Retail Grocery Market Structure Analysis of Virginia Metropolitan and Micropolitan Areas Prepared for Virginia Community Capital (VCC) by The Reinvestment Fund (TRF) as part of the ReFresh initiative, supported by JPMorgan Chase | February 2015 Retail Grocery Market Structure Analysis of Virginia Metropolitan and Micropolitan Areas Prepared for Virginia Community Capital (VCC) by The Reinvestment Fund (TRF) as part of the ReFresh initiative, supported by JPMorgan Chase | February 2015 TRF’s Market Structure Analysis measures the concentration of market share within a region’s retail grocery industry. In general, as the concentration of market share within the top few grocers increases, the region’s overall level of competition within the industry decreases as it evolves into a tighter oligopoly.1 An oligopoly is a market condition in which the supply of a good or service is largely controlled by a small number of entities, each of which is in a position to influence prices, thus directly affecting its competitors’ ability to sustain profitability. After decades of mergers, acquisitions, and emphasis on economies of scale, the retail grocery industry has naturally evolved into an oligopoly, ranging in intensity from tight (fewer majority owners) to loose (more majority owners), based on the number of owning entities controlling the majority market share.2 TRF’s experience with the Pennsylvania Fresh Food Financing Initiative suggests that a tight oligopoly in at least one Pennsylvania metro area made market penetration especially difficult for local and regional grocers that were not members of the oligopoly. Conversely, loose oligopolies with less concentrated market share exhibited fewer barriers to entry for prospective grocers. Knowledge of a region’s market structure can help VCC tailor its policies and financing programs to accommodate the competitive climates within its geographic regions. Our market structure analysis seeks to address the following question: How do the market structures in Virginia’s metropolitan and micropolitan areas, cities, and counties compare to their nationwide peers, and to what extent do measures of competition vary within the state? It may be the case that some of Virginia’s regions have oligopolies that are so tight that a new fresh food retailer would find it especially challenging to be financially successful, even if it is successful in increasing food access in inequitably served communities. In such regions, VCC should consider a preservation and expansion strategy to prevent the formation of new LSA areas, as opposed to new construction financing in existing LSA areas. Ultimately, the project- level nature of VCC’s financing decisions will require its staff to analyze LSA areas on a case by case basis using PolicyMap. Results from the Market Structure Analysis should not be used to decide whether or not to implement a fresh food financing program in a given region – it is not a yes or no question. Instead, the results serve as a precautionary reminder of competitive environments and provide VCC with information that can be used to tailor each region’s strategy so as to maximize its program’s ability to finance viable fresh food retailers in underserved communities. KEY FINDINGS 1 In most cases, this report uses the terms “grocer” and “fresh food retailer” instead of “supermarket” to avoid the potential for readers to associate the term “supermarket” with very large, big box stores, even though supermarkets in our store location database can be as small as 1,000 square feet. 2 Ellickson, Paul, 2007. “Does Sutton apply to supermarkets?” Rand Journal of Economics. 1 Market shares in Virginia’s retail grocery industry vary by region, but tend to be concentrated in a handful of owners, notably Food Lion (Delhaize America), Wal-Mart (including affiliates), Giant, and Kroger. The following regions3 and cities/counties (explored in more detail later on) exhibit the most potential for VCC fresh food financing because they are relatively competitive markets or their food access problems disproportionately affect low-income and/or minority populations – or both: Richmond, VA Metro Area Washington, DC-VA-MD-WV Metro Area Virginia Beach-Norfolk-Newport News, VA-NC Metro Area Roanoke, VA Metro Area Winchester, VA-WV Metro Area Cumberland County Buchanan County VCC should note that other parts of Virginia may very well contain individual LSA areas with high mission fit and competitive markets. This analysis focuses on aggregate LSA results and can overlook the presence of a single, high mission-fit LSA area within a smaller geographic area. VCC should use PolicyMap to evaluate all 42 of the state’s LSA areas within the context of this reports regional analysis. Even if a mission-fit LSA area exists in an uncompetitive region, VCC could focus on opportunities to expand existing small grocers as opposed to constructing new large stores that might struggle to compete with members of a tight oligopoly. TRF’s experience suggests that it is often more economically feasible to preserve and expand an existing limited-service store4 in order to prevent the formation of a new LSA area than it is to construct a new store to eliminate an existing LSA area. Opportunities for preservation and expansion are apt to exist in just about any Virginia region, regardless of how concentrated retail grocery market shares are or how disproportionate the effects of food access are on low-income populations. Of course, VCC should verify that a prospective borrower actually needs to expand and/or rehabilitate in order to remain open – the “but for financing” evaluation is not always easy to conduct, though it must be done in some capacity. MEASURING OLIGOPOLY IN THE SUPERMARKET INDUSTRY Our research focuses on the specific structure of the retail grocery industry, as measured by market share concentration. The concentration of a market can be measured in a variety of ways. Two common measures are the single-firm (CR-1) and four-firm (CR-4) concentration ratios, defined as the percentage of the market controlled by the single largest and four largest firms, respectively.5 In most 3 Regions generally refer to Metropolitan and Micropolitan Areas, which are types of Census Core Based Statistical Areas (CBSA) – CBSAs are defined in more detail in the Methodology section below. 4 “Limited-service” stores include superettes and dollar stores; superettes are grocery stores with less than $2 million in annual sales. Limited-service stores do not prevent the formation of an LSA area; only full-service stores preclude the formation of an LSA area. Store definitions are described in the Methodology section below. 5 The Herfindahl Index is an alternative measure of concentration, defined as the sum of the squares of market share of the top fifty firms in a market. The Herfindahl Index is commonly used in anti-trust law, and the US Antitrust Department considers a Herfindahl Index of 0.10 to 0.18 to be loosely concentrated and a Herfindahl Index above 0.18 to be highly concentrated. However, because the supermarket industry is a tight oligopoly, and 2 industries, a tight oligopoly is considered to have a CR-4 value above 50%, and a CR-4 between 25% and 50% is considered a loose oligopoly. However, there are very few metropolitan areas, and no micropolitan areas, with a CR-4 value below 50%, as the retail grocery industry has not only evolved into an oligopoly – it has evolved into a particularly tight oligopoly. As a result, this analysis focuses more on each region’s CR-1 and CR-2 values where there is much more differentiation among metropolitan and micropolitan areas. And instead of using threshold values for concentration ratios, we use the relativity within each type of metropolitan or micropolitan area to identify regions with favorable, unfavorable, or average measures of competition. Tables 1 through 4 show market concentration ratios and names of the top 4 owning entities within the nation’s metropolitan, micropolitan, and custom areas (CR-1, CR-2, CR-3, and CR-4), the CR-1 value for the family of stores owning the largest market share (Store Family CR-1), and the family name (Top Family). For brevity, we only show the top 10, middle 10, and bottom 10 regions within each category. Concentration ratio values are shaded based on the range of values within each column so that green represents low market concentration (highly competitive), yellow represents average concentration, and orange/red represents high concentration (highly uncompetitive). Lastly, Store Family CR-1 values that exceed the CR-1 value are bordered with bold lines in Tables 1 through 4 (e.g., the Virginia Beach- Norfolk-Newport News metro in Table 1). The difference between owner and family CR-1 values are worth noting because store families have the potential to behave in a manner that is more similar to a single owner, thus acting less competitively within the family. For example, it may be that Walmart Supercenters and Sam’s Club stores act in concert when deciding where to locate so as not to cannibalize collective sales, while two separate owners under the SuperValu/Albertsons family of stores might act much more independently, with less reluctance to be more competitive with their family members. In the event a family of stores is apt to avoid intra-competitive behavior, it would make more sense to use the family CR-1 value to measure 6 competition. In Virginia, most metropolitan and micropolitan areas do not show substantial differences in the owner CR-1 value and the store family CR-1 value, but differences are noted in this report, where relevant. In some U.S. regions, the family CR-1 is larger than the owner CR-1, suggesting that there is not a clear market share leader in the region.