metro stores with high Food Stamp redemption rates lag behind other stores in the adoption of progressive supply chain and human resource practices. Finally, stores with the highest Food Stamp redemption rates have lower sales margins relative to other stores, but have significantly lower payroll costs as a percentage of sales. Overall, operating costs for stores with high Food Stamp redemption rates are not significantly different from those for stores with moderate Food Stamp redemption rates. If the poor do pay more, factors other than operating costs are likely to be the reason.Food prices, supermarkets, low-income consumers, Food Stamps, metro, nonmetro, Marketing,

Household Food Expenditures across Income Groups: Do Poor Households Spend Differently than Rich Ones?

The Life Cycle - Permanent Income Hypotheses (LCPIH) suggests that the timing of an income payment or government transfer should have no effect on the expenditures of the recipient. In this paper we test the LCPIH against a dynamic model of household consumption which predicts clustered food expenditure. We use data from 7,013 households in fifty-two urban and peri-urban markets throughout the United States containing detailed daily expenditure data collected by ACNielsen Homescan for 2003. Specifically, we examine aggregate food expenditure patterns, shopping trip patterns, and expenditure patterns across retail channels over calendar weeks, weekly seven day cycles, and days of the week. Our main finding is that households in the lowest 25 percent of the income distribution that have zero employed people have a significantly higher differenced expenditure level in the beginning of the month and significantly lower differenced expenditure in the last week or weeks of the calendar month, thus rejecting the LCPIH. Further, we find that, in general, households do not use convenience stores as a complementary retail channel to the grocery channel.Consumer/Household Economics,