Grocery chains boost profits by charging different prices for the same stuff

A report out on Tuesday from the Agri-food AnalyticsLab at Dalhousie University in Halifax says many Canadians are hoping a grocery code of conduct will protect them from soaring food bills thatthey see as profiteering and "price gouging."

Meanwhile,Prime Minister Justin Trudeau this week has been out promoting the federal grocery rebatefrom last week's federal budget.

But while the effectiveness ofcodes or rebates in driving down prices remains uncertain, experts in the economics of pricing say consumers have access to a powerful tool to fight food inflation by taking advantage of a strategy retailers use to maximize their own profits.

Squeezing for profits

Called "price discrimination"or the "two-price system," it's a long-standing technique used by retailers and service providers to squeeze the most profit out of their customers by selling to different people at different prices.

"The goal is to increase sales and profits," said Jean-Paul Lam, an associate professor of economics at the University of Waterloo in Waterloo, Ont.

"Retailers will charge customers the price they are willing to pay, allowing them to capture more of the consumer surplus, which is the difference between what a customer is willing to pay and what they actually pay," Lam explained in an email."These retailers/producers can increase their profits and profit margins by capturing more consumer surplus."

WATCH | The federal budget'sgrocery rebate is unlikely to drive down prices:

What is Canadas new grocery rebate, really? | About That

1 year ago

Duration 7:49

When the federal budget was announced on Tuesday, it included what Finance Minister Chrystia Freeland called a grocery rebate. CBC business correspondent Peter Armstrong joins Andrew Chang to break down what it is, who will get it and why it doesn't have much to do with groceries at all.

For most of us, if we think about how grocery stores set their prices at all, we likely imagine it as pretty simple: Retailers see how much their suppliers are charging, then they tack on some percentagemarkup to cover their own costs. But that's not how pricing works.

Instead, retailers use their different branded stores to charge a range of prices from slightly above the supplier's price to many dollars above that price, depending on how much they think we'll pay.

And it is clear that a lot of Canadians don't like it. Following a recent CBC article on grocery pricing, readers from across the countrytold us the huge difference in prices at different stores wasobvious evidence that retailers were price-gouging.

Prices varywildly

Ted KeayofNew Minas, N.S., did some comparison shopping for the same 250-gram container of parmesan cheese at four different stores. Prices varied wildly, he said, going from a high of $10.29 at Sobeys to a low of $6.97 at Giant Tiger.

Mary Briggs ofMississauga, Ont., thought she would take advantage of a 20 per cent seniors' discount at Shoppers Drug Mart, a drugstore chain owned by LoblawCompanies Ltd.But she found thateven after the discount, the drugstore price of $15.99for the Tide Pods she wanted was more expensive than the $10.99 at the Loblaw-owned Independent Grocery.

"Why two companies owned by Loblawshave such a large price difference is the question," Briggs said in her email.

Someone discovering they bought the Tide Pods for $5more than at a nearby store owned by the same company might feel as thoughthey've been played for a sucker.But for grocery chainsusing the technique of price discrimination, that big difference is not a bug. It'sa profit-maximizing feature.

From old-fashionedhorse traders to moderncar dealershipsto suburban garage sales, wily sellers know that some people are willing to pay more than others. Setting prices toohigh so some people walk awaymeans you won't sell as many horses or cars,or as much basement junk.

A traditional example in economic theory is the country doctor who chargedthe local gentry top dollar. But in rural areas, there werea lot more poor farmers who couldn't afford those prices.

So countrydoctors keptbusy and maximized their income byalso treatingthe poorer farm families even if they couldonly afford to payin carrots and bushels of apples. Two different prices means more business and more food for the winter.

As much as they can get

David Hardisty, an associate professor of marketing at the University of British Columbia's Sauder School of Business in Vancouver, studies the behavioural economics of pricing, and he says the way retailers decide how much to charge is far more complex that shoppers realize, evenbeyond price discrimination. And when companies are trying to maximize their profits, there's no Mr.Nice Guy.

"They want to charge as much as they can and still get the sale," Hardistysaid via Zoom from Milan, Italy, where he is currently a visiting professor. "And that amount is going to be different for different people ... because some consumers are very price sensitive and others are not."

Some shoppers may be too rich to pay attention, too busy or not a numbers person. Maybe they value convenience or can only get to the one nearby store. Like customers choosing between Saks Fifth Avenue and Zellers, maybe they are pleased to pay for things like nicer decor or better service.As Lam said, maybe they are "status signalling" by shopping in fancier, more expensive shops.

Hardistysaid that's why having access to all of your data gathered through loyalty and credit cards is so valuable. When they know your shopping habits and price sensitivity, retailers have a better idea ofhow much they can get away with charging.

He said a lot of times, consumers simply don't know what things aresupposed to cost, how much theycostto make or what the things they are buying arereally worth. In other words, when they pay five bucks more for Tide Pods or a block of cheese, they don't know they are being ripped off. And retailers would rather they didn't know.

Sometimes that is called information asymmetry, where the seller knows everything and the buyer is ignorant. Like other parts of behavioural economics, it flies in the face of the concept of Homo economicus, the idea that humans respond to price signals the way traditional economists say they should.

Voting with your dollars

Hardisty said that consumers do have power: They can vote with their dollars. Grocery stores care about customer loyalty as well as profits, and they don't want to alienate even richer shoppers who think they are being suckered with excessive profits.

"You're saving by shopping around," he said, but that's not all. "You're actually doing some good for the world, too. Because you are sending a signal. You're telling the companies,'I'm not going to get ripped off like this' ... and that's the only signal they'll listen to and that's the dollars."

So people likeBarbara Hayes who wrote from Vancouver saying she's cut off the chain Save-On-Foods for being too pricey are actually retail heroes. Even if they can affordhigher prices themselves, thosewho have the time to comparison shop are not just saving themselves money;they are holding prices down and fighting inflation for everybody else.

"I can't even imagine how the poor are dealing with food prices," Hayes said. "So sad to think about, but those with a low income won't be able to afford healthy food, let alone any of the 'extras'that make life bearable."