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What are the economies of scale in groceries? Seems like at a certain point there will be more overhead due to the management required for managing the entire c

What are the economies of scale in groceries? Seems like at a certain point there will be more overhead due to the management required for managing the entire chain of stores, and also lower quality of product due to only being able to source products from massive producers.

mdasen 4y ago
Recently, Market Basket (a family-owned New England chain) was rated #1 during inflationary times (https://www.supermarketnews.com/retail-financial/market-basket-named-top-inflationary-times-grocer https://www.supermarketnews.com/retail-financial/market-bask...). Market Basket made news a few years back because their non-union employees basically organized a strike to save management - yes, the workers were standing up for the CEO that got ousted. The chain was co-owned by two sides of a family and one side wanted to oust the CEO and co-owner - but the workers loved how he treated them and basically forced the other side of the family to sell to the CEO. Not only employees, but a lot of suppliers wanted to stand up for the ousted CEO. See: https://en.wikipedia.org/wiki/Market_Basket_protests https://en.wikipedia.org/wiki/Market_Basket_protests One of the reasons that they wanted to oust the CEO is that they wanted a dividend while the CEO instead decided to cut prices by 4% for the entire year. It was kinda amazing going grocery shopping and looking at the receipt and literally seeing 4% come off the price of every item. No, they didn't hike prices just to give the feeling of 4% off. I bring this up because while Market Basket has economies of scale, it isn't an international company like Ahold Delhaize of the Netherlands which owns Stop & Shop, Giant, Hannaford, Food Lion, and over 2,000 stores in the US (and tons around the world); it isn't Walmart or Amazon; it isn't Albertsons with 2,250 stores or Kroger with 2,700. It has 90 stores. Yet they seem to be incredibly profitable while offering better pricing to consumers. A friend of mine who worked in the supermarket business in Nebraska knew about Market Basket because they were such an example of how well-run a supermarket could be. No loyalty cards, no self-checkout, employees have profit-sharing, healthcare, and sick time, and instead of hiring outside execs they've tended to promote from within - people who have worked for the company for decades, sometimes starting part-time as teenagers. At the same time, this seemingly old-fashioned company is thriving. In some ways, it makes me question a lot of what companies do to optimize things. Yes, there are all sorts of things companies can do like surge pricing, but that can leave a bad taste - and it leaves people wanting to do it back to you if they ever have the power. Sure, you can try and exploit suppliers, but that can create a hostile, unstable relationship. How much money are you burning trying to see exactly how little you can pay? Do you hire expensive execs, an army of data scientists and economists, etc. to see how you can use your power to get a little bit extra? I do think the Kroger-Albertsons merger will be good for the companies/shareholders. Before, if you were a supplier, you'd have these two 2,000+ store chains to sell to. Now there's one less buyer and economists research this a lot (and there's been a lot of good work on monopsony/oligopsony recently). If you're a worker, there's one less supermarket employer to work for. However, those aren't economies of scale - those are just market power gains. I do think there are still economies of scale, but they do become smaller. When you already have 2,000+ stores sharing an inventory system, its cost can be pretty small and moving to 4,000+ stores might not really change things much. Plus, there's a lot of cost and pain integrating systems to save that money and companies spend years doing it. Still, it certainly doesn't seem like a necessary merger to remain competitive. Small chains like Market Basket (90 locations), Wegmans (109 locations), Central Market (10 locations), and Heinen’s (23 locations) get top marks from Consumer reports (https://www.consumerreports.org/products/grocery-stores-supermarkets-34741/grocery-stores-supermarkets-33753/view2/ https://www.consumerreports.org/products/grocery-stores-supe...) way ahead of the mega chains (many of which are near the bottom including lots of Albertson's brands, lots of Ahold Delhaize's brands, Walmart, etc).
- kotlin2 4y ago
  That’s my observation too. Grocery chains need to be big enough to stock a wide variety of goods. But after a certain point, getting bigger makes the stores worse.
petra 4y ago
I think the next battle is grocery pickup/delivery and the tech needed for it. Many more locations, cusyomers and more money would surely help there.
Retric 4y ago
The back end logistics of grocery stores get complicated, but lager networks are strictly better because they get more leverage with suppliers. They can also spread the expense for R&D/training materials etc across more stores and wider advertising channels without significant viewers being outside the range of their stores.
efficax 4y ago
groceries are traditionally thin margin so you can reduce overhead in the administrative, marketing, supply chain parts of the business. you also get bargaining power with producers. most packaged food producers are already "massive" and you generally see the same brands with only minor regional variations (like some different kinds of bread) from store to store across the country. they would also have a better ability to purchase from local producers, pushing out smaller grocers and making it harder for them to access the limited supply of local farms and creameries etc. basically all the advantages of a streamlined supply chain would happen here (instead of running two competing supply chains in the same region they can now run one which knows the stocking demands of all the stores). There are actually a lot of good reasons for the food business especially to have only one retail outlet, since it would reduce food waste from overbuying, and simplify consumer choice problems (i have to go to a few stores if i really want to get all the brands I like) except for the fact that it means inevitable monopolisitic pricing and ends up punishing producers because they have no other options for who to sell to.
- kotlin2 4y ago
  Do those advantages continue to scale last a certain point? I use a service called Fresh Direct for groceries. They serve nearly the entire NY metro area, so they’re pretty big, but not nearly as big as a national chain. The quality provided by Fresh Direct is so much better than Whole Foods or Shop Right. The reason is that they partner will smaller producers that sell really good stuff. Like they have really good yogurt from Brooklyn, amazing organic produce from a cooperative in Pennsylvania, pasture raised meat, etc. Whole Foods used to have similar items before they were purchased by Amazon. At least for my personal shopping habits, bigger doesn’t necessarily mean better.
gorbachev 4y ago
The economies of scale on grocery store mergers is that you can reduce the number of stores you maintain, because typically competitors will have stores near each other. Don't need Albertsons and Kroger stores a block away from each other after you operate as a single company.

mdasen 4y ago

Recently, Market Basket (a family-owned New England chain) was rated #1 during inflationary times (https://www.supermarketnews.com/retail-financial/market-basket-named-top-inflationary-times-grocer https://www.supermarketnews.com/retail-financial/market-bask...). Market Basket made news a few years back because their non-union employees basically organized a strike to save management - yes, the workers were standing up for the CEO that got ousted. The chain was co-owned by two sides of a family and one side wanted to oust the CEO and co-owner - but the workers loved how he treated them and basically forced the other side of the family to sell to the CEO. Not only employees, but a lot of suppliers wanted to stand up for the ousted CEO. See: https://en.wikipedia.org/wiki/Market_Basket_protests https://en.wikipedia.org/wiki/Market_Basket_protests One of the reasons that they wanted to oust the CEO is that they wanted a dividend while the CEO instead decided to cut prices by 4% for the entire year. It was kinda amazing going grocery shopping and looking at the receipt and literally seeing 4% come off the price of every item. No, they didn't hike prices just to give the feeling of 4% off. I bring this up because while Market Basket has economies of scale, it isn't an international company like Ahold Delhaize of the Netherlands which owns Stop & Shop, Giant, Hannaford, Food Lion, and over 2,000 stores in the US (and tons around the world); it isn't Walmart or Amazon; it isn't Albertsons with 2,250 stores or Kroger with 2,700. It has 90 stores. Yet they seem to be incredibly profitable while offering better pricing to consumers. A friend of mine who worked in the supermarket business in Nebraska knew about Market Basket because they were such an example of how well-run a supermarket could be. No loyalty cards, no self-checkout, employees have profit-sharing, healthcare, and sick time, and instead of hiring outside execs they've tended to promote from within - people who have worked for the company for decades, sometimes starting part-time as teenagers. At the same time, this seemingly old-fashioned company is thriving. In some ways, it makes me question a lot of what companies do to optimize things. Yes, there are all sorts of things companies can do like surge pricing, but that can leave a bad taste - and it leaves people wanting to do it back to you if they ever have the power. Sure, you can try and exploit suppliers, but that can create a hostile, unstable relationship. How much money are you burning trying to see exactly how little you can pay? Do you hire expensive execs, an army of data scientists and economists, etc. to see how you can use your power to get a little bit extra? I do think the Kroger-Albertsons merger will be good for the companies/shareholders. Before, if you were a supplier, you'd have these two 2,000+ store chains to sell to. Now there's one less buyer and economists research this a lot (and there's been a lot of good work on monopsony/oligopsony recently). If you're a worker, there's one less supermarket employer to work for. However, those aren't economies of scale - those are just market power gains. I do think there are still economies of scale, but they do become smaller. When you already have 2,000+ stores sharing an inventory system, its cost can be pretty small and moving to 4,000+ stores might not really change things much. Plus, there's a lot of cost and pain integrating systems to save that money and companies spend years doing it. Still, it certainly doesn't seem like a necessary merger to remain competitive. Small chains like Market Basket (90 locations), Wegmans (109 locations), Central Market (10 locations), and Heinen’s (23 locations) get top marks from Consumer reports (https://www.consumerreports.org/products/grocery-stores-supermarkets-34741/grocery-stores-supermarkets-33753/view2/ https://www.consumerreports.org/products/grocery-stores-supe...) way ahead of the mega chains (many of which are near the bottom including lots of Albertson's brands, lots of Ahold Delhaize's brands, Walmart, etc).

kotlin2 4y ago
That’s my observation too. Grocery chains need to be big enough to stock a wide variety of goods. But after a certain point, getting bigger makes the stores worse.

petra 4y ago

I think the next battle is grocery pickup/delivery and the tech needed for it. Many more locations, cusyomers and more money would surely help there.

Retric 4y ago

The back end logistics of grocery stores get complicated, but lager networks are strictly better because they get more leverage with suppliers. They can also spread the expense for R&D/training materials etc across more stores and wider advertising channels without significant viewers being outside the range of their stores.

efficax 4y ago

groceries are traditionally thin margin so you can reduce overhead in the administrative, marketing, supply chain parts of the business. you also get bargaining power with producers. most packaged food producers are already "massive" and you generally see the same brands with only minor regional variations (like some different kinds of bread) from store to store across the country. they would also have a better ability to purchase from local producers, pushing out smaller grocers and making it harder for them to access the limited supply of local farms and creameries etc. basically all the advantages of a streamlined supply chain would happen here (instead of running two competing supply chains in the same region they can now run one which knows the stocking demands of all the stores). There are actually a lot of good reasons for the food business especially to have only one retail outlet, since it would reduce food waste from overbuying, and simplify consumer choice problems (i have to go to a few stores if i really want to get all the brands I like) except for the fact that it means inevitable monopolisitic pricing and ends up punishing producers because they have no other options for who to sell to.

kotlin2 4y ago
Do those advantages continue to scale last a certain point? I use a service called Fresh Direct for groceries. They serve nearly the entire NY metro area, so they’re pretty big, but not nearly as big as a national chain. The quality provided by Fresh Direct is so much better than Whole Foods or Shop Right. The reason is that they partner will smaller producers that sell really good stuff. Like they have really good yogurt from Brooklyn, amazing organic produce from a cooperative in Pennsylvania, pasture raised meat, etc. Whole Foods used to have similar items before they were purchased by Amazon. At least for my personal shopping habits, bigger doesn’t necessarily mean better.

gorbachev 4y ago

The economies of scale on grocery store mergers is that you can reduce the number of stores you maintain, because typically competitors will have stores near each other. Don't need Albertsons and Kroger stores a block away from each other after you operate as a single company.