Prices and marketing margins Fluctuations in retail store margins

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					Prices and Marketing Margins
         fluctuations in retail store margins found to be interlocked
         with changes in wholesale prices and with retail sales volume
                                                                                                                              Sidney Hoos
The following is the second of two articles                                               stores which average about the same.
                                                  ferent, in fact, are the degrees of change
based on a study o f prices and retail margins                                            The wholesale prices paid by the large
                                                  in the daily prices, is shown by the fol-
for oranges, lemons, and grapefruit reported in
detail in Reports No. 168 and No. 170, pub-       lowing measures of percentage fluctua-  stores average less than those paid by
lished by the Giannini Foundation of Agncul-                                              the medium stores, which, in turn, aver-
                                                  tion in relation to the average prices in
turd Economics, University of California,         Denver during the year studied.         age somewhat lower wholesale prices
Berkeley                                                                                  than the small stores. The large stores
                                                              Oranges lemons Grapefruit   on the average have lower retail prices
   Marketing margins for farm prod-                               %      %        %
ucts-one subject in agricultural mar-                                                     because they tend to buy more cheaply
                                            Retail price .. . . .
keting that has received much attention Wholesale price. .. . 13  15
                                                                         12
                                                                         15
                                                                                  19
                                                                                  23
                                                                                          and to have smaller absolute margins.
in recent years-continue to cause con-                                                       Although the small stores tend to have
fusion as to why they behave as they do.                                                  higher wholesale costs for citrus, they
                                               These figures show that some differ-
Studies on market prices of fresh citrus ences do exist in the degree of fluctua- have lower absolute margins than do the
were made to provide a firm basis for tion in the daily retail and wholesale medium-sized stores. The lower margins
separating the facts from the folklore prices. The wholesale prices do vary rela- used by the small stores just about offset
about marketing margins.                                                                  their higher wholesale costs so that the
                                            tively more than the retail
   If the retailer-often considered a bot-, the difference is not sufficientprices, but retail prices in the small- and medium-
                                                                             to account sized stores average at about the same
tleneck in the market-price sygtem-         in a substantial way for the uncertainties level over a period of several months.
actually raised retail prices quickly when in marketing.
wholesale prices advanced and held back                                                      Large stores average lower absolute
in lowering retail prices when wholesale       When changes in weekly prices are margins but not the lowest relative
prices decline, movement to consumers considered, it is found that the retail and margins. During the first half of the
would be retarded. For quickly advanced wholesale prices fluctuate in about the year studied, the small stores averaged
prices at one time, coupled with slug- same degree. It is further learned that slightly lower relative margins than the
gishly lowered prices at another time, in the large stores the weekly prices large stores. For the year as a whole,
would both discourage consumers from fluctuate considerably more than in the the small and large stores averaged the
purchasing increased quantities of citrus. small or medium stores. These greater same relative margin, each being greater
    Examination of what does happen fluctuations in the large stores do not than for the medium-sized stores. Of in-
shows that most citrus retailers closely occur always, but at irregular periods terest is that the average relative mar-
follow the wholesale market. But when the large stores have sharp breaks soon gins do not differ widely among the three
the current wholesale price goes up or followed by strong advances in their groups of stores-small, medium, and
 down, that in itself does not make the prices. Such occurrences are tied in with large.
 retailer change his selling price for the the purchase and margin-setting prac-              A major advantage of the large stores
 citrus he has on hand. The price of the tices of the large stores.                        is their ability to buy fresh citrus at
 citrus he is selling remains tied to the                                                  lower prices than the other stores. Such
 wholesale price he paid for it and when Prices and Retail Margins                                      Concluded on page 14
 he purchases new fruit at the changed
 wholesale price, he bases his retail price    To summarize the differing price and
 for the new fruit on the wholesale price margin experience of the large-, medium-,
 he paid.                                    and small-sized stores, the following            C A L I F O R N I A A G R l C U LTU RE
                                                                                              Progress Reports of Agricultural Remarch,
    The retailers are just as sensitive and average weekly measures are noted for             published monthly by the University of Cali-
 responsive to downward as to upward oranges. A comparable situation between                    fornia Division of Agricultural Sciences.
 adjustments in wholesale prices.            stores prevails in lemons and grapefruit.
                                                                                              William F. Calkina. . . . . . . . . . . . .Manager
                                                                                                                  Agricultural Publications

 Price Changes
                                                        Retail            7::
                                                                        Absolute Relative                           .
                                                                                              W. 0. Wilde. . .. . . . . .Editor and Yanager
                                                                                                                      California Agriculture
                                                   Store
                                                   group         (cpe,:t' 8::;
                                                                 price
                                                                                 margin
                                                                                  (cents
                                                                                            margin
                                                                                           (percent
  The record of daily prices of citrus                                             per       retail   Articles published herein msy be republished
                                                                 pound)   p ~ ~ ~pound)
                                                                                    d )     price)    or reprinted provided no endorsement of a
shows that they vary from day to day                                                                  commercial product is stated or implied.
                                                                                                        Please credit: University of California
and, at times, the changes are consider-          Small                                                    Division of Agricultural Sciences.
able in amount. Price fluctuations both           stores . . .   12.2      8.8     3.4        28      California Agriculture wl be sent free upon
                                                                                                                              il
                                                  Medium                                              request addressed to: Editor, Ualifomia
cause and reflect uncertainties in the            stores   ...   12.4      8.4     4.0        32      Agrfculturs, University of California, 22
marketing system. Some marketers have             large                                                  Giannini Hall, Berkeley 4, California.
sought to reduce the uncertainties by re-         stores   ...   10.5      7.6     2.9        28        To simplify tbe information in California
                                                                                                      Agriculture it is sometimes necessary to use
                                                  Weighted
ducing the degree of price fluctuations           average                                             trade names of products or equipmeut. No
                                                                                                      endorsement of named products is intended
over a period of time. It has been argued         for oIi                                             nor is criticism implied of similar products
that, if the degree of fluctuations in the        stores .  ..   11.8      8.2     3.5        30                which are not mentioned.
retail and wholesale prices were not so
different in amount, that-in      itself-           The retail prices in large stores aver-                                    141


would lead to less uncertainty. How dif-          age lower than in the small and medium

 2                                                                               CALIFORNIA AGRICULTURE, APRIL, 1955
                TURKEY                           large stores hover close to or not much              the three sizes of stores, are shown for
                                                 under the wholesale prices paid by me-               oranges in the table below:
           Continued from page 4
                                                 dium-sized or small stores. The lower                     Average Change in Weekly Margin for
and expenditure on sales efforts limit the       average retail and wholesale prices, and                   a Change of 100 Pounds in Weekly
                                                 also absolute margins, in the large stores                        Retail Sales Volume
validity of any average or generalized
estimates based on these data alone. The         are due in the main to the occasional                    Store group
                                                                                                                                            Change in
                                                                                                                                          absolute margin
operators are pursuing different goals,          intervals when the large stores enjoy                                                   (cents per pound)
the one seeking a wide market for direct         marked differentials in their wholesale              Small stores
                                                                                                                               ~~




                                                                                                                    .... .. .. , . .. ..
                                                                                                                         ..                    -1.08
sales, the other furnishing supplies             prices and at the same time operate with             Medium stores    ..............          -0.32
through intermediary channels. This              reduced absolute margins.                            Large stores  .. . . . . . . . . . . .
                                                                                                                       . ..                    -0.10
phase of the study indicates the character          The small stores maintain their com-              Weighted average
                                                 petitive position with the medium-sized
                                                                                                        for a11 stores  . ......... ...        -0.33
and range of the special pedigree ex-
penses.                                          stores by accepting smaller margins, ab-                These results not only show how much
   Similarly no attempt was made to              solute and relative, than do the medium-             the margin is affected with changes in
evaluate the efficiency of these particular      sized stores. The latter, however, succeed           retail sales volume in each of the three
enterprises and thus to consider whether         in maintaining their absolute and relative           store groups but the effects differ in each
services of equal quality may be obtained        spreads above those of the small stores              of the groups. Thus, as business volume
at lower cost.                                   as well as the large ones.                           fluctuates from week to week and shifts
   This exploratory study points the way                                                              from store to store, it carries along with
toward the development of systems by             Wholesale Prices                                     it fluctuations in the store margins.
which the cost of various alternative                                                                    Margins, and their changes over time,
genetic programs might be estimated in              Citrus margins, in cents per pound,               do not occur by chance or haphazardly.
advance. The effect of variations in the         do not remain fixed; they change in re-              Changes in retail margins are intertwined
proportion of birds of different ages            sponse to changes in the wholesale                   with changes in many business factors,
maintained, in the duration of the test-         prices. As the wholesale price increases,            particularly, changes in wholesale prices
ing periods, and in the price of labor and       the cents-per-pound margin also in-                  and changes in retail sales volume.
feed could be analyzed. Geneticists are          creases, but the relative or percentage
able to forecast provisionally the degree        margin decreases. The changes in the                    Sidney Hoos is Professor o f Agricultural
of gain which may be expected frofi              margins, as the wholesale price changes,             Economics, University of California, Berkeley.
the maintenance of standard selection            are summarized for oranges as follows:                  The study was undertaken with the Agricul-
                                                                                                      tural Marketing Service, U. S . Department of
programs for a given number of genera-                 Average Change in Weekly Margin                Agriculture, co-operating and was financed in
tions. Economic values may also be at-                    for a Change o 1 Cent per
                                                                        f                             part by funds administered under the author-
tached to these expected gains. The syn-                   Pound in Wholesale Price                   ity of the Research and Marketing Act of 19%.
thesis of these two approaches would                                 Change in           Change in
                                                                                          relative
permit both individual breeders and in-               Store           absolute       .    margin
dustry groups to balance the cost of a
                                                      group            margin
                                                                 (cents per pound)       r$zi zrie)                 HONEYBEES
proposed breeding program against the                                                                             Continued from page 5
probable gain.                                   Small stores   ... . +0.32                -0.55
                                                 Medium stores     .. +0.41                -0.37
                                                                                                      TEPP, Compound A-42, Compound 340,
  J . C. Abbott was Instructor in Agricultural   Large stores . . .. +
                                                                    . 0.34                 -0.09
                                                                                                      endrin, and chlordane.
Economics, University of California, Davis, at   Weighted average
the time these studies were made.                  for all stores . . 4-0.37               -0.36         Moderately toxic materials were : po-
  V. S. Asmundson, Professor of Poultry Hus-                                                          tasan, Compound 21/116, Compound
bandry, University of California, Davis, CO-        The above figures show that in re-                4-137, DDT, calcium arsenate, isodrin,
operated in the studies reported here.           sponse to changes in the wholesale price,            Compound 1189, tartar emetic, Chloro-
                                                 the effect on the absolute margin is                 benzilate, Compound 21/199, cryolite,
                                                 about the same in the small and large                Compound 876, ryanh, NPD, TDE, R-
               MARGINS                           stores; but there is a greater effect on             242, OMPA, methoxychlor, Compound
                                                 the absolute margin in the medium                    2066, DNOCHP, Aramite, and toxa-
           Continued from page 2
                                                 stores. In terms of the relative margin,             phene.
lower purchase prices put the larg:              however, changes in the wholesale price                 Relatively safe materials were: sulfur,
stores in a position to quote lower retail       result in substantially greater effects on           Compound 2131, rotenone, Ovotran,
prices and have lower absolute margins           the relative margin in small stores than             chlorinated terpine, Compound Q-128,
but still have relative spreads averaging        in large stores; the effect for the medium           pyrethrins, Compound 923, Neotran,
not less than some other Stores. In terms        stores being about halfway between.                  CMU, demeton, allethrin, DMC, cuni-
of returns in relation to investment in             It is clear that changes in the whole-            late, dilan, and nicotine.
fresh citrus, the large stores are in a fa-      sale price cause different effects on the               E . L. Atkins, lr., is Associate Specialist in
vorable position, particularly in view of        margins of various sized stores. As the              Entomology, University of California, River-
their volume handled and rate of inven-          wholesale price varies from day to day               side.
tory turnover.                                   or week to week, instabilities result in                L. D. Anderson is Entomologist, University
   Lower wholesale price is not a con-           margins and also in retail prices.                   of California, Riverside.
sistent advantage held by large stores at                                                                T. 0. Tuft was Senior Laboratory Techni-
all times. When the detailed daily and                                                                cian, University of California, Riverside, when
weekly record is studied, it is found that       Sales Volume                                         the above reported studies were made.
                                                                                                         P . H . Gerhardt, Assistant Entomologist; M .
only periodically, with an irregular tim-           In addition to wholesale price changes,           H . Frost, Principal Laboratory Technician; G .
ing, do their wholesale prices go sharply        retail margins are affected by the volume            E. Printy, Senior Laboratory Technician; R .
and markedly below the wholesale prices          of citrus sales in the stores. As the sales          M . Hannibal, Laboratory Technician; and Rich-
paid by other stores. The same applies           volume increases, the margin tends to                ard Smith, Laboratory Technician, University
                                                                                                      o f California, Riverside, co-operated in the
to the absolute spreads in the large             decrease; with decreased volume, the                 laboratory phase of these tests.
stores. At other tiyes, and not for brief        margin tends to increase. Such average                  The above progress report is based on Re-
periods, the wholesale prices paid by the        effects of volume on margins, in each of             search Project No. 1499.

14                                                                             CALIFORNIA AGRICULTURE, APRIL, 1955