July, 1992

Fruits of Thought

What's Fair Got To Do With It?

A little knowledge can be a dangerous thing, and the truth of this expression was clearly illustrated in mid-June. That’s when a self-proclaimed “consumer group”, run by a nutritionist who was a long time aide to a liberal congressman and funded by some frustrated produce growers, tried to spring a trap. They published a newsletter and sent letters to some major retailers, all in the cause of disclosing supposedly “unfair” mark-ups being imposed by the chains. The plan was simple: try to embarrass the chains into lowering their produce prices.

The produce growers who hatched this plan had for a long time been upset that retailers didn’t offer lower prices on their products when the F.O.B. market was down. It seems that they had some data on comparative produce prices in different cities, and the data indicated that in some cities, particularly Denver and Chicago, retailers charged higher prices for produce.

The whole scheme now seems to have collapsed. As it turned out, the “consumer group” was utilizing a database not appropriate for the sort of inter-city price comparisons the group was trying to make. The group was obliged to issue an embarrassing retraction on a lot of its data. Even more important, the whole effort came across as disingenuous and maybe a little underhanded.

Even though the politics of this story is a big deal, it seems to me that the more interesting question is: Are the growers correct? Should retailers charge less for produce particularly when the F.O.B.s are down?

This whole episode shows an enormous frustration with the status quo, but it doesn’t indicate that these growers urging lower prices actually have the answer. For one thing, there really is no evidence that lower produce prices, per se, result in higher produce sales. This question is what economists speak of when they try to analyze the “elasticity of demand” for a product. That is to say they try to determine how much sales of a given item will increase or decrease if the price is raised or lowered. To be honest, there are no good elasticity-of demand studies for produce as a category.

But we can say, based on experience, that the effect of price changes varies sharply with different items. For example, cutting the price on garlic 95 percent, though perhaps encouraging short term hoarding, would be unlikely to boost sales of garlic very much. We do know that some items, such as grapes, can respond strongly to price decreases. It is important to note, however, that almost all of our experience in analyzing price changes is in the context of “sales” or “specials”. These almost always include not merely price changes but change in display size, advertising, in-store promotion, etc. It is unclear that price is the most important variable.

Even if price is important, it is important mostly as a point of comparison to other produce items. The Focus on Produce Consumer Research Project gives substantial weight to the notion that consumer perceptions of produce value are relative rather than absolute. In other words, if you lower the cost of bananas, people will perceive that other snack fruits are a worse value.

There is not so much a steady curve of produce demand rising and falling with changes in price but rather a series of set points by which consumers evaluate the reasonableness of a given price. In other words, consumers may be just as willing to buy lettuce at 99 cents as they are at 89 cents, but if it goes to a dollar they think it is too expensive and sales decline.

Part of the problem, of course, with this whole effort is that in a multi-product sales environment such as a supermarket, it is impossible to find an objective standard by which a given price on a given item is found to be “fair” or “unfair”. The pricing of any given item is part of a store’s individual merchandising strategy. It is not a moral issue.

Perhaps one store chooses to sell at generally high mark-ups compared to other retailers, but then has deep discount loss-leading sales items, while another store may have more moderate prices overall but never sells an item at loss. Is one of these approaches more fair? One store may choose to emphasize produce and offer great values there, but be high-priced on meat; another store may take the opposite approach. Which store is more fair?

A part of the frustration by growers is, of course, that many do not make money. Nobody wishes this on them, but nobody makes them grow produce either. They chose to take a gamble and put a fortune into the ground. If things are good, they can make money, and if the chips don’t fall their way, they lose money. It is a risky business.

Part of the problem is that many growers are simply unwilling or unable to get involved with marketing. If a supermarket is making good money on a given item, you would think those growers would be there pitching such things as larger displays of this highly profitable item. If the growers confine their thinking only to growing, always trying to produce more but not working to increase demand, they will be left with what they have in this case, a sort of plaintive plea to retailers to lower prices.

In fact, the error of their ways can be seen in who they chose to attack. In their first newsletter, out of all supermarkets in the country, the newsletter singled out Dominick’s in Chicago for attack, yet Bob DiPiazza, vice president of produce operations for Dominick’s, is literally a national resource for the produce industry. I can think of few people who have done more to help boost produce sales. Even among shippers (and they tell me bad things about plenty of retailers), Bob DiPiazza is widely praised for working with them on plans to boost sales of their products. But perhaps that’s the difference. The shippers who are working with Dominick’s are trying to boost demand with real efforts. The shippers funding this newsletter are just screaming in the dark.  pb