The economics of supermarkets in snow storms

Bryan Caplan raises an excellent puzzle, following his visit to the supermarket (I can confirm similar observations, even earlier in the day):

They were out of milk and bread, but there was still plenty of cheese and chocolate.  That was easily explained – people knew they could shop again in a few days, so they only needed to stock up on staples.  But the more I looked around, the more puzzled I was.

Here's what I noticed: For any given type of product, the most popular brand always sold out first.  There were no Eggo waffles, but plenty of Wegmans brand waffles.  All the national brands of hot dogs and sausages were gone, but there were plenty of obscure sausages still on the shelves.  If you broadened the categories, the pattern remained.  In produce, all the bananas were gone, but there were still plenty of apples.

You might say, "What's the puzzle?  Of course the most popular stuff sells out first."  But that's a feeble explanation.  After all, if X is ten times more popular than Y, then you'd expect stores to simply carry ten times as much X as Y.  Why would X sell out faster in a blizzard if stores have already taken its greater popularity into account?

I see it like this.  When visits to the store are in "normal times," the store weighs "mass goods" vs. "niche goods" when stocking the shelves.  Some niche goods will be given shelf space because they get some minority of customers into the store in the first place.  (I go to Whole Foods for Spelt Flakes, two or three key cheeses, and my favorite dark chocolate.  While I'm there, I end up paying the higher prices for their milk and green peppers, neither of which is better for me than competing products at Shoppers Food Warehouse.)  If the store stocks too few niche goods, it attracts too few niche-oriented customers and loses money on milk, meat, etc.  

Note also that the niche buyers tend to hold stocks of their favored goods, so if they have a sudden, unexpected supermarket trip, they don't necessarily need to buy more.

Enter the snowstorm.  People are forced to visit the store, more or less.  The previous calculations of mass vs. niche goods are no longer appropriate for the new emergency.  The store, temporarily, would prefer to have more mass goods and fewer niche goods.  The niche goods served the function of "motivating 47 visits a year rather than 23" but in the new short run they are nearly useless for this purpose.  We will see too many of them left on the shelves.  

Read Bryan's comments section as well.  I pondered the "rate of restocking" answers, but slow turnover and slow inventories imply a higher profit margin (if the product can compete for shelf space) and I believe for this to work it has to invoke customer heterogeneity in some manner, as I have done above.

Addendum: Imagine the same problem in the context of a book store.  There is an emergency edict which requires everyone to read three newly purchased books over the next week.  Borders will be swamped, They will end up short on bestsellers, not their niche books.

Comments

There are more niche brands than mass brands; is this what they call "the long tail"? The easier it is to run a just-in-time supply chain, the more niche brands you can offer and the more money you can take from the heterogenous group of niche consumers. Twenty years ago, there would have been more mass goods in the store, as a proportion of the whole.

Yes but if there was broadcast dedicated to publicising compulsory reading week then Borders should still be expected to stock up on bestsellers.

One complication is that supermarkets don't stock all their products any more. They stock their own brands, but vendors stock their other products. This isn't just niche products either, but common things like frozen dinners or cookies.

Frequently when they are out of some common item, I get the explanation "oh, we don't stock that" or "the vendor is late this week".

So I suppose when there's a surge in demand, shortages would depend on the flexibility of vendors vs. the store's own suppliers.

Slocum, if people are less price-sensitive, then why do you hypothesise that they consume mid-price mass brands rather than shifting up to high-price niche brands?

The puzzle is not why there aren't enough mass brands, the puzzle is why the prices of off brands aren't discounted more heavily to sell those out as well. After all, didn't Bryan say the prices were suddenly raised?

I suspect this is a disguised mechanism to increase margins in the face of high demand.

In a high-demand situation, people (or at least the marginal person) is of course willing to pay more for a given product. However, supermarkets are unwilling to hurt their long-term customer relationships by visibly increasing prices.

Instead, they keep in stock a bunch of high-margin products which are rarely purchased under normal circumstances. There's little doubt that Wegmans waffles are more profitable for the retailer than Eggos - the reason Eggo spends all that money on brand building is to capture a higher share of the producer surplus from the retailer.

Thus, by forcing a switch onto higher-margin products, the supermarket gets to make more money in response to a demand increase without consumers feeling gouged.

Whether they do this as a conscious strategy or not, it will show up in the long-run measurements of total sales of Wegman's and result in that product being kept on the shelf.

Bananas vs. apples actually makes sense. The shelf life of a banana is much shorter than an apple. So, unless you went to the grocery store in, say, the last 5 days, you probably need bananas again. But as long as you went in the last few weeks, you could very well still have good apples still.

CIP - if only it were true - yes retailers know there turnover rates - but the stocking decisions are far from rational. The products that Bryan and Tyler found on shelf are either the poorest sellers (waffles, hot dogs and sausage) or had relatively long shelf life (apples vs bananas)

The poor sellers are carried by the retailer not because there is demand for them - but because the retailer believes it can offset the power of a dominant brand by carrying both second and third tier competitors and it's "own" or store brand.

The short shelf life products - bread, milk, bananas are normally delivered more frequently - bread and milk daily in many stores. Longer shelf life products - pet food or soap are weekly or less frequent deliveries. So when a stimulus - snow warning - accelerates consumption, short life products need only sell one or two days of supply - pet food would have to sell 10 times as much to be out of stock.

The book example isn't applicable. The difference between Eggo and store-brand waffles or national brands of hot dogs and local varieties isn't like the difference between mass-market books and niche books. It's more like the difference between two editions of the same book, one of which has a better cover design and perhaps slightly better paper stock, and also costs more.

One explanation I haven't seen mentioned is that people may begin irrationally valuing products that are approaching selling out more. They see that only 25% of the national brand is left while 50% of the private-label is left and they grab the national brand so they don't get left out.

This is (yet another) place where knowing how grocers work might help economists.

Grocers can't adjust prices without months of effort, because pricing isn't allowed at the local store level. They can't change their warehousing or their shelf space without weeks for similar reasons. They can't adapt to demand at all, unless they are Walmart.

They price according to *fixed* margin, unless they use a company that sells them prices, like a Demandtec or a Retek. That means they don't even make more money when they get things for a lower price.

I tend to agree with the "Males Shop" explanation. My husband rarely if ever goes to the store -- when he does he buys brand names because that's what he remembers from his childhood. Just looking around the supermarket I see more men than normal and more guys that look like they don't shop (e.g., witness the number of guys standing in front of the cart at checkout and not understanding the checker needs the chart, their bafflement on encountering self-check out). Their attendance has been increased by the fact it is Superbowl weekend and many men were there to make sure they had enough beer and snacks to watch the game in tradition fatty glory. While they were there they were under instructions to stock up on essentials -- hence the purchase of large amount of brand names from the 1950s through the 1980s.

either the markup is higher for niche goods, or slotting fees are involved which make it profitable for the store to carry a disproportionate amount of them.

Niche products often pay for the right to be stocked in major retailers. We should therefore expect that their stock level exceed what supply and demand might dictate. Grocers are more than happy to hold a large inventory of paying merchandise, even if it doesn't sell so well, as long as they net out at least as much between the supplier paying for shelf space, and the margins. The niche products are sold at a loss (all costs in) by suppliers at the start, in hopes of being the next big thing, at which point they no longer have to pay for shelf space, and well.. they are the next big thing!

The simple answer is "people are irrational, contrary to economic 'theory' of rational buyer." This merely illustrates once more that contemporary "economic theory" is really religious dogma.

Really, why would you need more toilet paper simply because of some snow? Because the leaves around the place you swat are covered with snow and ice? Didn't you save the corn cobs for the winter? Can't people read enough pages of the Sears catalog while sitting on the can to wipe with?

Look, if people were rational buyers, they would be buying toilet paper in bulk, and on sale, and not buying in a panic. A rational buyer would have a minimum of several days to shop built into their rational shopping plans. A rational buyer would know whether they are on the verge of running out from poor planning.

Clearly the shopping for toilet paper is irrational for the majority of shoppers. When "theory" doesn't agree with reality, it is a disproved hypothesis, or else the "theory" is really just religious dogma.

This is exactly the reason LTCM failed: under time pressure, people flock to the name brand vs the equivalent non-name brand product (e.g. on the run vs off the run treasuries.) The spread widens in the short-term. In the bond markets, people fight for a fraction of a basis point most days, yet happily pay a bit more in an emergency for the reduced cognitive effort to ensure safety.

Ah the marvel of the cash-and-carry grocery! The closest to an efficient market we are likely ever to see.

There has been an Eggo waffle shortage for some months now. Here: http://www.leggomyeggo.com/whats-new

Okay, we've gotten 27" of snow. The Township was shut down on Friday,6pm. The first thing as a retailer, I'd hire a plowing crew to make my Market easy to access. Same thing goes for Market Centers. As for stock: shoppers are buying salt and shovels. Then they'll be looking for bread, butter,eggs and milk. Lastly, affordable foods and sodas. Whatever your family prefers depends on how long you'll be homebound.

My take: I think there are multiple factors (all working together):

In times of stress our brains turn towards familiarity (Bias from stress-influence encourages us towards the availability bias). If we've had a good experience with Kraft Dinner in the past and we know a storm is coming we don't want to take a chance on a store-brand (uncertainty avoidance). We are also creatures of habit-- if we normally buy Kraft Dinner and it sells out, we do what we normally do which likely doesn't lead to buying the store brand (we substitute with something else). There is also an element of scarcity -- subconsciously we know national brands will be more desirable to others so we desire them more. We know others will stock up on them and we do the same. And then there is signaling. After the national brands noticeably start selling more there is also an element of social proof that comes into play (KD is selling quick, everyone is buying it, i need to buy it...).

I bet that goes the same for their pet supplies too. www.topdogsupplies.net

cheap stuff is what everybody needs to buy today because the majority doesn't afford quality products. and by the way: quality products have sky rocketing prices, but they shouldn't... let's imagine that Nike is a quality product... they sell nice shoes right? the cost for making a pair of shoes is China where they have their manufacturing "headquarters"... is about 5$... but they sell one pair of Nike shoes for 100,200 or more... you do the math.

I guess how lisa said the past is the past and now we confrunt with this problem: we can't find quality products in the shelves of supermarkets.One way or another we are forced to buy different things which might cost us pretty much at some point in the future.Wigs

I looked all over google for it!! Thanks for the info..pfff! :)

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