K76 PRICES AND PROFITS OF LEADING RETAIL FOOD CHAINS, 1970-74 HEARINGS BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETY-FIFTH CONGRESS FIRST SESSION MARCH 30 AND APRIL 5, 1977 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 96-514 WASHINGTON: 1977 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 , It. I4 JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.) RICHARD BOLLING, Missouri, Chairman HUBERT H. HUMPHREY, Minnesota, Vice Chairman HOUSE OF REPRESENTATIVES SENATE HENRY S. REUSS, Wisconsin JOHN SPARKMAN, Alabama WILLIAM S. MOORHEAD, Pennsylvania WILLIAM PROXMIRE, Wisconsin LEE H. HAMILTON, Indiana ABRAHAM RIBICOFF, Connecticut GILLIS W. LONG, Louisiana LLOYD BENTSEN, Texas OTIS G. PIKE, New York EDWARD M. KENNEDY, Massachusetts CLARENCE J. BROWN, Ohio JACOB K. JAVITS, New York GARRY BROWN, Michigan WILLIAM V. ROTH, JR., Delaware MARGARET M. HECKLER, Massachusetts JAMES A. McCLURE, Idaho JOHN H. ROUSSELOT, California ORRIN G. HATCH, Utah JOHN R. STARK, Executive Director Louts C. KRAUTHOFF II, Assistant Director RICHARD F. KAUFMAN, General Counsel ECONOMISTS WILLIAm R. BUECHNER KENT H. HUGHES PHILIP MCMARTIN G. THOMAS CATOR SARAH JACKSON GEORGE R. TYLER WILLIAM A. Cox JOHN R. KARLIK ROBERT D. HAMRIN L. DOUGLAS LEE MINoarIY CHARLES H. BRADFORD STEPHEN J. ENTIN GEORGE D. KRuMSHAAR, Jr. M. CATHERINE MILLER MARE R. POLICINSEI (II) -CONTENTS WITNESSES AND STATEMENTS WEDNESD-AY, MARCH 30,41977 Long, Hon. Gillis W., cochairperson, member of the Joint Economic Com- Page mittee: Opening statement - - 1 Heckler, Hon. Margaret M., cochairperson, member of the Joint Economic Committee: Opening statement--____________-__-_-_-_-__-__-_ 3 Mueller, Willard F., and Bruce W. Marion, members, Food System Re- search Group, University of Wisconsin, Madison, Wis-- ____-_-_ 4 Goldberg, Ray A., Moffett Professor of Agriculture and Business, Grad- uate School of Business Administration Harvard University, appearing at the request of the Food Marketing institute -__-_______-__-____ 58 Farrell, Hon. Kenneth R Deputy Administrator, Economic Research Service, Department of Agriculture -__-___-__ -_-___-____-__ 70 Hammonds, Timothy M., vice president for research, Food Marketing In- stitute, accompanied by Thomas L. Sporleder, professor of agricultural economics, Texas A. & M. University - 77 TUESDAY, APRIL 5, 1977 Long, Hon. Gillis W., cochairperson, member of the Joint Economic Com- mittee: Opening statement -____----__--_--_-_-_-_-_-_-_ 115 Heckler, Hon. Margaret M., cochairperson, member of the Joint Economic Committee: Opening statement -__--___-- _- __ 117 Hatch, Hon. Orrin G., member of the Joint Economic Committee: Open- ing statement - 118 Scanlon, Paul D., associate editor, Antitrust Law and Economics Review 120 Johnson, Hon. Owen M., Jr., Director, Bureau of Competition, Federal Trade Commission, accompanied by Mack Folsom, Deputy Director, Bureau of Economics - __------ __--_--_--_--_--____-__ 139 Mueller, Willard F., member, Food System Research System, University of Wisconsin, Madison, Wis -___--------_-___- _____-___ 149 Aders, Robert O., president, Food Marketing Institute -___-__-__-___ 165 Silbergeld, Mark, acting director, Consumers Union, Washington, D.C., office - _-- __------_____--_--_-- _-- ___________--____----_ 175 SUBMISSIONS FOR THE RECORD WEDNESDAY, MARCH 30, 1977 Farrell, Hon. Kenneth R.: Response to Representative Brown of Ohio's request to supply the major food items that constitute the market basket - _-_-_-_-_ 113 Response to Representative Brown of Ohio's query regarding the meat procurement practices of large versus small food chains - 114 Goldberg, Ray A.: Prepared statement with attached letters -_-__-__-_-___-_-__ 63 Hammonds, Timothy M., et al.: Prepared statement -_----________--_----__--___-_-_-__-_-__-_ 97 Mueller, Willard F., and Bruce W. Marion: Prepared statement --------------- ------------------------ 15 Letter to Representative Long from Mr. Mueller, dated July 16, 1977, expounding upon an enclosed article entitled "Food Prices: Wash- ington Tops the List," from the Washington Post, June 30, 1977, in which it compares chain grocery store prices in 19 cities - 32 Comments on testimony of Mr. Goldberg - _- __-_-___-_-_-_ 62 Comments on testimony of Mr. Farrell - __-_-___- ____-_-_ 75 Comments on testimony of Mr. Hammonds _- _____-_-___-_----- 82 (m) IV TUESDAY, APRIL 5, 1977 Aders, Robert 0.: Page Prepared statement with attachments -___________-____-_______ 170 Johnson, Hon. Owen M., Jr., et al.: Prepared statement -------------------------------------------- _ 144 Long, Hon. Gillis W.: Press release entitled "FTC Announces Investigation of Retail Food Prices," dated July 1, 1974 - _________________-______-_______ 155 Scanlon, Paul D.: Prepared statement -___________________________ 124 Silbergeld, Mark: Prepared statement -_____--____--_____________________________ 178 APPENDIX Letters, comments, and analyses, and a supplemental statement and a study in regard to the hearings of March 30 and April 5, 1977, into the impact on the consumer of economic concentration in food retailing and for the publication of the study entitled "The Profit and Price Per- formance of Leading Food Chains, 1970-74" around which the hearings centered -______--_--______________--___________--__--___--_ 185 PRICES AND PROFITS OF LEADING RETAIL FOOD CHAINS, 1970-74 WEDNESDAY, MARCH 30, 1977 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Wadhington, D.C. The committee met, pursuant to notice, at 10:20 a.m., in room 318, Russell Senate Office Building, Hon. Gillis W. Long and Hon. Mar- garet M. Heckler, cochairpersons (members of the committee)-, presiding. Present: Representatives Bolling, Long, Brown of Ohio, and Heck- ler; and Senators Roth, McClure, and Hatch. Also present: John R. Stark, executive director; George R. Tyler, Steve Watkins, and Katie MacArthur, professional staff members; Mark Borchelt, administrative assistant; and Charles H. Bradford, George D. Krumbhaar, Jr., M. Catherine Miller, and Mark R. Policin- ski, minority professional staff members. OPENING STATEMENT Or REPRESENTATIVE LONG Representative LONG. This hearing will come to order. At the direc- tion of the chairman of the Joint Economic Committee, Representative Bolling of Missouri, I call to order this Joint Economic Committee hearing. It is a full committee hearing on "Prices and Profits of Lead- ing Retail Food Chains, 1970-74." Today the committee will hear testimony on a study prepared for the committee and at the committee's request, started some time ago and prepared for the committee and for the Congress by Mr. Willard Mueller, Mr. Bruce Marion, and a number of other economists at the University of Wisconsin. The study examines the relationship between supermarket price levels, food chain profits, and the structure of local markets. This study is the most recent component of a broad series of studies that the Joint Economic Committee has been making into fac- tors causing inflation. It was initiated in the fall of 1974,21/2 years-ago. Economists have said that studies of food retailing-and some gov- ernmental statistical studies as well-all suffer markedly from inade- quate data. Publicly available data are too aggregated and too incon- sistent; data coverage, they say, has been too spotty to assure a bass of information broad enough on which to proceed. In an effort to rec- tify the problem, the committee subpenaed price and profit data from the 17 largest national food chains. Two preliminary hearings by the Joint Economic Committee were held in November and December of (1) 2 1974, based on a portion of this subpenaed data. Additional data were -then collected through the summer of 1975. To digress, an enormous amount of data-confidential data-was acquired. The committee compiled more than eight file cabinets of data. For the past 2 years, since that summer of 1975, the five-person research team from the University of Wisconsin has been compiling, coding, and interpreting this data with the use of computers. In addl- tion, a sizable volume of data in the public domain was used, includ- ing the FTC chainstore premerger forms that stores file in a number of instances, and Commerce Department market concentration data. With this data, the researchers evaluated the statistical relation- ship between food price levels, food chain profits, and the degree of competition that existed in the local food retail markets. A variety of relationships were tested using multiple regression equations in this endeavor. The regression analysis was designed to test the basic economic thesis that high food prices and chain profits exist where little competition exists, such as where few stores control a large portion of the local supermarket sales. The analysis generally confirms this thesis. A strong statistical rela- tionship was discovered to exist between high food prices and local market concentration in the period, 1970-74, covered by this study. For example, the study concludes that consumers buying food in markets where only a few firms compete paid up to 14 percent higher prices than consumers shopping in more competitive markets. In fact, the researchers concluded that these higher prices added, at minimum, a staggering $662 million to consumer food bills in 1974 due to un- competitive market conditions in food retailing. The researchers also maintain that higher food prices did not trans- late entirely into higher profits. As prices vent up, food retailers seem- ingly became somewhat more inefficient, according to the researchers' findings, allowing costs to rise for really no apparent reason. Nationally branded supermarket food items were priced 12 percent higher, on average, than so-called store brands, even though both brands frequently contained identical products, according to the re- sults of this study. As I understand it, the data that has been utilized is far more de- tailed and extensive than has ever before been used to examine food retailing.