The New England Retail Grocery Industry
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Working Paper #1120-80 never published WORKING PAPER ALFRED P. SLOAN SCHOOL OF MANAGEMENT THE NEW ENGLAND RETAIL GROCERY INDUSTRY Paul E. Cournoyer WP 1121-80 March 1980 MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASSACHUSETTS 02139 THE NEW ENGLAND RETAIL GROCERY INDUSTRY Paul E. Cournoyer WP 1121-80 March 1980 This report was prepared for the Economic Research Division, Economic Development Administration, U.S. Department of Commerce, under grant number OER-620- G78-14 (99-7-13440) . The work was co-sponsored by the Office of Research and Development, Employment amd Training Administration, U.S. Department of Labor; and the Center for the Study of Metropolitan Problems, National Institute of Mental Health, U.S. Department of Health, Education, and Welfare. Contractors and grantees conducting research under government sponsorship are encouraged to express their own judgments freely. Therefore, the statements, findings, conclusions, and recommendations in this report are solely those of the author (s) , and do not necessarily reflect the views of amy of the sponsor- ing agencies. .-n -> /'-\ .^- ^ t? BIBLIOGRAPHIC DATA SHEET . On the research project of which this report is one product, "Private Investment, Public Policy, and the Transformation of Older Regions: An Analysis of the New England Economy" A research team of economists, planners, and industrial relations and management specialists has completed a twenty-two month study of the New England economy. Case studies, historical research and statistical analysis of several new microdata sets were used in combination to learn about the development since the 1950s of twelve specific (3-digit) industries in the region, representing both the old (e.g. apparel) and the new (e.g. computers), both mcmufacturing (e.g. aircraft engines) cuid services (e.g. hospitals). Additional working papers were written on plant closings and the impact on workers, on differences in labor meurket structure between "old" and "new" American cities, and on the various methodologies employed in the case studies themselves. A synthesis of the case studies is also available. Like the latter, this synthesis/overview is organized around five themes: the historical development of the industry, nationally and in New England; the record (since the late 195-Q5) of private investment and disinvestment in the industry in New England; major changes in technology which have affected or facilitated industry expansions, contract- ions or relocations of private capital; the impacts of these transformations on the region's labor force (and especially on workers in these particular industries) ; and the ways in which government (especially at the national level) has promoted or retarded these developments . The synthesis is accompamied by a statistical overview of macroeconomic changes in the New England region— chcuiges in the growth and mix of all of the area's industries —since the end of World War II. This provides a context within which the case studies may be given some perspective The principal investigator was Prof. Bennett Harrison of the M.I.T. Department of Urban Studies and Planning. His faculty colleagues included Prof. Barry A. Bluestone, Director of the Social Welfare Research Institute of Boston College; and Prof. Thomas A. Barocci, Industrial Relations Section, Sloan School of Management, M.I.T. They and a team of twenty under- graduate and graduate MIT and BC students conducted the research over the period March, 1978 - Jan., 1980, based at the Harvard- MIT Joint Center for Urban Studies. The project was co-sponsored by the U.S. Economic Development Administration, the Employment and Training Administration of the U.S. Department of Labor, and the Center for the Study of Metropolitan Problems in the National Institute of Mental Health. to be added later: list of project reports and from whom they cam be ordered (either NTIS, the Joint Center, or the Sloan School l-forking Paper Series) • Acknowledgements I would first like to thank Professor Thomas Barocci for his direc- ' tion and support throughout this project. He was responsible for my ini- tial involvement in this study and has given me considerable help in all aspects of this report. Professor Bennett Harrison has been an invalu- able resource and as such has provided numerous comments on the struc- ture and content of this report. I would like to thank Ms. Christine LeCain for editing this report in its entirety as well as keeping me company in the library for what turned out to be memy hours Lastly, I would like to thank Milton Segel, executive director, Massachusetts Food Association, for introducing me to many grocery execu- tives in the New England states and for providing me with an overview of this industry in the initial stages of my research. TABLE OF CONTENTS CHAPTER I, INTRODUCTION 1 Description of the Grocery Industry 2 Methodology of This Study 8 CHAPTER II, HISTORICAL DEVELOPMENT, ANALYSIS OF NEW ENGLAND VS. U.S. TRENDS 11 Historical Development of the Grocery Industry 11 CHAPTER III, MARKET STRUCTURE 21 Vertical Integration, Investment and Mergers 26 Location 31 Pricing 34 Price Discrimination 38 Advertising/Marketing 45 CHAPTER IV, TECHNOLOGY AND INNOVATION 51 Innovation and Technology 51 CHAPTER V, EMPLOYMENT AND TRADE UNIONISM 59 Longitudinal Analysis of the Grocery Industry's Labor Force 59 Employment 60 Short-Run Worker Mobility by Industry: Workers Leaving the Grocery Industry 69 New Entrants to the Grocery Industry 71 Origin and Destination Studies: Long-Run Mobility 73 Earnings 82 Dun and Brads treet Data 91 CHAPTER VI, GOVERNMENT LEGISLATION AND REGULATION 104 Government 104 CHAPTER VII, GROCERY INDUSTRY OUTLOOK AND SUMMARY 112 The Grocery Industry Outlook 112 Summary 116 APPENDIX 118 BIBLIOGRAPHY 121 TABLE OF TABLES TABLE 1 Market Share of Convenience Stores ' 4 TABLE 2 Sales and Nxomber of Stores 6 TABLE 3 Employment in the "Food Industry" 18 TABLE 4 Concentration Ratios and Number of Stores 22 TABLE 5 Grocery Closings and Reopenings ^~°^ 25 TABLE 6 1975 Operating Profiles - Independent Stores 27 TABLE 7 Average Relationships Between Industry Concentra- tion, Firm Market Shares, and Average Profits: 1976 28 TABLE 8 Consumer Price Index 37 TABLE 9 Average Costs of Doing Business 39 TABLE 10 Distribution of Employment of Yovmg and Old 62 TABLE 10a Age" Distribution of Workers 64 TABLE 11 Distribution of Employment by Sex and Age 66 TABLE 12 Distribution of Employment by Race 68 TABLE 13 Number of Workers Leaving Grocery Industry by Age 70 TABLE 14 Number of Workers Leaving Grocery Industry by Industry into Which They Move 72 TABLE 15 Distribution of Entrants by Age and Sex 74 TABLE 16 Distribution of New Entrants to N.E. Grocery 1973 76 TABLE 17 Destination Study 1973 78 TABLE 18 Origin Study of Workers in 1969 80 TABLE 19 Origin Study of Workers Under 25 81 TABLE 20 Comparison 6f Real Annual Earning 83 TABLE 21 Grocery Worker's Real Earnings Distribution by Age 86 TABLE OF TABLES (continued) TABLE 22 Average Yearly Earnings by Age 87 TABLE 23 Ratio of Grocery Earning to All New England Average by Sex 89 TABLE 24 Ratio of Female to Male Earnings 90 TABLE 25 Comparison of Sexes Working All Four Quarters 92 TABLE 26 1969-1972 Components of Employment Change 94 TABLE 27 1972-1974 Components of Employment Change 95 TABLE 28 Components of Employment Change 1974-1976 97 TABLE 29 Distribution of Regional Unionization 99 . CHAPTER I INTRODUCTION This case study of the New England grocery industry is one of twelve industry studies conducted by the New England Economy Project under the auspices of the Harvard/M.I .T. Joint Center for Urban Studies. The major areas of inquiry in the project as a whole include the historical development of each industry, market structure, technology and innova- tions, government regulations and legislation, employment, and finally an industry forecast. -This grocery industry study places particular em- phasis on market structure and employment Topics included in the market structure section of this paper are concentration, competition, integration, merger, investment, diversifi- cation, location, pricing, and price discrimination. The information is based on interviews I conducted with a number of New England grocery chain executives, industry spokesmen and academic experts on the grocery retail industry (see Appendix for the interview guide used for this purpose) . Utilizing longitudinal data on the work histories of a large number of Social Security-covered people working in New England at some time between 1957 and 1975, the employment section analyzes labor force behavior in the New England grocery industry. Description of the grocery industry Grocery stores (SIC541) , as defined by the Standard Industrial Classification, are primarily engaged in the retail sale of all sorts of canned food and dry goods, either packaged or in bulk, such as tea, coffee, spices, sugar, and flour, fresh fruits, and vegetables and fre- quently smoked and prepared meats, fish and poultry. They are commonly known as supermarkets, food stores and delicatessens. The grocery or retail food business is the largest retail industry in the United States, with over $180 billion in annual sales. It is characterized by large variations in store size as measured by sales vol- ume. The three categories of grocery stores as defined by sales volume include supermarkets, superettes, and a variety of convenience or small stores. Supermarkets are defined as those grocery stores with annual sales exceeding one million dollars. These stores are typified by large 30,000 to 40,000 square foot markets such as Stop and Shop, Purity Su- preme, and Star Markets. Superettes, the second category of grocery stores, have annual sales between $500,000 and $1,000,000 and tend to be owned by small independents. Convenience stores or small stores are characterized by annual sales of less than $500,000, typically averaging around $300,000.