UF Researcher: New Grocery Strategy May Not Be Good For Consumers

March 4, 1999

GAINESVILLE — The grocery store business is changing, leaving consumers with fewer choices and higher prices and manufacturers with less leverage than ever before, according to a study by a University of Florida researcher.

Since the early 90s, supermarkets have been moving toward category management strategies, in which grocery stores control the prices and distribution of entire classes of groceries — laundry detergent, cereal or deodorant, for instance — rather than letting the makers of specific brands set their own prices, said Murali Mantrala, an associate professor in UF’s Warrington College of Business Administration. Mantrala did the study with Suman Basuroy of Rutgers University and Rockney Walters of Indiana University.

The reduction in brand competition has caused a slow-but-steady rise in prices, and Mantrala said he expects to see more stores follow the practice in the future. About a third of the national supermarket chains have adopted this strategy in some categories.

“I think that over time, maybe half of the retailers might fully adopt this,” said Mantrala, whose study was funded by UF’s Center for Retailing Education and Research. “It’s the talk of the times.”

In the category management program, grocery retailers choose the best-selling brands in various categories, cut the brands that don’t sell well and then eliminate the competition between the remaining brands by taking price control away from the manufacturers.

“That way, you can improve the entire shelf profitability of that category instead of being brand-oriented, which was more in the interest of the manufacturer,” Mantrala said.

In the short run, category management is not benefitting the consumer, because it is allowing grocery retailers to raise prices.

“When it comes down to it, it’s the retailer’s business, and he is effectively stamping out the competition that is supposed to exist between Tide and Clorox, for example,” Mantrala said. “Whenever there is more coordination than competition, it’s a standard result that you have high prices.”

Rising prices in the stores that have adopted category management have driven some consumers away, reducing sales, but Mantrala’s research shows that the stores’ profits continue to rise because retailers have more leverage to squeeze manufacturers to get lower wholesale prices.

“Why would a retailer persist with high prices even if he’s losing sales?” Mantrala said. “It turns out that even though they’re losing sales, they may be making more profits because the margins on these units of products they sell will actually improve.”

Cincinnati-based Kroger, the largest supermarket chain in the country, was one of the first to initiate category management, Mantrala said. Many other chains, including Winn-Dixie and Publix in Florida, have followed suit in some categories.

However, supermarket executives should use category management in moderation to avoid alienating consumers and losing too much business, Mantrala said.

“The retailers should be a bit worried because they need to think about their long-term interests, in which case they need to find a way to pass on some of this benefit to the consumers,” he said. “It’s not clear that’s happening yet.”

Despite the fact that consumers may be paying higher prices in the beginning, over time category management actually will reduce prices for consumers by increasing competition between stores instead of between brands, Mantrala said.

“In all this efficiency and competitiveness, you lose some amount of flexibility and choice, so in that sense, some consumers might be affected,” he said. “However, the consumer in the end will benefit from better competition between the stores themselves. This is forcing the traditional retailers to become more competitive than they were before.”