Why are groceries more expensive in the bulk food section?

Many grocery stores have a bulk food section, where shoppers scoop flour or nuts or spices from big bins into little plastic bags, and then take them up to the cash, where each individual purchase is weighed and priced.

There are no brand names. There is no fancy packaging. Shoppers do all the work of scooping and bagging themselves. So it must be cheaper, right? 

Actually, not necessarily.

A few months ago I went searching for whole grain, whole wheat flour. And I noticed something strange. 

The flour in the bulk food section was $0.69 per 100g/$3.14 per pound. The flour on the shelves was $9.99 for 2.5 kg, or about $0.40 per 100 grams (see the pictures). How could that be?

Actually, there is a simple economic explanation [which may not be right - see comments below].

There are, roughly speaking, two types of flour purchasers. There are heavy flour users, people who make their own bread, muffins and cookies on a weekly or a daily basis. And there are light users- people who use flour only on special occasions, like making a scratch quiche for a dinner party, or baking cookies to impress or seduce.

When a heavy flour user walks into a grocery store, his demand for flour is relatively elastic - the amount of flour he's willing to purchase responds a great deal to the price of flour. If flour is on sale at a good price, he might buy several kilos, and store it for future use. If a grocery store sells only expensive flour, it's worth his while to go somewhere else.  When a person buys flour in 10 kg bags, it's worth shopping around a bit to save $1 per kilogram. 

When a light flour user walks into a grocery store, her demand is typically relatively inelastic - that is, relatively insensitive to the price of flour. She needs the flour for her quiche crust tonight, not next week. Moreover, since a quiche crust only takes about 250 grams of flour, there is little point in shopping around. Even if she can get flour for $1 per kg less elsewhere, that's only 25 cents - not worth driving for.

A grocery store can increase its profits if it can find some way of separating out the heavy flour users and the light flour users, and charging the light users more. That's where the bulk food section comes in.The bulk food section allows shoppers to purchase as much or as little as they like, which makes it attractive to people who only wish to make a small purchase.  Having lured the light users in with convenience and flexibility, the grocery store can then jack up its prices. It is not easy to compare prices between the bulk food section and the packaged-stuff-on-shelves section, partly because the two sections of the store are some distance apart, and partly because the goods are priced differently ($9.99 per bag v. $0.69 per 100 grams). The heavy users will (probably) notice, because they (probably) know more or less what the going market rate for flour is. Light users won't.

Here is a picture:

 

A price discriminating grocery store separates out the two groups of customers - the ones with more elastic demands and the ones with less elastic demands. It figures out how much it wants to sell by setting marginal revenue equal to marginal costs, and charges the maximum people are prepared to pay for that quantity. Bulk food sections are one way of separating out customers, but not the only way. In Canadian grocery stores, "ethnic" food sections often sell beans, spices, coconut milk and Ribena at a lower price than is charged for almost exactly the same product in the same store. Not all ethnic foods sections are cheap, however - Walmart's "British foods" section sells special, extra-expensive, imported-from-the-old-country baked beans. "Natural foods" sections are another way of selling slightly differentiated products at a highly differentiated prices. They're all forms of price discrimination.

Update: As noted in the comments below, this price discrimination explanation assumes that grocery stores have some degree of market power. Price discrimination can't happen when sellers are operating in an environment where competition between grocery stores means that everyone cuts prices to the point where they are just covering costs. An alternative explanation for the higher price of scoop-your-own "bulk" food is that distributing food this way is actually more expensive, because of spoilage, snackage, and the cost of individually weighing out each purchase. However people who only want a small quantity of some foodstuff are willing to pay a higher per-unit price for scoop-your-own, because it works out to be less expensive in the long run than buying a big package, most of which will end up being wasted. When price differentials are driven by cost differentials, the diagram would look more like this:

Does all of this mean that it's unwise to shop at Bulk Barn, or to purchase food from the bulk section of the grocery store? No. Not everything is more expensive in the bulk bins. And even when it is, it can be cheaper in the long run to buy a small quantity of food at a high per unit price than to buy a large quantity of food - most of which will go unused - at a low per unit price.

Just understand what you're paying - and why.

Comments

[Brian]

I wonder if another factor accounting for higher-priced bulk food items might be "spillage and snackage" - the immediately edible bulk foods such as nuts are more susceptible to being eaten before being weighed and bought. These might not add up to much of a price increment, but it's certainly non-zero.

[Frances Woolley]

Brian: "spillage and snackage"

One way of getting at that might be to look at the bulk/packaged price differential between snackable foods (jelly beans) and non-snackable foods (kidney beans). That wouldn't be a perfect test because the jelly bean market is very different from the market for uncooked kidney beans (Mark Bittman fans being a more larger portion of the latter than the former). But it would be worth looking at. I actually worry more about vermin - think about how much food gets spilled on the floor in bulk places, how hard it is to make sure it's all cleaned up, and what yummy snackage oats and rice and nuts are, when considered from the point of view of an average mouse or rat.

[Lord]

Some of us aren't heavy users, just price sensitive users that don't mind or even prefer maintaining inventory stock, at least for long shelf live goods.

[Frances Woolley]

Lord - agreed, technically the categories should be elastic demand and inelastic demand, rather than heavy user and light user. Heavy users might have highly inelastic demands because they have all sorts of other constraints e.g. transportation, storage, liquidity, etc. Hence the "roughly speaking".

However whole grain flour has quite a short shelf life good because of the fat in the wheat germ (unless you keep it in the freezer), so in this example heavy user/light user isn't a bad approximation of the two categories.

[Tel]

I would have thought that for flour, the pre-packaged items offer significantly lower cost of handling.

I've never seen flour selling in open bulk bins in Australia... way too much risk of contamination, insects, and even spilling a spoon full will spread flour over everything else. That sort of fiddling with bags and scoops is massively inefficient. Then the shop staff need to refill the bins... too many steps!!

Best small pack of flour is the 1kg sold in a square sided plastic jar with the wide screw down top. It's sealed, very easy to handle, stacks on the shelf nicely, keeps a long time (I checked, it's 1.5% fat content but anyway it's sealed so not much air gets to it). At the supermarket checkout they scan a barcode which takes about 1 second, rather than fiddling around with weighing the item and keypad entry which takes about 20 seconds. At home we clean up the plastic jars and re-use them to store the other bulk goods like nuts, pulses, etc.

Australian households that do more serious baking tend to buy the 25kg Manildra flour which comes in the heavy paper bags, and I think that 25kg is the government standard size for what one manual labourer is allowed to lift. There's a standard size and shape of bag regardless of whether you are buying flour, cement, sand, fertilizer, or whatever.

I notice that even the local Arab shop that buys bulk green coffee beans and then sells freshly roasted coffee has started pre-packaging their coffee into 1kg plastic bags with the heat seal. They used to spoon it into paper bags while you stand there, but the process was slow and anyway when you get it home you have to move the coffee out of the paper bag again. With the pre-packaged plastic bags of coffee you get in and out of the shop faster, scan the barcode, pay and go. The bags are sealed and have a nice foil liner so you get a good shelf life. I would guess the guy in the shop must fill, weight and seal the plastic bags during the quiet times of the day, but that's more efficient use of labour because he can use this as his low-priority idle task to consume time that would otherwise be wasted just standing around.

[Joseph Savon]

Dear Dr.Woolley
Your efforts to bring Econ to the muggles are indeed a Worthwhile Initiative...
a) Please take pity on an elderly engineer and give the functional form & dimensions of "marginal revenue" & "marginal cost"
b) Why are MR & D equal at zero kg?
c) Shouldn't chart axes dimensions be mass/time & $/mass?
d) why do Econs feel it necessary to re-invent the vocabulary of applied mathematics?

[Frances Woolley]

Joseph -

a) the diagram isn't clear - the vertical axis should say $/kg, which is the price unit the horizontal axis should say kg. Sorry about that!
b) Imagine there's only one seller, facing an (inverse) demand function of the form: p=a-bq where p=price and q=quantity. Then revenues=R=p*q=aq-bq^2. Marginal revenue, i.e. dR/dq=a-2bq. S D and MR are equal when q=0.
c) yes, I guess it's kg sold per unit of time, but econs always drop the time units for these pictures.
d) we use math for the same reasons as many others do - it is an aid to deductive reasoning, helps clarify and simplify, and helps you see things you might not have done otherwise. Plus its fun. There's a long history-of-econ-thought explanation as to why the dependent variable goes on the horizontal axis in basic supply and demand diagrams - Nick would remember it, I don't.

[Frances Woolley]

Tel - fascinating. Actually it may be Canada that's different. There's a big chain here called Bulk Barn, which sells everything in those bulk containers - but it doesn't sound like there's anything equivalent in the US. But Australia is also distinctive in lots of ways - relatively small and isolated, which probably impacts industrial structure, history of high minimum wages, a culture that abhors pretentiousness, also having a truly remarkable number of toxic beasties.

[Avon Barksdale]

There are two explanations for this phenomenon. The first, as Frances points out, is price discrimination based on the behaviour of two customer types. Price discrimination here, in which the store charges more that marginal cost to some customers requires some market power. The second explanation is that the "bulk" flour provision has higher marginal costs and so sees the higher price. Which is it? It's not obvious. We are discussing a perishable product with two different storage arrangements. We need to solve for the optimal inventory policy with these two different set-ups before we can claim that the price difference is the result of market power. It's easy to miss an input cost when discussing in general terms. Given the financial difficulties that grocery stores are seeing in the competitive environment right now, I wouldn't be surprised if the answer really is an increase in marginal cost.

[rjs]

if i'm baking cookies, they're not "to impress or seduce"...they're to eat...

[Erik Lund]

I go on vacation, and this is what you talk about?

So:
Cleaning is a huge issue. I make a point of inspecting the bulk food section at the start of my shift, because it nearly always needs a sweep, at least. At the same time, my experience with serious infestations is that inaccessible areas are a much more serious concern than the bulk food section, at least if the section has been properly designed with minimal nooks and crannies. It's the sticky floors, trip hazards, and general unsightliness that are the main concerns.

Price: Yes, bulk foods are not actually very economical. There is a reason that food comes in packages! They reduce wastage, inventory, and handling costs. Nor are we making bank on bulk foods. I was amazed at just how low the actual bulk section sales were --considerably less than 1% of store sales at my current location. IN fact, unless my memory is dropping off a decimal point in an attempt to be dramatic, less than 1% of grocery category sales. They're there because customers demand them, not because they're a profit centre. I won't comment on all bulk-food outlets, but you'll notice that they're not exactly ubiquitous.

Nature of demand: this is a tricky one. I, personally, divide groceries three things. First, there are the things that people need. The quintessential example is table salt, which, even in our gigantic store, is available under only one brand, and in four sizes --two shaker products, 1kg box, 2kg box), and certainly not as a bulk item. Flour, milk, rice, Shake and Bake (look, I don't argue with the consumer) fit into this heading. Second, there are things that people want, such as candy and potato chips. A few of these go into every basket to top it up, and they are hugely important to the business. A single family-sized chocolate bar added to the grocery basket of every customer through our doors would push daily sales up a full band, and 2 would be enough to set record sales. Not surprisingly, the main actual items in the bulk food section are bulk candy and snack nuts.

Third, and most importantly from the point of view of this discussion, is aspirational demand. I'm sure that there's heavy-duty marketing theory about this product category, but I think of it as things that people want to want. Ingredients for the meal you should cook tomorrow instead of ordering in; canning jars, because you really should get back into canning; quinoa; gluten-free. . .

As a retailer, your local grocery store is not in the business of judging you. Every time we exclude an aspirational item, we are, implicitly judging. "No, we don't carry canning supplies any more. No-one's got time to can, and you won't use them if you buy them. You know that the Doublestuff Oreos are right here."

Ingredient-type bulk foods are aspirational. They represent the desire to cook more, to budget better, to become an informed, Adbusting(tm) consumer. So that's why we have them. And the prices are high because of costs, and because aspirational products aren't very price sensitive.

[Linda Welling]

I'd agree with your second last paragraph: "It can be cheaper in the long run to buy a small quantity of food at a high per unit price than to buy a large quantity of food - most of which will go unused - at a low per unit price." Adding in storage costs, I tend to focus on "price per unit used" rather than "price per unit purchased". Buying in bulk brings the two closer to equality.

[Frances Woolley]

Erik -

Thanks so much for these insights. I've changed the post in response to your comments, and those of Avon above. I like the "aspiarational foods" idea. For me the ultimate aspirational food is kale. There's some sitting in the fridge, gradually fading away, right now. I've been meaning to make kale and quinoa salad all week, and every day I find some excuse not to do so.

Linda - yup, it's another one of the costs to being a smaller household. I think it's great that we've done so much for child poverty in recent years, but I think it's time to turn our attention to single poverty. We need to distinguish between senior couples, for example, who are mostly doing o.k., and older single seniors, who are at substantially higher risk of poverty. To start thinking seriously about the plight of unwaged, un-familied people in their 30, 40s, and 50s who are eligible for so few supports.

[Antti Jokinen]

Nick, anything new on the red/green world front?

I found your two posts (and discussions under the posts) on it today. Very interesting. It happens that I've been working two years on a theory which seems to clear all the confusion around the red/green world you guys seemed to be experiencing (or did everything become clear already?). I would be happy to elaborate, explain my theory/model step by step, but first you have to promise me one thing: You must be ready to entertain the possibility that no "medium of exchange" (money) exists in the way we are used to think about it. Based on some comments you've made, I reckon you find this hard to accept?

The "medium of exchange" is the ledger, the accounts -- not any*thing* on the accounts. The buyer doesn't transfer anything to the seller, and the seller transfers only goods to the buyer -- no "red money". The only thing that happens in the "monetary realm" is that the buyer's account gets debited and the seller's account gets credited. In our minds we need to build an impassable wall between the two accounts; nothing moves between them. This bookkeeping, of course, serves a real purpose, which is not to track "money holdings" (there isn't any) but to track goods given (sold) and goods taken (bought). You could think of it as a "gift economy" with an explicit tracking of the gifts (there's a connection here to Kocherlakota's "Money as Memory" and Ostroy's paper which Kocherlakota builds on). No bilateral balance in trade required -- just multilateral (ie. I can buy from you and sell to Peter, and you won't be able to claim anything from anyone, but that won't make you unhappy as you can, in turn, buy from anyone and thus get rid of your credit balance).

This solution works, but to see that it works you might have to turn your world upside down. That's not easy -- at least it wasn't for me. Let me know if anything here resonates? (I apologize for being so mysterious. Just trying to build some drama around this, I guess.)

[Frances Woolley]

Antti - this post wasn't written by Nick, and he's probably not monitoring the comments. If you'd like to share something with him, please comment on one of the posts that he's written (it will say Nick Rowe at the bottom), or contact him directly by email - his email address is easy to find - Frances

[Antti Jokinen]

My apologies for hijacking your comment thread, Frances! I should have noticed it wasn't Nick. I'll contact him directly.

[Frances Woolley]

Antti - no worries, if you'd like me to delete this exchange, please let me know.

[Tel]

There are a few shops in Sydney that are specifically bulk foods, which are kind of hipster shops really, people go there for the experience.

https://www.facebook.com/thesourcebulkfoodslanecove

I haven't checked closely but I'm confident they do have flour, and it would be a lot more expensive on a per kilo basis than at the supermarket... but these are all "artisanal" speciality products. Basically Western society is sufficiently wealthy that productivity is no longer the primary concern for many people. I would argue that this particular niche market is entirely isolated from regular food shopping.

Economic arguments about price kind of miss the point when you are in the realm of what is effectively a kind of entertainment and leisure activity.

[Nathan W]

I'm surprised, then, that they wouldn't tend to offer discounts above a certain amount. E.g., any bulk purchases greater than $20 receive a 10% discount, over $20 receive a 20% discount. Because then you might try a bit of a whole bunch of things, and come back and buy more.

Usually if I get something from the bulk section it is because it is not available elsewhere.

Also, on the cost issue, consider that on 10m2 floor space (2 sides, 3-4 levels/rows on each side, say, 30cm wide = 30 items per row on each side) you can easily fit a few hundred options in that much space. You don't need staff to come "front the stock" one or several times a day. For restocking, you can walk up and down each row (20 seconds?) to see what needs to be restocked - if any, then more time to note them down would be possible.

And, the issue of wastage should be trivial in the long run. If there is wastage they will either stock less at a time or discontinue the product (although probably the bottom of every bin needs to be thrown out because it's crumbs, not food). This would be a risk for introducing a new bulk food section because you don't know how much of what to stock, etc. (one might start small, but then it's not notable enough to be attracted to), but I highly doubt that wastage is particularly high in operations that have been running for a few years.

[Bob Smith]

I would have thought that bulk food stores serve a different market than the bulk food aisle in the grocery store (and that the "artisanal" speciality products store serves a different market than the "bulk barn"). But I'm going to make a point of checking next time I'm in there.

On a related question, you might ask "why are groceries cheaper in the "ethnic foods" aisles"? It's a remarkable example of effective price discrimination to look at how the prices for "ethnically" branded foods vary from the "mainstream" brands, often produced by the same manufacturers.