Half-price chips, “two for one” chocolates, “buy one get one free” soft drinks: Australian supermarkets make it very easy for us to fill our trolleys with junk food...
We looked at supermarket specials over a year to see how healthy they were. The results of our research, published today, show junk foods are discounted, on average, twice as often as healthy foods...
The way supermarkets choose what products are on special each week is complex.
Food manufacturers pay large premiums to have their products featured in supermarket catalogues, at end-of-aisle displays or near the checkout. The arrangements between food manufacturers and supermarkets are often governed by contracts that specify the way products are to be promoted.
Food manufacturers and supermarkets know unhealthy food is often bought on impulse, making price discounts a great way to entice customers to make those impulse choices.This was quite timely, because last week I covered pricing strategy in my ECONS101 class, and the week before that we covered elasticity. The combination of elasticity and pricing strategy, along with transaction utility from behavioural economics, do a good job of explaining what supermarkets are doing, and why.
Consumer demand for junk food is likely to be relatively price elastic. Most junk food items are relatively inexpensive, so they take up only a small proportion of our income, and that is associated with relatively more elastic demand. They also have many substitutes (there are lots of items to choose from), so our demand for any particular item is also likely to be relatively more elastic. Finally, they tend to be luxury items (in contrast with necessities), which also have relatively more elastic demand.
When demand is elastic, a change in price has a bigger effect (in percentage terms) on the quantity that we purchase. So, a 10 percent price discount on an item with elastic demand will lead to an increase of more than 10 percent in the quantity purchased. That increases revenue for the seller. [*]
This also explains why they would discount junk food items but not fruit or vegetables. Fruit and vegetables are necessity items, not luxuries - they have price elasticities of demand that are less than one (as noted here). So, fruit and vegetable sales do not respond much to a decrease in price, so discounting them would decrease revenue for the seller. Discounting fruit and vegetables is a sure-fire way for a supermarket to destroy their profitability.
However, elasticity by itself doesn't explain discounting, because if it was the only explanation, then the seller would better off to keep the price low permanently. A complementary explanation is transaction utility (as I discussed in this post earlier this year). When we buy an item, we get utility (satisfaction or happiness) from receiving the item (which we call consumption utility), plus we get utility from the transaction itself (transaction utility). If we feel like we are getting a good deal, that makes us happier about our purchase. It doesn't make us any more satisfied with the item itself, but it increases our transaction utility. Higher total utility (consumption utility plus transaction utility) makes us more likely to buy the item. By offering discounts on different items every time, they avoid giving consumers the perception that the price is lower, so each time a discount cycles back to an item, there has been time enough for consumer perceptions about the 'usual' price to reset.
So, if an item has relatively elastic demand (which is true for junk food, but not for fruit and vegetables) and the seller can make us feel good by offering a discount, then it can make sense for them to do so.
All of this is somewhat related to another practice of supermarkets, which is loss leading. That is where a seller sells some products at a loss in order to increase sales of other products. However, it seems unlikely that discounting junk food is an example of loss leading. As the quote above notes, junk food is an impulse purchase. In contrast, the ideal loss-leading product is one that has elastic demand and will therefore bring a lot of customers into the store. Nobody chooses their supermarket based on a discount for their favourite chocolate bar (I think?).
Anyway, none of this behaviour by supermarkets should be a surprise to us. It only takes a little bit of knowledge about consumer behaviour and price elasticity to explain why supermarkets discount junk food and not healthy food. The article finishes with:
Imagine what it would be like to shop at a supermarket where healthier food was on special more often, and with bigger discounts. Where customers were enticed by discounted fruit and vegetables instead of half price chips, chocolate and soft drinks.You'll have to use your imagination. No such store exists, and if it did, you'd better get in fast because it's not going to last long before it fails.
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[*] Economists' usual assumption is that firms are trying to maximise profits, not revenue. For simplicity, I'm ignoring that assumption here. For a supermarket, with high fixed costs and the power to negotiate steep quantity discounts from suppliers, there probably isn't too much difference between maximising revenue and maximising profits.
Read more:
- Transaction utility and the behavioural economics of discounts
- Why we are sucked in by good deals for things we don't need
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