Evaluating the Performance of U.S. Supermarkets: Pricing Strategies, Competition from Hypermarkets, and Private Labels

By Volpe, Richard | Journal of Agricultural and Resource Economics, December 2011 | Go to article overview

Evaluating the Performance of U.S. Supermarkets: Pricing Strategies, Competition from Hypermarkets, and Private Labels


Volpe, Richard, Journal of Agricultural and Resource Economics


This study draws upon literature from the fields of agricultural economics, industrial organization, and business to study the performance of supermarkets in the United States. The empirical work draws from a rich dataset on the characteristics of supermarkets across the U.S. to test several hypotheses. Supermarkets utilizing everyday low pricing operate more efficiently than those using other strategies. Stores increase their performance by using strategies of their closest competitors. Competition with hypermarkets results in decreased supermarket performance, especially for smaller stores. Increases in private label sales relative to national brand sales are not necessarily related to increased performance.

Key words: food retail, market power, pricing strategies, hypermarkets, private labels, supermarkets

(ProQuest: ... denotes formula omitted.)

Introduction

In American agribusiness and food distribution, the retail sector has emerged as a subject of interest to researchers in agricultural economics, marketing, business, and industrial organization. The factors determining supermarket performance, as measured by profitability and efficiency, are vital to understanding the directions in which the food retail industry is headed in the future. In particular, the drivers of supermarket performance determine the extent to which supermarkets can obtain and exercise market power in both buying and selling. This study examines pricing strategy, competition with hypermarkets, and the success of private label (PL) brands. All of these have been the subject of several publications as well as disagreement or uncertainty among researchers.

Economists have studied market power in food retail for decades, in large part because it enables retailers to set price above wholesale cost, which has direct welfare effects for consumers. Peterson and Connor (1996) attributed a consumer loss of between 7.4 and 8.7% of the total value of branded food shipments in the U.S. to retailer oligopoly power. While market power has proven to be difficult to measure among food retailers (Sexton and Zhang, 2001), standard industrial organizational theory suggests that it is on rise in food retail as a result of several factors. These include increased retailer concentration (Smith, 2004), intensified competition among manufacturers (Messinger and Narasimhan, 1995), the rise in prominence of PLs (Mills, 1999), and the countervailing power of "big box" retailers such asWal-Mart (Chen, 2004). This paper strives to explore how factors impacting supermarket performance may have implications for consumers and the rest of agribusiness.

The primary purpose of this study is to test empirically a number of hypotheses pertaining to supermarket performance using data collected from over 800 unique supermarkets across the United States. The data come from The Food Industry Center (TFIC) of the University of Minnesota (King, Jacobson, and Seltzer, 2001, 2002; Kinsey et al., 2003; Chung et al., 2010). A major advantage of this data set relative to others that have been used in studies of supermarket characteristics and performance, such as the Food Marketing Institute (2010), is that it is reported at the individual store level rather than the chain level.

Pricing strategies are of economic interest because of their effects on retail price variation. A substantial body of literature has focused on formulating models to explain sales in order to better understand and predict retail pricing (Varian, 1981; Sobel, 1984) and subsequently testing these models and understanding the effects of sales on price variation (Pesendorfer, 2002; Hosken and Reiffen, 2004). Retailers can choose between pricing strategies that favor the heavy use of promotions and those that do not, and thus the performance effects of these pricing strategies in today's retail environment have direct implications for price variation. In addition to their effects on consumers' purchasing decisions, retailer price variations have effects on producer welfare (Sexton, Zhang, and Chalfant, 2003; Sexton, Xia, and Li, 2006).

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